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You don't have to over-complicate the analysis. The fact that they give you the options instead of cash is proof the options are worth less than the cash. This

You don't have to over-complicate the analysis. The fact that they give you the options instead of cash is proof the options are worth less than the cash. This is Econ 101: bad currency drives out good as good currency gets horded.

draw_down 9y ago
Well, kind of the whole idea is that maybe they will be worth more than the cash in the future.
- moron4hire 9y ago
  When a company gives you options instead of cash, they are making a bet with you that they can make a better return on the cash than you can. They are hoping they can convince you that cash_in_your_hand_now < value_of_shares_in_the_future, but in order for them to even consider making the bet, they have to expect that value_of_shares_in_the_future < cash_in_their_hand_now.
  - draw_down 9y ago
    Yes, and things don't go as expected 100% of the time. Again, that's the whole idea here.
- poikniok 9y ago
  Great argument for paying people in lottery tickets!
  - draw_down 9y ago
    I mean, yeah. That's what this all is, that's why people refer to options that way. Thing is, people win sometimes.
seanhunter 9y ago
This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair market value of the company on the day I join. When I exercise that option, the value will be the appreciation in the value of the company up to that point (ie the value I have had a role in creating). So options (when the plan is set up well) incentivise employees to maximise the value of the company for shareholders. More broadly you could say that options tend to incentivise long-term value creation ("dividend-seeking") over short-term value extraction ("rent-seeking") behaviours. Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash. Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).

draw_down 9y ago

Well, kind of the whole idea is that maybe they will be worth more than the cash in the future.

moron4hire 9y ago
When a company gives you options instead of cash, they are making a bet with you that they can make a better return on the cash than you can. They are hoping they can convince you that cash_in_your_hand_now < value_of_shares_in_the_future, but in order for them to even consider making the bet, they have to expect that value_of_shares_in_the_future < cash_in_their_hand_now.
- draw_down 9y ago
  Yes, and things don't go as expected 100% of the time. Again, that's the whole idea here.
poikniok 9y ago
Great argument for paying people in lottery tickets!
- draw_down 9y ago
  I mean, yeah. That's what this all is, that's why people refer to options that way. Thing is, people win sometimes.

seanhunter 9y ago

This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair market value of the company on the day I join. When I exercise that option, the value will be the appreciation in the value of the company up to that point (ie the value I have had a role in creating). So options (when the plan is set up well) incentivise employees to maximise the value of the company for shareholders. More broadly you could say that options tend to incentivise long-term value creation ("dividend-seeking") over short-term value extraction ("rent-seeking") behaviours. Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash. Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).