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TLDR Stock Options

• RubenSandwich 8y ago
  Feature request: When you select a new funding round of a company: "Seed", "Series A", etc. Can you keep the same IPO amount? As it is right now the IPO amount slider will keep the same position, not amount, so if your not paying attention to the IPO amount it makes it seem like 0.01% in a Seed round is worth less then in a Series A round.
  • bethly 8y ago
    Thanks for the feedback! That's a good idea; I'll add it to our list!
  • Timothee 8y ago
    Ah, that's what happened! I couldn't figure out why a certain percentage at series A would yield a higher payout than the same percentage at series B and C…
• deyan 8y ago
  Unfortunately this is highly misleading without the ability to customize (e.g. capital raised, liquidation preferences, future rounds, etc.).
  • bethly 8y ago
    If you are looking for more detailed scenario modeling, we've also built a free cap table management tool that takes into account the specifics of a particular company: https://captable.io/ https://captable.io/
• allworknoplay 8y ago
  More than the other feature requests seen here, this needs to be adjusted by a discount rate that reflects the risk over time.
• aidenn0 8y ago
  Even shorter TLDR: single-digit percentages of equity are unlikely to be worth much more than 1-2 years of salary. Really if you are in the bay area and consider only the financial aspect, working for FAANG for the low 200s is almost certainly better than a startup for the mid 100s plus equity. Note, I choose to work for a non-FAANG company for non-financial reasons. I therefore don't work in the bay area for financial reasons (I was able to find a non-FAANG job for mid 100s somewhere that is ~40k a year cheaper for a mortgage).
• brootstrap 8y ago
  This is cool... I was first employee at startup who sold about 5 years later. My original stock options sheet said my shares would be worth a cool 1.2mil. Turns out the shares were only worth about 60k. Pretty solid , but not fuck you money. more like pay off some of wife's student debt and kickstart retirement saving money haha. I will have to say though getting a check worth 5 figures and cashing that bitch felt great!
  • maxxxxx 8y ago
    That’s 12000 per year so in the big picture it’s really not much.
    • k__ 8y ago
      If it's additionally to their regular compensation?
      • jadell 8y ago
        Not if they took a 13k/year pay cut to get it. Options are usually "instead of" not "in addition to" salary.
        • brootstrap 8y ago
          I started off as a wee-lad fresh out of college (degree in science not computer programming) so was on a 50k/yr salary and i got options too.
    • brootstrap 8y ago
      We actually got a bigger bonus as part of the acquisition, just not technically stock options. My total comp after the take-over is roughly 120k (pretax). For my situation , it was pretty amazing. I'm not on the standard path of CS degree + working at FAANG. I'm a DIY-er , self taught. Given where I am now, 23 year old self would be fucking amazed. We built and sold a digital company from nothing to some mega corporate suit bros worth billions of dollars!
  • 8y ago
• crazypyro 8y ago
  Seems easier to just assume the stock option has no value, especially given failure rates. I feel most people will overestimate their chances of success which will give them an unrealistic number.
  • mykowebhn 8y ago
    This. I tend to look at stock options at an early-stage startup as a lottery ticket.
    • linuxftw 8y ago
      Worse than a lotto ticket. A lotto ticket doesn't make you accept below-market wages and has fixed amount winnings that won't be diluted.
      • roguecoder 8y ago
        Lottery tickets cost you money up front and have a defined possible upside. Neither of those is true of equity. The uncertainty of startup equity makes it impossible to do the same probable value calculations you can do on lottery tickets.
        • ryandrake 8y ago
          Options are worse because they cost you money year after year: the difference in salary you could have made instead of taking a job that offered those options in lieu of a market salary. If im offered a job that comes with options but pays $1000/yr less than I’m making now, I have to ask myself: why not just keep my current job and spend that $1000/yr on an investment with similar risk/reward profile? If I’m willing to do that then I should just keep my job and buy that investment. If I’m not willing to do that, than I shouldn’t take the job, because that’s in essence what it would mean. In either case I shouldn’t take the job.
• kemitchell 8y ago
  Giant asterisk FTW
• r0f1 8y ago
  Why is Snapchat (Snap Inc.) among the top companies when you move the slider? Since the beginning, Snap Inc. has had a clear downward trend.
  • spalas 8y ago
    Because it is based on the value when the stock options became liquid (when they IPO'ed), not on the performance since.
    • jiveturkey 8y ago
      they should base it on the value 6 months after IPO, ie after the typical lockout period.
• maerF0x0 8y ago
  Previously posted. Big discussion here: https://news.ycombinator.com/item?id=14463260 https://news.ycombinator.com/item?id=14463260
• mikekij 8y ago
  Great concept, and really helpful for most non-legal savvy early employees. I noticed that an employee getting 1% options in a seed stage company doesn’t seem to get anything unless the exit is > $35M. Not sure that applies to most seed stage companies. Employees of a company I know well would start seeing proceeds after an exit >$5M.
  • trhway 8y ago
    A highly ratcheted round can easily change that.
  • jasode 8y ago
    >doesn’t seem to get anything unless the exit is > $35M. It's because their model assumes "$41 million" was invested into the hypothetical seed company over 4 rounds. Therefore, the company has to exit for more than $41m for the employees' common stock to be worth something. You have to click on the "How We Guesstimate" button to see their underlying financial assumptions. In my opinion, this type of "what if?" calculator would be easier to understand if they explicitly showed the intermediate calculation steps in the user interface. A more obvious "show your work" would educate people and preemptively answer questions such as yours about why a $5 million exit nets $0 for employees.
    • nitrogen 8y ago
      Seconded. A user-friendly display of intermediate steps would be great for educational purposes.
      • bethly 8y ago
        Building this tool we purposefully steered away from education. We found that the users we talked to, people considering startup jobs who didn't know how to value options, were frequently overwhelmed and discouraged by tools with more educational content. This tool might spark someone's curiosity, but we purposefully built it for a group that didn't want to have to learn about venture finance and still wanted to work at a startup.
• code4tee 8y ago
  Easiest strategy is to just assume the options are worthless and base your comp assessment on that. Doing otherwise sets people up to get burned badly. Furthermore the risk reward for all but the founders is typically significantly lopsided. If you can accept the risk great, but again assume you’ll never see a penny from options or far far less than you might think (as the calculator highlights nicely). If things go well you’ll get a nice bonus. Not life changing for the vast majority of people, but a nice financial surprise. The mistake most people make is accepting far too little cash comp on the grounds that their options may be worth something some day. When they turn out not to be they get burned twice. First on not getting that money period, and second on not having higher cash comp all along which means they also missed out on compound savings or investment with that money. Net net see options for what they are in most companies—-a way to “pay” people when the company can’t really afford to pay people.
  • usaar333 8y ago
    > Easiest strategy is to just assume the options are worthless and base your comp assessment on that. But that easy thing leads to: a. Having no basis to negotiate your options. (X% of $0 is always $0 regardless of X) b. Your comp will always look like crap compared to a publicly traded company.
    • xchaotic 8y ago
      Then negotiate a higher salary which is the statistically correct course of action. Many of my colleagues are 10+ years stuck waiting for an IPO that may never come.
    • yowlingcat 8y ago
      B is kinda true a priori. It's easier to negotiate A should be negotiated in relationship to ownership and responsibility. You should get into the head the hiring manager in question and figure out what's the max/min range to motivate a candidate to do the job properly. That could be anything for single digit percentages for senior ICs at an early stage company to 50% for a pre funding cofounder to a couple bips for an IC at a series D medium sized company to a sizable fraction of a percent for an executive at a series B. Trying to value illiquid options as if they were fungible in cash is a fool's bargain. Reject it. They have value, but they're different.
• jpollock 8y ago
  I had 1% of a company at seed time which eventually went public. The value peaked at USD$400k before I could sell, and quickly dropped down to USD$100k for 6+ years of work.
• eanzenberg 8y ago
  This looks like pre-tax
• psadri 8y ago
  I’m curious if anyone here has used an exchange fund (or swap fund) to diversify a portion of their private shares?
• marssaxman 8y ago
  Assume stock options are worthless. Once in a career, perhaps, you might experience a pleasant surprise in a modest little way. Do it for the salary, do it for the experience, do it because you are trying to be the change you want to see in the world, but don't do it because you imagine the stock will be worth anything.
  • throw31415 8y ago
    Unless the company is on the market for almost a decade now, shows steady growth and IPO might happen during the vesting period. However I agree that most cases stock option is worthless in early ages, especially if it needs VC money to keep the ship from sinking.
    • marssaxman 8y ago
      Sure, but in that case you won't be receiving potentially-life-changing quantities of stock options, because it's already too close to being a sure thing. You're only going to strike it rich if you are one of the first handful of employees to receive options at a very early startup which later has a very successful exit, and you simply can't know in advance whether the startup you are thinking about joining will or won't be one of those.
• smallgovt 8y ago
  This tool isn't really helpful. What you really want to know, as an employee, is what the expected value of your options are -- not what they will be worth if company IPO's for $xxb. This expected value is strongly correlated to your company's valuation which isn't an input into the posted model. As a general rule of thumb, I'd recommend taking the valuation of the company's last financing round and halve it. Then, multiple this valuation by your projected vested ownership percentage (and subtract any impact from exercise price). The biggest reasons you want to discount the company's last private valuation are liquid preference and risk intolerance. This rule of thumb is most effective if the last private valuation was recent and completed on standard terms. Edit: I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary.
  • kemitche 8y ago
    I concur with your line of thought, as long as the base salary covers your basic needs (food, shelter, sufficient extra to put away for retirement, basic vacations). Once those bases are covered, the employee is already looking at "more money than they need" and should take a measured approach to how they want to invest/risk that money. But ultimately, it should be done objectively based on the reality of the company and the options presented.
  • roguecoder 8y ago
    Given that 2/3rds of venture-backed startups fail entirely, your approach is going to massively over-estimate the likely value of options.
    • sokoloff 8y ago
      I don't think that's the case. 2/3rds fail, 2/9ths return a small multiple, 1/9th return a substantial multiple to a typical decent VC. Valuing the shares at half the most recently priced round puts them into a quite reasonable range, IMO.
• pfortuny 8y ago
  While you cannot sell them (if this happens) then they are worthless (value is market-intrinsic, not an inherent property). Gold is worthless in a famine.
• krzkaczor 8y ago
  Generally, I agree that you should treat shares as worthless and negotiate your base salary, the only exception that I can see is blockchain space where you can often get tokens that are already tradable. This basically means that you can sell anytime (ofc. you still have vesting period etc).
• OliverJones 8y ago
  The "how we guesstimate" box didn't mention preferred shares, but it looks like the $0 for low exits covers that. Of course, there's probably also "participating preferred shares." I don't think it's possible to really understand that without putting on a blue pinstripe suit and bringing your $700/hr lawyer to the meeting. tl;dr it's like the Blues Brothers' rubber biscuit. "You Go Hungry Baaaow Baaaow Baaaow." Don't forget: when you work for stock options / restricted stock / equity , you are an investor in the company. You buy your investment with your scarcest resource, your time. (The VCs buy their investments with a resource that is NOT scarce for them, money.) Smart investors ask questions. Honest founders answer them clearly. This web site might be a really good starting place for your questions. If the founders balk at your questions, don't invest. Seriously.
• k__ 8y ago
  What is the reason companies aren't handing out stock, but only stock options?
  • smallgovt 8y ago
    Some do. See the differences between RSU's and stock options.
  • tlb 8y ago
    Handing out stock is taxable to the employee at the moment it's handed out, even though (for non-public companies) they can't sell it. It'd be ruinous to give an employee $1M of startup stock, since they'd owe around 400k tax on it. So the standard is to hand out options with a strike price equal to the current fair market value. The employee eventually gets the upside, but not the downside.
  • paulsutter 8y ago
    Taxes. Income tax is owed on the value of whatever is granted. If an option is granted with a strike price equal to the fair market value for the stock, then there's no income tax owed. This is also the reason it's important the company chose FMV in a way that wont get disputed later. Because back taxes and penalties are a bear. Some do grant RSUs (restricted stock units), which are usually taxable as income when you receive them.
    • dilyevsky 8y ago
      This isn’t correct. Double trigger RSUs (which are handed out by pre-ipo companies) are taxable on liquidation event.
  • roguecoder 8y ago
    It's so they can make the employees pay the taxes later, rather than paying taxes up front as most companies do for RSUs. As an employee, you want RSUs, not options.
    • matthewowen 8y ago
• abalone 8y ago
  It’s important to remember this calculator is looking across several years of the growth of a company but only valuing one option grant. There may be additional grants given along that journey (say, every 2-4 years) along with salary increases that bring you closer to market.
• anovikov 8y ago
  Something is wrong here, why is the probability of exit is lower for C than for B stage and B stage lower than for A stage company?
  • CardenB 8y ago
    Companies can still exit at stage A. I don’t know what the actual probabilities would be, but more funding rounds do not necessarily mean it’s a higher probability of exit.
• phy6 8y ago
  What if my company doesn't tell its employees how many shares have been issued, so that it's impossible for us to know what percentage of the company we own?
  • unholiness 8y ago
    Then that's absurd, and you should push back. You wouldn't accept your salary in a currency with no known exchange rate, why would you accept options without knowing the size of the pie?
    • PeterFBell 8y ago
      As mentioned by someone else, estimating how much of the company you have depends on seeing the complete cap table (redacted for names is fine) along with a copy of all of the major financing documents to validate liquidation preferences, participation mechanisms, sweeteners for i-bankers and various other instruments. Good luck getting that information as a dev. Given that, I tend to join the group that value options in an early stage private company as "worthless". If the cash comp doesn't work for me, it's unlikely the options will move the needle as I'll probably need to be there 5-9 years to actually see a positive event and I'll need to do that 5-10 times to have a solid chance of a couple of meaningful wins. Of course, some of the failures you can drop out after a year or two, but it's still many decades to have a reasonable possibility of a return from options. It's hard enough for VCs who do this for a living and can make 10-50 simultaneous bets to come out well ahead - and the good ones have access to insane deal flow and all the docs during due diligence. Good luck being confident that you will beat that serially with limited deal flow and limited due diligence access. To be clear, a certain proportion of people here DID beat that and are doing great with stock options, but the odds are not in your favor . . .
      • phy6 8y ago
        Thanks, this was a good amount to chew on. I feel like a first grader peeking into the 2nd grader's math class.
  • smallgovt 8y ago
• icedchai 8y ago
  I had around 0.6% of a seed stage company. After series A, acquisition, a down round with the acquiring company, etc. I wound up with like $12K. Most people do much worse.
• sdrinf 8y ago
  Relatedly, the valley still does not have a good story for first employees. Given the economics of stock options, there is currently no good economical reason to go working for a startup when the option of working for an already IPOd & liquid Corp exists.
  • woolvalley 8y ago
    Which is why as a startup you have to offer something that FANG can't offer, like full remote working or similar. That or taking the people who fail to get FANG offers / naive jrs.
    • richman777 8y ago
      I wonder how much the proliferation of start up failures has to do with this very fact versus a poor product/model/founder/execution/etc. Not saying that the employees are to blame but I'm sure there's plenty of good ideas out there that just don't have the right people trying to implement it. Or that's such a small amount that it really doesn't contribute. Really just wondering what that number is.
    • opportune 8y ago
      If I were to start a VC-backed startup I would just employ the paradigm most big publicly traded tech companies use: pay competitive market rates for good engineers as FTEs, and contract with body shops for all the other work. Given that FANG are some of the best performing companies in the world I'd say it's a safe assumption that they've done the math and found that it's more economical to pay a high rate for a limited number of high qualified engineers rather than pay medium rates for less qualified engineers. And then you can have contractors making less than what "medium" engineers make do the less important/skillful stuff.
      • deanmoriarty 8y ago
        Not to totally dismiss your point, but don't forget that one of the reasons, a very big reason, why FAANG companies pay that high is because they literally print money like crazy, so they can afford to behave that way. They have tons of cash to burn and they're not going to run out of it anytime soon. If you are a startup that just raised 10M$, you just can't go around and pay a few good engineers $500k a year in cash compensation (which is what they would make at FAANG, since the RSU portion of the compensation is basically cash-equivalent, perhaps discounted at 80% if you want to be conservative), even if "a few" is a very small group. You'll have to settle with offering them $180k base + stock options that on paper might bring their compensation to $500k, 5-10 years down the road, and any reasonable good engineer should value them at 10% of their pitched value, if not less. It just really never makes sense to join a startup for financial reasons, and I say this as a person who was lucky enough to have a ~1M$ windfall from stock options of a former startup employer: amortized over the amount of time I spent at that company (4 years), I'd have been much better off financially had I been at FAANG the whole entire time (which is where I am now btw, completely done with the startup bs).
• iooi 8y ago
  For what it's worth, a 35% dilution per round is pretty high. If you have good traction 15% is very doable. That said, I like that it's conservative so you'll undervalue your options - it's very likely that they'll be worth nothing.
• tasuki 8y ago
  "You've been offered 100% of a Seed company. If the company is sold or IPOs for $40M ... in 7-ish years you could be looking at something like: $0" Really?
  • deanmoriarty 8y ago
    It's basically the difference between common stocks vs preferred stocks. The scenario assumes the startup raised ~40M from investors, which is realistic. So in that case yes, you can own 99.9% of the equity the company, but if it sells for less than the total amount raised, the investors will exercise their liquidation preference rights (typically 1X for clean deals), meaning that they will wipe you out completely and keep the 40M for themselves. If the startup sells for 50M, the investors can then decide to either exercise their liquidation preference rights and get their 40M (leaving you with 10M, assuming non-participating rights), or they can decide to convert their equity to common and thus get 0.1% of 50M, and you take the 99.9%. They'll take whatever is the most convenient for them, which typically means they'll exercise their liquidation preference rights unless the company sells for more than what they valued it at during their round of investment.
• alangpierce 8y ago
  To be clear, this is saying that seed-phase companies have a 74% chance of eventually failing, and a company that makes it to series C is nearly as likely to eventually fail, at 71%? My impression was that joining a later-stage company is generally seen as much lower-risk, which is also why companies tend to give out fewer options as the company grows. Is that the wrong way of thinking about it?
  • bethly 8y ago
    In the data set I used for reference, Series C+ companies still mostly failed to exit. Even at the furthest extreme the data tracked, of the 35 Silicon Valley companies that raised a fifth round 18 failed to exit or raise more money. On the other hand, there are some advantages that may make later companies less risky: the timeline to exit may be shorter (though that is less true in the case of an early M&A, which ~23% of the cohort found). The nature of the risks may change in ways that make it easier to evaluate. And cash salaries usually rise in the later stages, reducing the marginal cost to employees. There was no stage at which venture-backed companies stopped being a risk, but that's also true of public companies that grant options: it is always possible that the share price goes down and the options are worth nothing. I think the takeaway is that in this 2006-2008 cohort, earlier startups were less at risk of running out of money that most people would assume.
• erichurkman 8y ago
  The biggest downside to options is the tax treatment. The treatment by the IRS is absolutely asinine: you're taxed on the 'gain' between strike & current fair market value, or rather, you'll pay tax through the AMT. You can't sell the shares, so why are you taxed at exercise?
  • roguecoder 8y ago
    If you were given stock you'd be taxed on the whole value immediately, because you are getting something of value whether or not it's liquid. Getting compensation tax-free at time of receipt, as options do, is already a pretty great tax deal.
    • erichurkman 8y ago
      Tax free at receipt is great. It should be tax free at exercise, too, and only taxed when the shares are sold. It's asinine to get taxed on something you cannot realize any actual gain from.
• filleokus 8y ago
  Would I be willing to invest any of the surplus cash I would get from a FANG-style salary in something as risky a startup? Definitely not. Just considering stock options as a cash investment (as opportunity cost) drives me so hard towards not taking them it's silly. Of course I would have an information advantage as an employee, and also perhaps a possibility to slightly effect the outcome. But at the same time I'm locked up at the startup, and putting my salary and equity in the same basket. (Maybe this has been covered in other comments, but couldn't find it)
• GCA10 8y ago
  This model feels very mechanical in the rigid $50 million cutoff between "low exit" and "will make you money." Truth is, niche companies with small burn rates can yield nice payoffs to investors even if the exit is $20 million. And cash-hungry dream-chasers can yield almost nothing to insiders even with a $80m to $100m valuation. I'd like this model more if it had a second slider that let you move between "thrifty bootstrap" and "costly moonshot." Over the years, I've seen friends get surprised on both sides of the supposed $50m divider.
• zamfi 8y ago
  Hmm. One thing that is really not covered here, even in the giant asterisk, is the diminishing probability a big acquisition will be clean. Where by clean I mean: the acquiring company acquires the shares of your company for the stated acquisition value. These days, it seems like acquisitions often end up using retention packages for key employees, and letting the rest go. The actual per-share purchase price is low compared with the total acquisition value, so even if you're fully vested, not that diluted, etc. -- of a $1B acquisition, very little will go to the actual common stockholders.
  • deanmoriarty 8y ago
    Do you mind elaborating a bit more on this concept? In such a scenario, why would investors ever want to put money in a company if the bulk of the value came via retention packages (which they can't tap into), as opposed to the per-share purchase price (which they can tap into)? I am talking about investors who put money in "clean deals", so 1X liquidation preferences, non-participating, which from what I've seen in the Bay Area is fairly standard. If the terms are clean (assumption above), common holders not making any money on a $1B acquisition would just mean that investors will at best recoup all their original capital, without any meaningful return, so why bother? I understand that the investors have a lot of money to play with and can afford to lose a good chunk of it, but in the scenario you are picturing they would get screwed even when the company itself becomes a massive success (as defined by the $1B acquisition), which is exactly the needle in the haystack they look for. Am I missing something? Are there some obvious ways through which investors with 1X preferences can make a lot of money while wiping out common holders?
    • zamfi 8y ago
      I don't know why investors would want to put money into such a company, if they knew a priori what would happen. But I'm not saying "common holders make no money" in literal terms. A $1B acquisition might look like $100-500M stock consideration, certainly not nothing. It happens because, these days, founders often retain control of shares and board even all the way up to billion-dollar acquisitions, and their incentive to share all (or even most) of that acquisition money with their investors is, frankly, not that high -- the investors would rather a deal go through than the company fail, and they don't have enough control to dictate terms. The acquiring company cares most about the product (often) and about retaining key talent, not how much the investors get. So, in a founder-controlled startup, no one who has power over an acquisition has a strong incentive to reward shareholders. Perhaps this is an inevitable result of founder control, and will cause the pendulum to swing back the other way? Anyway, it's worth noting that this doesn't apply to IPOs.
• myrandomcomment 8y ago
  This is a better tool. https://comp.data.frontapp.com https://comp.data.frontapp.com
• mkoryak 8y ago
  I worked at startups for the free beer, the tech and people. 3 startups later I have made 0 money on stock and had loads of fun. That's the truth about startups. Now I don't work at a startup, I make butt loads more money, and have much less fun.
• xivzgrev 8y ago
  Does anyone else frequently encounter companies that are coy about what percentage of stock your options represent? I've probably asked 10+ companies and only one or two shared. They're all too happy to share number and strike price, but not the outstanding shares.
  • JimboOmega 8y ago
    They'll never share the actual cap table in any case. With preference etc, the strike is a bit of a fantasy anyway.
• gumballhead 8y ago
  This is pretty accurate when compared to my own experience, which really surprises me.
• Iknown0thing 8y ago
  More than percentages, it is the terms that matter. You can get a decent percentage of a early stage company, but end up making no money even if the company sells for 10-100x of the valuation at the time of stock options. Be sure you understand the terms.
  • te0x 8y ago
    Can you expand on this? What are some of the terms that should be careful examined?
    • Iknown0thing 8y ago
      Most of them are related to how and when your stocks are vested. Most companies never IPO and get to a point where you can sell your stocks on secondary markets. So vesting period and terms of it are important. For example - if you dont have accelerated vesting, you end up getting nothing when the company is acquired even at a good valuation. Depends on terms of acquisition as well and what happens to employee stock pool when acquisition happens.