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Cash is nearly always better for the employee. Startups like options because: 1. They can "pay" people with "free" pieces of paper that effectively cost nothin

Cash is nearly always better for the employee. Startups like options because: 1. They can "pay" people with "free" pieces of paper that effectively cost nothing from a cash standpoint 2. It helps keep staff onboard by slapping golden handcuffs on 3. In the event that these paper options turn into something with actual value that only happens if the founders and investors make a ton of money first, so at that point they don't really care what the options "cost". It's like writing a paycheck that can only be cashed if the founders/investors get rich. A great deal for them, not so great for you. Net net all these things benefit the founders/investors and not the person receiving the options. In nearly all cases people are getting options as part of core comp because the company can't afford to pay out all that cash. It's important potential employees understand that when agreeing to a base package that is heavily in options vs cold cash. Options should be treated as a bonus that may pay off but very likely won't, not base comp.

blennon 9y ago
Startups also like options because they believe it creates an "ownership mentality" among its employees. I believe this is mostly true. I think equity compensation is also a selection mechanism. If I'm running an early stage startup, I want everyone to have a stake in the game. Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me. One of the struggles of offering equity to employees is finding a mechanism that has no taxable value upon issue, benefits from capital gains, and is legally sound. One option is to organize as an LLC and offer a profits interest. These can be issued with $0 taxable value and benefit from the upside of the company. They can vest, and once vested they can participate in the gains of the company (including distributed income, not just a sale). I believe these are inherently more fair to the employees because there is no golden handcuff. They don't need to be exercised and once they're vested, you can walk away with them. On the downside, they are a little more cumbersome to set up.
- maerF0x0 9y ago
  Remember that people having a stake in the game (and not current cash) gives incentives for early liquidity. That could be a bad deal for all involved (except the acquirer). If your staff/founders are going broke before the greatest gains in value of the options, they will still have to push for liquidity event before the optimal time.
- jboggan 9y ago
  More than cumbersome to set up, they are extremely cumbersome to amend.
- pascalxus 9y ago
  Employees should have ownership over the responsibilities of their jobs, anything more is just altruism. When a company or overly aggressive recruiter tries to sell me options, that aren't worth anything yet, like it's a billion dollar lottery ticket, that's a big Red flag for me. It says something about the culture of the company.
- state_less 9y ago
  I'd prefer plain old stock without restrictions and a larger proportion of it. I think we ought to target a controlling interest for the employees (i.e. employees own over 51% of the company) and shareholders vote on the weight of their shares, like they normally do. In sum, I'd rather see a founder worth $100 Million and 999 employees worth $900k than a $800 Millionaire and 999 employees worth $200k. And I actually think this would have an important impact on the economy by balancing out the income inequality. In other words, not only would we see far more ~$1 Millionaires, but also more $100 Millionaires because now the money is moving faster with all the fresh Millionaires buying goods/services.
  - gech 9y ago
    There are plenty of people, especially on here, that want to maintain the ever widening gap between the many and the few. You make a great point about how more even distribution would increase the participation in the economy leading to more activity naturally.
  - warcher 9y ago
    As somebody who's founded a couple companies, there just aren't enough people with the appetite for risk and drive needed to manage a controlling interest in a company. And on an economic level, if the net compensation level, including crushing levels of stress and overwork, was so bad between founders and employees, you'd see a lot more founders until the system balanced itself out. And you do not. Most real good engineers just want a fat paycheck and a clear delineation of responsibility. Trust me, a senior valley level salary and not riding that ride is a good gig. That said, the side of the bread with the butter on it is pretty clear. The reasons for that are less clear until you've done it, but nobody's standing in your way-- you want to be the daddy/get really rich, found a company.
    - pbecotte 9y ago
      Come now, you believe that more people don't found companies because of the stress? It seems far more likely that most people don't have the capital assets for that to be an option, except three groups... 1. The very young who have very low expenses, the ones who cashed out already, and the ones who started rich.
- JimboOmega 9y ago
  While the math of options value may not always work out, the mindset - that I'm a real part of this thing - is why I got attracted to startups to begin with. Feeling like I own a non-negligible part of it is part of that feeling. When companies act like that's not the case, whether in terms of compensation or in other ways... it really turns me off. For instance, at one ~10 person startup I worked at, it was common for "Senior Staff" to have closed-door meetings and try to keep us totally in the dark on what was going on, BigCo style. I need to care about my company, and to feel like my company cares about me. Them letting me have a small slice of it is part of that equation. Acting like they can totally shaft me on cash compensation as a result... well that doesn't work, of course!
- DrAwdeOccarim 9y ago
  Yes, exactly. The start-up I joined did this with a fair vesting schedule. Now I own actual stock in the company without having to pay any cash to take ownership of them. One issue we've found, though, is that early employees have less of a reason to stay on once they become vested. With options, as long as they're employed by the company they don't have to exercise. If they leave, they have only a short period of time before they have to come up with the cash to buy their shares. One other downside is that an LLC can't go public, so if the company decides to go that route they'll have to reorganize to a C-corp. Of course the lawyers love this because the paperwork required is significant.
- m-j-fox 9y ago
  > Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me. But that says a lot more about you than it does about them. Everyone is different and judging from this thread, many believe equity is bullshit for reasons unrelated to their work ethic or team spiritedness.

blennon 9y ago

Startups also like options because they believe it creates an "ownership mentality" among its employees. I believe this is mostly true. I think equity compensation is also a selection mechanism. If I'm running an early stage startup, I want everyone to have a stake in the game. Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me. One of the struggles of offering equity to employees is finding a mechanism that has no taxable value upon issue, benefits from capital gains, and is legally sound. One option is to organize as an LLC and offer a profits interest. These can be issued with $0 taxable value and benefit from the upside of the company. They can vest, and once vested they can participate in the gains of the company (including distributed income, not just a sale). I believe these are inherently more fair to the employees because there is no golden handcuff. They don't need to be exercised and once they're vested, you can walk away with them. On the downside, they are a little more cumbersome to set up.

maerF0x0 9y ago
Remember that people having a stake in the game (and not current cash) gives incentives for early liquidity. That could be a bad deal for all involved (except the acquirer). If your staff/founders are going broke before the greatest gains in value of the options, they will still have to push for liquidity event before the optimal time.
jboggan 9y ago
More than cumbersome to set up, they are extremely cumbersome to amend.
pascalxus 9y ago
Employees should have ownership over the responsibilities of their jobs, anything more is just altruism. When a company or overly aggressive recruiter tries to sell me options, that aren't worth anything yet, like it's a billion dollar lottery ticket, that's a big Red flag for me. It says something about the culture of the company.
state_less 9y ago
I'd prefer plain old stock without restrictions and a larger proportion of it. I think we ought to target a controlling interest for the employees (i.e. employees own over 51% of the company) and shareholders vote on the weight of their shares, like they normally do. In sum, I'd rather see a founder worth $100 Million and 999 employees worth $900k than a $800 Millionaire and 999 employees worth $200k. And I actually think this would have an important impact on the economy by balancing out the income inequality. In other words, not only would we see far more ~$1 Millionaires, but also more $100 Millionaires because now the money is moving faster with all the fresh Millionaires buying goods/services.
- gech 9y ago
  There are plenty of people, especially on here, that want to maintain the ever widening gap between the many and the few. You make a great point about how more even distribution would increase the participation in the economy leading to more activity naturally.
- warcher 9y ago
  As somebody who's founded a couple companies, there just aren't enough people with the appetite for risk and drive needed to manage a controlling interest in a company. And on an economic level, if the net compensation level, including crushing levels of stress and overwork, was so bad between founders and employees, you'd see a lot more founders until the system balanced itself out. And you do not. Most real good engineers just want a fat paycheck and a clear delineation of responsibility. Trust me, a senior valley level salary and not riding that ride is a good gig. That said, the side of the bread with the butter on it is pretty clear. The reasons for that are less clear until you've done it, but nobody's standing in your way-- you want to be the daddy/get really rich, found a company.
  - pbecotte 9y ago
    Come now, you believe that more people don't found companies because of the stress? It seems far more likely that most people don't have the capital assets for that to be an option, except three groups... 1. The very young who have very low expenses, the ones who cashed out already, and the ones who started rich.
JimboOmega 9y ago
While the math of options value may not always work out, the mindset - that I'm a real part of this thing - is why I got attracted to startups to begin with. Feeling like I own a non-negligible part of it is part of that feeling. When companies act like that's not the case, whether in terms of compensation or in other ways... it really turns me off. For instance, at one ~10 person startup I worked at, it was common for "Senior Staff" to have closed-door meetings and try to keep us totally in the dark on what was going on, BigCo style. I need to care about my company, and to feel like my company cares about me. Them letting me have a small slice of it is part of that equation. Acting like they can totally shaft me on cash compensation as a result... well that doesn't work, of course!
DrAwdeOccarim 9y ago
Yes, exactly. The start-up I joined did this with a fair vesting schedule. Now I own actual stock in the company without having to pay any cash to take ownership of them. One issue we've found, though, is that early employees have less of a reason to stay on once they become vested. With options, as long as they're employed by the company they don't have to exercise. If they leave, they have only a short period of time before they have to come up with the cash to buy their shares. One other downside is that an LLC can't go public, so if the company decides to go that route they'll have to reorganize to a C-corp. Of course the lawyers love this because the paperwork required is significant.
m-j-fox 9y ago
> Equity compensation attracts employees with that mindset. Conversely, if a potential employee would prefer all cash compensation to equity, that would be a big red flag to me. But that says a lot more about you than it does about them. Everyone is different and judging from this thread, many believe equity is bullshit for reasons unrelated to their work ethic or team spiritedness.