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Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker

Even though anecdotally, I have made some money on option grants, I now see them as a symptom of cargo-cult management practices. A few weeks ago, a co-worker asked me for advice about a new (to us) employee stock purchase plan, and I basically said, "don't shit where you eat." Messing around with your employer's stock isn't a wonderful idea. Most people should just be blindly investing x% of their income in a robot-managed index fund. Fewer people should also be investing in only those businesses they understand well enough to independently analyze. And if I were in any position to really analyze the financials of my employer, well, now I'm subject to insider trading gotchas. But as a peon-level employee of a company, I am always in the very first group of people to be lied to whenever anything goes wrong. Everything is fine. Continue working as usual. Don't worry about office shutdowns and massive layoffs. I'd always tend to overvalue my employer's stock (or frantically shotgun resumes to other potential employers). For the purposes of incentivizing better productivity, the company could be adding cash bonuses to my paycheck. It's very simple, and great for my morale (barring memberships in the Jelly-of-the-Month Club, Sparky). My current company has done it a few times. When you hide the "extra free money" behind a stock-shuffling scheme, it makes me think you're up to something sneaky. Also, I don't consider it wise to be heavily invested in the company that is my primary source of ordinary income. Think of it this way: would/could you buy the option/stock on the open market if the company wasn't offering it up in the conference room? I wouldn't. Only if I were already 100% financially secure otherwise would I ever invest in my employer directly. And guess what? 100% financially secure means that I can quit, right now, and not have an employer, freeing me to invest in whatever damned-fool thing I want. If you're taking financial advice from random people on the Internet, the only place you should be investing is robot-managed index funds, and not doing anything on the side until after you have already maxed out your 401(k) contributions. So I basically value options as "this company would rather generate massive amounts of additional paperwork and hassle than just give me an equivalent value in cash bonuses."

smallnamespace 10y ago
To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the company, since they would rather sell equity to you than to a random person, and it's better for you, because you are an informed investor and know more than just from reading balance sheets. That said, IMO you should basically only work at a startup that you think will be successful. Given that, you should buy as much equity as you can afford to. From a financial perspective, working at a startup then not taking equity is just throwing away a big chunk of informational efficiency. If you just want a cash paycheck, go work at a big company instead.
- JonFish85 10y ago
  As a counter-argument to this, the employees at Enron were pretty blindsided (for the most part) when their stock was wiped out.
  - smallnamespace 10y ago
    Naked accounting fraud on the level of Enron is exceedingly rare though. But all the other reasons a company can go belly-up (bad product, bad customer base, no roadmap, stopped doing R&D, etc.) are usually much more visible to an employee than an external investor.
- logfromblammo 10y ago
  The only rational reason to work as an employee of a startup is for better job titles, working conditions, and professional development (from tougher challenges). Getting paid in lottery tickets is not sound investment strategy. You may be a better informed investor if you pick the locks on the filing cabinets in the C-level offices after the bosses go home, and bug all the conference rooms, but it is unlikely that will make you better at estimating the future market value of the company, or at evaluating potential buyout scenarios. In any case, I never thought that spying on my bosses was a good idea. I just heard the lies, saw through the BS, and started sending out resumes. Or I got blindsided and started sending out resumes. You should only work at a startup that will support the lifestyle you desire. If you were really critical to the company, you would have a contract and genuine equity, rather than being "at will" with a promise of options vesting later. Your primary concern should be "can the company continue to pay me for my work this month?", and your secondary concern "can they pay me next month?", and so on. As an employee, you are a replaceable worker-for-hire. If you want to win big at the startup game, be a co-founder with undilutable equity. If you want to invest prudently as an employee, you can play the entire market rather than just one small, potentially volatile company, and a bigger cash paycheck makes that easier to do. Employee option grants just seem like a con to make peon-level employees feel like they have more agency and more emotional connection with their employer than they actually do. The anecdotal success stories of option grants that actually pay off are necessary to keep the game going, just as state lotteries have to blow some money on oversized checks, balloons, and confetti whenever someone wins the jackpot. The company's money does not come from a vacuum. No matter what amount of profit you get from an option grant, the company could have given it to you in a different, less complicated way. If you exercise 1000 options, and have to sell 500 of the shares to cover the exercise price, the company could have just granted you 500 shares directly, and still had 500 left to give out later. The hand-wavey sort-of-options are 100% there to benefit the company, and its owners, and their tax preparer, not you.
planteen 10y ago
I agree with what you are saying about not having too many eggs in a basket. I have seen many variations on ESPP: 1) You can buy the stock at market value on some set date by paycheck deductions (but you avoid that commision!). Worthless, not work doing IMHO. 2) You contribute up to N% of your salary at M% discount on the stock. I would do this and sell immediatley. There was a small risk associated with that of a big market movement, but in my case M was 15%, so that made me feel comfortable. It worked out to some free money. 3) There was a 6-month window. The company took the lower of the prices at the start of the window or end of the window AND applied a discount. That was awesome. A big rise in 6 months led to big gains. If the stock was tanking, you still got the discount. I would still sell immediately.
- logfromblammo 10y ago
  Last time I checked, the (US) tax rules stated that if you sold ESPP shares or exercised employee options grant shares before a year had elapsed, the gain was to be reported as ordinary income on your W-2 and taxed accordingly. So you might as well send 28% of the sale to the IRS immediately, to avoid trouble later on. Anecdotally, I once sold some shares/options, so the same gain was reported in my W-2, again on the 1099 from the brokerage, and apparently one more time from my consumer bank when I transferred the funds from the brokerage using a printed check. The IRS said "Screw your return. We're changing it, because you had additional income you didn't report. Pay up, Buttercup." Well, that "additional income" was actually the same pile of cash, photographed at different times from three different angles. It took 10 years and way too many hours of writing FOIA requests and explanatory letters to sort out. The outcome was not what I would ever consider fair, but as I no longer need to fight it any more, I'm content to write off my losses as an educational expense. Your experience with an ESPP is about 99% likely to be better than mine. But before you take the free peanut butter, take a quick look around for any levers connected to a gigantic spring. Poke it with an 11-foot pole a few times. It's but one of the several reasons why I mentally model the US government as neckless slab of meat that is 7'6", 400#, and a crack shot with an infantry rifle, yet with the ethics of a 4-year-old toddler. At all times, stay out of its line-of-sight, and if you ever need to interact with it, you'd better bring it candy and flattery.
pilom 10y ago
Don't bash the Employee Stock Purchase Plan without getting more info though. Maximizing that and immediately selling (i.e. I never actually held my company's stock) netted me about $10k over the course of a year. The standard ESPP rules (buy at price today or price 6 months ago whichever is lower at a 15% discount with immediate selling) are even more advantageous than 401k rules but not all are standard.

smallnamespace 10y ago

To play devil's advocate though, you are being provided more information than the external market would be by virtue of being an employee of a company, and also someone working in the industry, etc. Having more information at your disposal to evaluate a company means that option grant is worth more to you than to a random person on the street, which is why the company will pay you in options. It's better for the company, since they would rather sell equity to you than to a random person, and it's better for you, because you are an informed investor and know more than just from reading balance sheets. That said, IMO you should basically only work at a startup that you think will be successful. Given that, you should buy as much equity as you can afford to. From a financial perspective, working at a startup then not taking equity is just throwing away a big chunk of informational efficiency. If you just want a cash paycheck, go work at a big company instead.

JonFish85 10y ago
As a counter-argument to this, the employees at Enron were pretty blindsided (for the most part) when their stock was wiped out.
- smallnamespace 10y ago
  Naked accounting fraud on the level of Enron is exceedingly rare though. But all the other reasons a company can go belly-up (bad product, bad customer base, no roadmap, stopped doing R&D, etc.) are usually much more visible to an employee than an external investor.
logfromblammo 10y ago
The only rational reason to work as an employee of a startup is for better job titles, working conditions, and professional development (from tougher challenges). Getting paid in lottery tickets is not sound investment strategy. You may be a better informed investor if you pick the locks on the filing cabinets in the C-level offices after the bosses go home, and bug all the conference rooms, but it is unlikely that will make you better at estimating the future market value of the company, or at evaluating potential buyout scenarios. In any case, I never thought that spying on my bosses was a good idea. I just heard the lies, saw through the BS, and started sending out resumes. Or I got blindsided and started sending out resumes. You should only work at a startup that will support the lifestyle you desire. If you were really critical to the company, you would have a contract and genuine equity, rather than being "at will" with a promise of options vesting later. Your primary concern should be "can the company continue to pay me for my work this month?", and your secondary concern "can they pay me next month?", and so on. As an employee, you are a replaceable worker-for-hire. If you want to win big at the startup game, be a co-founder with undilutable equity. If you want to invest prudently as an employee, you can play the entire market rather than just one small, potentially volatile company, and a bigger cash paycheck makes that easier to do. Employee option grants just seem like a con to make peon-level employees feel like they have more agency and more emotional connection with their employer than they actually do. The anecdotal success stories of option grants that actually pay off are necessary to keep the game going, just as state lotteries have to blow some money on oversized checks, balloons, and confetti whenever someone wins the jackpot. The company's money does not come from a vacuum. No matter what amount of profit you get from an option grant, the company could have given it to you in a different, less complicated way. If you exercise 1000 options, and have to sell 500 of the shares to cover the exercise price, the company could have just granted you 500 shares directly, and still had 500 left to give out later. The hand-wavey sort-of-options are 100% there to benefit the company, and its owners, and their tax preparer, not you.

planteen 10y ago

I agree with what you are saying about not having too many eggs in a basket. I have seen many variations on ESPP: 1) You can buy the stock at market value on some set date by paycheck deductions (but you avoid that commision!). Worthless, not work doing IMHO. 2) You contribute up to N% of your salary at M% discount on the stock. I would do this and sell immediatley. There was a small risk associated with that of a big market movement, but in my case M was 15%, so that made me feel comfortable. It worked out to some free money. 3) There was a 6-month window. The company took the lower of the prices at the start of the window or end of the window AND applied a discount. That was awesome. A big rise in 6 months led to big gains. If the stock was tanking, you still got the discount. I would still sell immediately.

logfromblammo 10y ago
Last time I checked, the (US) tax rules stated that if you sold ESPP shares or exercised employee options grant shares before a year had elapsed, the gain was to be reported as ordinary income on your W-2 and taxed accordingly. So you might as well send 28% of the sale to the IRS immediately, to avoid trouble later on. Anecdotally, I once sold some shares/options, so the same gain was reported in my W-2, again on the 1099 from the brokerage, and apparently one more time from my consumer bank when I transferred the funds from the brokerage using a printed check. The IRS said "Screw your return. We're changing it, because you had additional income you didn't report. Pay up, Buttercup." Well, that "additional income" was actually the same pile of cash, photographed at different times from three different angles. It took 10 years and way too many hours of writing FOIA requests and explanatory letters to sort out. The outcome was not what I would ever consider fair, but as I no longer need to fight it any more, I'm content to write off my losses as an educational expense. Your experience with an ESPP is about 99% likely to be better than mine. But before you take the free peanut butter, take a quick look around for any levers connected to a gigantic spring. Poke it with an 11-foot pole a few times. It's but one of the several reasons why I mentally model the US government as neckless slab of meat that is 7'6", 400#, and a crack shot with an infantry rifle, yet with the ethics of a 4-year-old toddler. At all times, stay out of its line-of-sight, and if you ever need to interact with it, you'd better bring it candy and flattery.

pilom 10y ago

Don't bash the Employee Stock Purchase Plan without getting more info though. Maximizing that and immediately selling (i.e. I never actually held my company's stock) netted me about $10k over the course of a year. The standard ESPP rules (buy at price today or price 6 months ago whichever is lower at a 15% discount with immediate selling) are even more advantageous than 401k rules but not all are standard.