4 ms·

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

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.
- smallnamespace 10y ago
  > Getting paid in lottery tickets is _not_ sound investment strategy. Anecdotally, I know someone personally who was an early employee at multiple startups at all IPO'd. Some of those IPOs happened years after he had already left. He's now a millionaire many times over because he had the acumen to pick winners, and that's specifically what he was looking for when he made his choice on where to work. This is obviously not general investment advice, because you have to have an eye for picking winners. But he certainly recognized that 1) he had an opportunity to get equity for cheap and 2) he knew more than the general market and took full advantage of that fact. He even diversified by working somewhere until his options vested, then moving on, while not waiting for exit. My point still holds: if you don't tolerate risk and want to get paid in cash, don't work at a startup. Your moralizing and demonizing of startup compensation seems misplaced here -- the #1 biggest reason they pay in equity and options is because they are short on cash and long on equity. Founders spend a lot of time trying to raise cash from investors, so turning employees into de facto investors is a cheap and convenient solution.
  - logfromblammo 10y ago
    > ...turning employees into de facto investors is a cheap and convenient solution. And also unethical, in my opinion. If startups treated their investors like investors, and their employees like employees, they would be able to hire people without needing to look at risk tolerance as a hiring qualification. Perhaps coincidentally, young, single people have a much higher risk tolerance than older people with families. If avoiding the appearance of age discrimination is at all important They would even fare better if they refrained from treating employee-investors as a lower class of investor, that can be diluted to oblivion while the higher classes of investor still get paid. Your anecdotal acquaintance sounds like an investor first, who just happened to be able to get hired as an employee. If you job hop while collecting discount equity opportunities, and leave before the success of the company is ultimately determined, how much of that value comes from the work you do, rather than your evaluation of the company and your co-workers? I presume that if the initial evaluation was off, he'd scarper for greener pastures in the middle of the night without waiting for anything to vest? You can't do that in most of the US. Away from the west coast and the Boston-to-DC corridor, there may only be one or two startups in town that need tech employees, if any. If you're in a college town, there may be few dozen, built around somebody's thesis work. If you don't like the local job scene, you have to move your entire household somewhere else. The startups follow the expectations of the investors, and the investors are looking at the coastal unicorns. I just get sick of all the cargo-culting of SV startup culture, y'know? It only works there because it's there, and I'm not even sure that "works" is the right word to use.

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.

smallnamespace 10y ago
> Getting paid in lottery tickets is _not_ sound investment strategy. Anecdotally, I know someone personally who was an early employee at multiple startups at all IPO'd. Some of those IPOs happened years after he had already left. He's now a millionaire many times over because he had the acumen to pick winners, and that's specifically what he was looking for when he made his choice on where to work. This is obviously not general investment advice, because you have to have an eye for picking winners. But he certainly recognized that 1) he had an opportunity to get equity for cheap and 2) he knew more than the general market and took full advantage of that fact. He even diversified by working somewhere until his options vested, then moving on, while not waiting for exit. My point still holds: if you don't tolerate risk and want to get paid in cash, don't work at a startup. Your moralizing and demonizing of startup compensation seems misplaced here -- the #1 biggest reason they pay in equity and options is because they are short on cash and long on equity. Founders spend a lot of time trying to raise cash from investors, so turning employees into de facto investors is a cheap and convenient solution.
- logfromblammo 10y ago
  > ...turning employees into de facto investors is a cheap and convenient solution. And also unethical, in my opinion. If startups treated their investors like investors, and their employees like employees, they would be able to hire people without needing to look at risk tolerance as a hiring qualification. Perhaps coincidentally, young, single people have a much higher risk tolerance than older people with families. If avoiding the appearance of age discrimination is at all important They would even fare better if they refrained from treating employee-investors as a lower class of investor, that can be diluted to oblivion while the higher classes of investor still get paid. Your anecdotal acquaintance sounds like an investor first, who just happened to be able to get hired as an employee. If you job hop while collecting discount equity opportunities, and leave before the success of the company is ultimately determined, how much of that value comes from the work you do, rather than your evaluation of the company and your co-workers? I presume that if the initial evaluation was off, he'd scarper for greener pastures in the middle of the night without waiting for anything to vest? You can't do that in most of the US. Away from the west coast and the Boston-to-DC corridor, there may only be one or two startups in town that need tech employees, if any. If you're in a college town, there may be few dozen, built around somebody's thesis work. If you don't like the local job scene, you have to move your entire household somewhere else. The startups follow the expectations of the investors, and the investors are looking at the coastal unicorns. I just get sick of all the cargo-culting of SV startup culture, y'know? It only works there because it's there, and I'm not even sure that "works" is the right word to use.