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Ask HN: Cash or equity?
I've got a major career decision to make and I'm really sweating over it.
I can choose between enough salary to cover my expenses and 50K stock options in a SF startup that is in the process of closing a $100M round with prominent companies and VCs in the valley. The stock will either be worthless or, up to 1.6M if the company manages to 10x it's current value. At current value, the options would be "worth" $135,000 after paying the strike price. Given the laws in my country of residence there would be no taxes on either exercise or selling the shares.
Or I can choose $400K in after-tax income over the same 4 years.
I think the company has good prospects of succeeding, and they'll certainly have the funding for it. They're in the nice hockeystick part of the growth curve. But nothing is for certain, and there's always ways it can go wrong.
How does a person even begin to make a sensible decision about something like this? I made some spreadsheets, entered some made up probabilities and the math tells me choose the equity. Everyone else tells me take the money.
If I had $400K in cash, I wouldn't spend it all on shares in this company - it seems to risky to me. That's an amount I would definitely miss if I lost it, and it's fully undiversified. Heck I wouldn't even put $400K into just Apple or just Google, and they're a lot less risky!
But the smart money may be to take the risk. What would you do?
- mosalarynolife 8y ago"A bird in hand is worth two in the bush" If you're reasonably young enough and free (i.e. no responsibilities, dependent family), you can gamble on the startup. If you have a semblance of a life, you will need to evaluate the company based on YOUR goals, not theirs. Personally, I would take the money.
- simplecomplex 8y agoA few things to consider: - If the money is not in the bank, then the company has not raised $100M. Until the money is wired, it can fall through. - Without a liquidity event you cannot make any money from your equity. It doesn't matter how much the company is valued, unless someone buys the company or it goes public you will not likely be able to sell your shares. - Most options come with a cliff, meaning you lose it all if you leave before 4 years. In this industry, 4 years is a long time. Be cognizant of the many ways in which you can lose your stock (cliffs, dilution, liquidity preferences, etc.) - I'd double check with a lawyer, but if you earn equity in the US you must pay taxes to the US - it doesn't matter what country you live in. - $400K invested wisely is enough for you to secure retirement, and then focus on risking everything for your own startup where you own 100% of the equity and upside. Personally, I would take the money, secure retirement ASAP, and then take your own shot at a startup.
- birdinhand 8y agoThat makes perfect sense to me. I've been thinking if I take the money I'll hedge taking the safe road by also taking my own shot at a startup which would at once be much more fulfilling and potentially more lucrative. At the least I won't screw myself over - which is more than I can say for any other company.
- coralreef 8y agoThe data shows that the global economy is entering a recession, and the US bull market run is over. Consider that within 4 years, if your company hasn't produced a significant profit/cashflow, it may be hard to raise another round. Not sure what probabilities you used, but the probabilistic outcome using a sample size of 'all startups that raise money', is probably to take the money and not the shares.
- codegeek 8y ago..."The stock will either be worthless.." ".."the math tells me choose the equity.." "..in the process of closing a $100M round.." Yea, go with your first assumption. More than likely, that will happen. If you are young, take the cash and you can always do more next time. I am big into risk taking but if you really want do it, do it your way. Run your own startup. Otherwise, your chances are very very slim of getting any significant payout, if any.
- altairiumblue 8y ago> If I had $400K in cash, I wouldn't spend it all on shares in this company - it seems to risky to me. This is your answer. Your investments really don't care if they started as stock options or were bought with your own cash. And neither should you. You would be effectively spending $400k on start-up equity. I know it doesn't quite feel that way when the money doesn't go through your own bank account but the effect is the same. You need to have very high risk tolerance to choose equity over cash in this case.
- matt_the_bass 8y agoThis is a great way to simplify the question.
- mchannon 8y agoThis is a straightforward, if not simple, math problem. Likelihood of happy path * happy path exit amount / happy path years until liquidation + equity-heavy salary A few considerations in terms of populating those numbers: 1. The entrepreneur's fallacy: You expect it'll either go gangbusters or fail suddenly and spectacularly, but the third case is most likely: the zombie case, where the company isn't thriving, but isn't dying either. You're still expected to work at that below-market rate for that underwhelmingly-performing equity. 2. Stockholm Syndrome fallacy: You assume that the company will vest according to plan, and future investors won't wash out your equity. Sometimes early employees make out like bandits when the company does well, but other times the management will get in bed with partners who sportf••• the early employees out of their share at the last possible minute. I'd head over to thefunded and do your own due diligence on the prominent companies and VC's. Are they the sorts who dance with the girl they brought, or toss her aside and laugh about it later?
- muzani 8y agoThe zombie option is by far, the worst. You'll still keep going at a large opportunity cost. Nobody will want to end it and often the first who does becomes the scapegoat. Better to be unemployed than stuck in a job nobody wants.
- birdinhand 8y agoTo everyone who replied here, thank you for giving me some food for thought! I'm going to take the cash, and invest it in a properly diversified way for my future retirement. I'll add some risk to my "portfolio" but in a different way by investing my time in a venture of my own.
- dawhizkid 8y agoThere is no right answer. I took a job a year out of college in SF at a below market salary for more equity. I'm no longer at the company, and it's still private, but it has done better than expected (at least when I decide to leave) and I was able to sell a percentage of my stock via a tender offer end of last year for a very high return. My total comp as a very jr person was more than Sr engineer would typically make at a big co. It's all a lottery. And if you're trying to do the math and calculate opportunity cost I think you'll most likely be disappointed.
- muzani 8y agoI always chose the equity. But that probably explains why I'm broke. We often overestimate our odds - our estimate of 90% is often closer to 30%. It really depends on your ambition level. Where would you like to be? If you absolutely need that shot to be a billionaire, go for the equity. If you're fine with a comfortable home and family, the money's not bad.
- zer00eyz 8y agoIf I offered you lottery tickets in lieu of a paycheck would you take those? They have KNOWN published odds on lottery tickets, and you could sit down and do the math but your still taking a risk. Not only do you NOT know the odds with options, they may not be as liquid as you think. Even if your company is doing well in 4 years do you KNOW that you can sell them? If they aren't publicly traded and you NEED to cash some in (life happens) you might find that the best you can get is pennies on the dollar. IF you are going to consider the options they make SURE you get a cap table. Make sure that you can read and understand what you are given. Where you fall on it and what the outcomes might be (massive dilution)
- cimmanom 8y agoMan, where can you make $400k in post-tax salary?