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The optionality in startup investing has mainly to do with the "limited liability" in Limited Liability Corporation (other types of corporations and partnership
by gjem97 9y ago
The optionality in startup investing has mainly to do with the "limited liability" in Limited Liability Corporation (other types of corporations and partnerships also have limited liability). That is, if you invest a dollar in a corporation, your losses are capped at a dollar. But, your gains are potentially infinite. Another instrument that has that characteristic--limited downside and infinite upside--is an option. The startup equity isn't actually an option, but it is useful to discuss its "optionality" because it does have some similar characteristics.
- bogomipz 9y agoThanks for the explanation. A related question I have then is would RSUs be considered as providing downside risk(but no upside) for employees then as the value is independent of the companies actual performance?
- jsjohnst 9y agoI'm far from an expect, but unless I'm misunderstanding your question, no, that's not it. RSUs negate some of the downside risk for an employee (vs an option), but have similar upside. With an RSU, it has value as long as the company has value, with an option, it has no value unless the sell price is above the strike price.
- bogomipz 9y agoI probably didn't articulate that as well as I could have. You answered my question though thanks. I actually don't hear about RSUs as much except for some unicorns that seem to be staying private for longer and longer.
- jsjohnst 9y agoMany publicly traded companies issue RSUs over options these days. But yeah, many startups don't.
- bogomipz 9y agoYes, I think that RSUs are the most common form of stock grants for publicly traded companies. I think FB might hae been one the first SV companies to use it for employees pre-IPO.