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What makes options a rough deal is the part of the contract: "We can change anything at anytime for any reason". What kills your options is dilution. You have

What makes options a rough deal is the part of the contract: "We can change anything at anytime for any reason". What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. You could be the second employee - however, if the founders & VC decide to make 20 million more shares [which they will] - you effectively have toilet paper -- AND you wont be in that meeting.

umanwizard 6y ago
If the founders have the same class of shares as you, will this effect them equally?
- itake 6y ago
  Not if they just issue themselves more shares
  - cj 6y ago
    > Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.
    - konschubert 6y ago
      It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-dont-allow-anyone-to.html http://christophjanz.blogspot.com/2018/11/founders-please-do...
      - cj 6y ago
        The article is from 2018, and reads: > In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low. It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
        rutthenut 6y ago
        Your points about why this is bad are entirely correct. But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
      - mizzao 6y ago
        Great article! I'd heard about this maneuver only in theory before and never saw it written up. Sounds like a bit of a moral hazard / principal agent problem for founders!
    - deleted 6y ago
      [deleted]
    - jariel 6y ago
      CJ it happens frequently enough that 'it's a thing' and it happens all the time. Usually in conjunction with a new round, but not always. The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders. That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime. It's generally going to happen in negative situations, but that happens a lot. Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
      - s1artibartfast 6y ago
        At venture capital law firms, they have an endearing term for it. They call it a "cram down, pull through" deal. It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
    - cedricd 6y ago
      I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a deal with an investor that took a huge ownership stake and diluted the company significantly. To entice the founders not to bail they carved out some additional stock for them, but everyone else got hit by the full dilution. Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.
- wrnr 6y ago
  They can negotiate for more shares for theme-selfs.
naveen99 6y ago
That would be true weather you had shares or options... dilution may be worth it, if valuation grows. It’s only bad if there is a down round. But then it’s a black eye for founders and earlier vc also.
- Traster 6y ago
  I think you need to consider your framing. "It's only bad if there is a down round" - actually, it's good only if they go from giving you options to cashing out without a single bump in the road. The likelihood of all those bad things happening - down rounds, bad exit, no exit, folding completely, etc. those are the most likely thing to happen. And if you're in the company earlier they're way more likely than anything else.
contingencies 6y ago
We can change anything at anytime for any reason In private companies, always remember: (1) control ≠ equity (2) equity ≠ profit (3) equity ≠ information. If this is new to you read Brad Feld's Venture Deals book and do the online course, it's time well invested. Note this is simply the nature of private equity. Companies go public to drink at the capitalisation trough of public markets, but the cost is regulation and increased transparency. Companies that stay private are rarely bound by significant rules in terms of board or management decisions redefining structure, equity, terms and so forth. There are at least four key firewalls (exercise, issue, share class, transfer) between "options" as issued or promised and meaningful equity value extraction for an employee. Good lawyers can probably name five more, and definitely dream up or deploy tens more at any time without breaking laws.
- marcus_holmes 6y ago
  I learned this in my first board position with VC's on the board (early 2000's). Thankfully I was vital to the company's platform, so had some leverage. But everything was fluid, and able to be changed according to how the VC's needed to present it in terms of a consistently successful investment story. In the end, I walked away with less than I hoped but more than I think I deserved (for being so naive). But it's been an abject lesson since: nothing in a private company is fixed, it can all be changed according to who pulls the strings. Options and equity are very vulnerable to this. Having equity is no guarantee of power or even a seat at the table (or of future wealth).
Waterluvian 6y ago
I bought $1000 of shares at a company when I left. $0.75. Their valuation at the time was like $18. In retrospect I'm pretty sure all I did was buy myself a tax burden when they fold or pocket change when they exit. The mistake I made was not realizing the parent comment: that I lack the information to make an informed decision or to be sure they don't just dilute to oblivion. The numbers I did have access to (above) communicated a very misleading story to me.
- fortran77 6y ago
  The tax implications make this deal a bad one nearly every time. It's simply not worth taking the chance. (BTW: Congress bailed out dot-com specu-vestors who claimed not to understand the tax event that occurrs when exercising options. https://www.mercurynews.com/2008/11/10/rescue-bill-offers-relief-to-some-valley-taxpayers-hit-with-the-amt/ https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re... )
- dehrmann 6y ago
  There was on place I left where the company was doing OK, but there were a lot of red flags on exercising options, so I let them expire. Someone asked why I didn't just exercise some for fun. I didn't want to have to do the taxes. Not pay the taxes, I mean fill out the forms.
  - icedchai 6y ago
    I've exercised options a couple times and never filled out any forms until I've sold. Was I supposed to? They never sent me any, so I didn't bother. Most private companies are pretty sloppy about handling their options. You send them a check to exercise and they'll note it in a spreadsheet. That's basically it.
commandlinefan 6y ago
This isn't new, either - this happened to me a couple times in the late 90's/early 2000's and I've since made a point of not even taking "stock options" into consideration when evaluating job offers. Yet my most downvoted comment on reddit ever was on /r/cscareerquestions when somebody was asking how to weigh stock options when considering job options and I said "not at all" and shared my own experiences.
- marcus_holmes 6y ago
  That's been my experience with the startup/entrepreneur subreddits too - no-one wants to hear anything that contradicts the Startup Dream. I figure there are very few people actually walking the walk in there.
  - VRay 6y ago
    The site is engineered in a way that makes it useless for any sort of expert information. If you know less than the average Redditor about something, it's GREAT, but otherwise it's best to just steer clear. Everybody gets an upvote button and a downvote button from day 1, and they'll downvote to oblivion anything they don't instantly resonate with. It turns every large-ish subreddit into an echo chamber pretty quickly
- acdha 6y ago
  I’ve been surprised by the degree to which people who pride themselves on being analytical badly want to believe that options will make them rich. They’ll talk about the few cases where the finance guys didn’t capture most of the wealth and ignore all of the people who eventually netted a few months salary or less (I’m reminded of the people from meetings with pets.com who were visibly just keeping a chair warm until the IPO made them rich, and ended up calling to ask if we were hiring later that year when the layoffs started). It’s a cliched observation but it really does remind me of the kids hoping to make it big in pro sports – there are way more who peak at the minor league level at best but the owners make a ton of money by encouraging everyone to think of the exceptions as the rule. Humans are prone to misjudging statistics in general and that’s really bad when one party has the best data and a strong incentive for other people to misjudge it.
mason55 6y ago
> What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%" The reality is that all common shareholders have the same incentive to not dilute the outstanding shares. That almost always includes the founders. Outside of a money raise most of the people involved in the company are aligned in the desire to not dilute each other. The major source of dilution is new fundraising and while it will effect your percentage of ownership it typically doesn't affect the value of your stake because the dilution is part of post-money valuation. So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change. The things people should be worried about are all the shenanigans that happen around participating preferred multiples. Or, the worst, 30-day exercise windows along with the tax treatment of options exercise/AMT. But since those are much more opaque concepts it's way harder to get people riled up about it. And if you have an unscrupulous CEO there's basically nothing you can do to protect yourself as a worker. But that's way different from the normal dilution you get as part of raising money.
- ForHackernews 6y ago
  > So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change. If that is indeed true, then there's almost no reason not to demand being paid in real cash money rather than stock options. If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD? This like saying, "don't worry, your lotto ticket won't be devalued: We'll make sure that even if those numbers win the jackpot, you'll still get the same $2 and it won't be diluted below that."
  - mason55 6y ago
    > If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD? Huh? You should compare the current value of the options to their value at the last fundraising round, not between pre- and post-money in the same round. The doubling in value happen between (e.g.) the Series A raise and the Series B raise, not at the time of the Series B raise, and when you compare the value of your options between the raises that's when you'll see the increase in value. For example, imagine you have 10% of the company and after the Series A raise the company is valued at $1m, so your share is $100k. Now you go and work for two years and increase the value of the company to $20m (pre-money). Your 10% is worth $2m now. If the company raises $5m for 20% ($25m post-money) in a Series B you now have 8.3% of the company (you were diluted) but your 8.3% is still worth $2m. The stock option reward happens while you're building the company.
ashtonkem 6y ago
Increasingly, negotiating a job offer at a startup feels like buying a used car. There’s an obvious information asymmetry, and it’s hard to escape the feeling that you’re getting screwed.

umanwizard 6y ago

If the founders have the same class of shares as you, will this effect them equally?

itake 6y ago
Not if they just issue themselves more shares
- cj 6y ago
  > Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.
  - konschubert 6y ago
    It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-dont-allow-anyone-to.html http://christophjanz.blogspot.com/2018/11/founders-please-do...
    - cj 6y ago
      The article is from 2018, and reads: > In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low. It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
      - rutthenut 6y ago
        Your points about why this is bad are entirely correct. But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
    - mizzao 6y ago
      Great article! I'd heard about this maneuver only in theory before and never saw it written up. Sounds like a bit of a moral hazard / principal agent problem for founders!
  - deleted 6y ago
    [deleted]
  - jariel 6y ago
    CJ it happens frequently enough that 'it's a thing' and it happens all the time. Usually in conjunction with a new round, but not always. The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders. That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime. It's generally going to happen in negative situations, but that happens a lot. Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
    - s1artibartfast 6y ago
      At venture capital law firms, they have an endearing term for it. They call it a "cram down, pull through" deal. It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
  - cedricd 6y ago
    I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a deal with an investor that took a huge ownership stake and diluted the company significantly. To entice the founders not to bail they carved out some additional stock for them, but everyone else got hit by the full dilution. Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.
wrnr 6y ago
They can negotiate for more shares for theme-selfs.

naveen99 6y ago

That would be true weather you had shares or options... dilution may be worth it, if valuation grows. It’s only bad if there is a down round. But then it’s a black eye for founders and earlier vc also.

Traster 6y ago
I think you need to consider your framing. "It's only bad if there is a down round" - actually, it's good only if they go from giving you options to cashing out without a single bump in the road. The likelihood of all those bad things happening - down rounds, bad exit, no exit, folding completely, etc. those are the most likely thing to happen. And if you're in the company earlier they're way more likely than anything else.

contingencies 6y ago

We can change anything at anytime for any reason In private companies, always remember: (1) control ≠ equity (2) equity ≠ profit (3) equity ≠ information. If this is new to you read Brad Feld's Venture Deals book and do the online course, it's time well invested. Note this is simply the nature of private equity. Companies go public to drink at the capitalisation trough of public markets, but the cost is regulation and increased transparency. Companies that stay private are rarely bound by significant rules in terms of board or management decisions redefining structure, equity, terms and so forth. There are at least four key firewalls (exercise, issue, share class, transfer) between "options" as issued or promised and meaningful equity value extraction for an employee. Good lawyers can probably name five more, and definitely dream up or deploy tens more at any time without breaking laws.

marcus_holmes 6y ago
I learned this in my first board position with VC's on the board (early 2000's). Thankfully I was vital to the company's platform, so had some leverage. But everything was fluid, and able to be changed according to how the VC's needed to present it in terms of a consistently successful investment story. In the end, I walked away with less than I hoped but more than I think I deserved (for being so naive). But it's been an abject lesson since: nothing in a private company is fixed, it can all be changed according to who pulls the strings. Options and equity are very vulnerable to this. Having equity is no guarantee of power or even a seat at the table (or of future wealth).

Waterluvian 6y ago

I bought $1000 of shares at a company when I left. $0.75. Their valuation at the time was like $18. In retrospect I'm pretty sure all I did was buy myself a tax burden when they fold or pocket change when they exit. The mistake I made was not realizing the parent comment: that I lack the information to make an informed decision or to be sure they don't just dilute to oblivion. The numbers I did have access to (above) communicated a very misleading story to me.

fortran77 6y ago
The tax implications make this deal a bad one nearly every time. It's simply not worth taking the chance. (BTW: Congress bailed out dot-com specu-vestors who claimed not to understand the tax event that occurrs when exercising options. https://www.mercurynews.com/2008/11/10/rescue-bill-offers-relief-to-some-valley-taxpayers-hit-with-the-amt/ https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re... )
dehrmann 6y ago
There was on place I left where the company was doing OK, but there were a lot of red flags on exercising options, so I let them expire. Someone asked why I didn't just exercise some for fun. I didn't want to have to do the taxes. Not pay the taxes, I mean fill out the forms.
- icedchai 6y ago
  I've exercised options a couple times and never filled out any forms until I've sold. Was I supposed to? They never sent me any, so I didn't bother. Most private companies are pretty sloppy about handling their options. You send them a check to exercise and they'll note it in a spreadsheet. That's basically it.

commandlinefan 6y ago

This isn't new, either - this happened to me a couple times in the late 90's/early 2000's and I've since made a point of not even taking "stock options" into consideration when evaluating job offers. Yet my most downvoted comment on reddit ever was on /r/cscareerquestions when somebody was asking how to weigh stock options when considering job options and I said "not at all" and shared my own experiences.

marcus_holmes 6y ago
That's been my experience with the startup/entrepreneur subreddits too - no-one wants to hear anything that contradicts the Startup Dream. I figure there are very few people actually walking the walk in there.
- VRay 6y ago
  The site is engineered in a way that makes it useless for any sort of expert information. If you know less than the average Redditor about something, it's GREAT, but otherwise it's best to just steer clear. Everybody gets an upvote button and a downvote button from day 1, and they'll downvote to oblivion anything they don't instantly resonate with. It turns every large-ish subreddit into an echo chamber pretty quickly
acdha 6y ago
I’ve been surprised by the degree to which people who pride themselves on being analytical badly want to believe that options will make them rich. They’ll talk about the few cases where the finance guys didn’t capture most of the wealth and ignore all of the people who eventually netted a few months salary or less (I’m reminded of the people from meetings with pets.com who were visibly just keeping a chair warm until the IPO made them rich, and ended up calling to ask if we were hiring later that year when the layoffs started). It’s a cliched observation but it really does remind me of the kids hoping to make it big in pro sports – there are way more who peak at the minor league level at best but the owners make a ton of money by encouraging everyone to think of the exceptions as the rule. Humans are prone to misjudging statistics in general and that’s really bad when one party has the best data and a strong incentive for other people to misjudge it.

mason55 6y ago

> What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%" The reality is that all common shareholders have the same incentive to not dilute the outstanding shares. That almost always includes the founders. Outside of a money raise most of the people involved in the company are aligned in the desire to not dilute each other. The major source of dilution is new fundraising and while it will effect your percentage of ownership it typically doesn't affect the value of your stake because the dilution is part of post-money valuation. So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change. The things people should be worried about are all the shenanigans that happen around participating preferred multiples. Or, the worst, 30-day exercise windows along with the tax treatment of options exercise/AMT. But since those are much more opaque concepts it's way harder to get people riled up about it. And if you have an unscrupulous CEO there's basically nothing you can do to protect yourself as a worker. But that's way different from the normal dilution you get as part of raising money.

ForHackernews 6y ago
> So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change. If that is indeed true, then there's almost no reason not to demand being paid in real cash money rather than stock options. If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD? This like saying, "don't worry, your lotto ticket won't be devalued: We'll make sure that even if those numbers win the jackpot, you'll still get the same $2 and it won't be diluted below that."
- mason55 6y ago
  > If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD? Huh? You should compare the current value of the options to their value at the last fundraising round, not between pre- and post-money in the same round. The doubling in value happen between (e.g.) the Series A raise and the Series B raise, not at the time of the Series B raise, and when you compare the value of your options between the raises that's when you'll see the increase in value. For example, imagine you have 10% of the company and after the Series A raise the company is valued at $1m, so your share is $100k. Now you go and work for two years and increase the value of the company to $20m (pre-money). Your 10% is worth $2m now. If the company raises $5m for 20% ($25m post-money) in a Series B you now have 8.3% of the company (you were diluted) but your 8.3% is still worth $2m. The stock option reward happens while you're building the company.

ashtonkem 6y ago

Increasingly, negotiating a job offer at a startup feels like buying a used car. There’s an obvious information asymmetry, and it’s hard to escape the feeling that you’re getting screwed.