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I'd have to imagine that taking equity as an employee is in most cases a negative EV move. Keep in mind, people win powerball. That fact that something is negat

by anm89 5y ago

I'd have to imagine that taking equity as an employee is in most cases a negative EV move. Keep in mind, people win powerball. That fact that something is negative EV doesn't mean there aren't winners. FAANG RSUs might potentially be another exception. But it seems like early stage startup options are an absolutely minefields for employees. I've seen instances where it was setup so regardless of how the company performed, people in the first 10 employees would have walked away with nothing in an exit. And that's before talking about Cliffs. Even if every other thing falls into place, you can just get fired on day 355 if a founder decides they'd prefer to hold more equity.

barrkel 5y ago
Equity (in reality, options, not stock) doesn't have a negative EV. What it has is an opportunity cost, but that's the whole package vs your alternative, not options. FAANG RSUs are free money.
- dahart 5y ago
  Expected Value is what you get when you account for the opportunity cost, the opportunity cost is precisely what can turn equity into a negative EV.
  - anm89 5y ago
    Right. A thing that only has upside (options, let's forget about extreme tax situations for now) can't have negative EV on it's own. The implication is that it's negative EV when factoring the opportunity cost.
  - barrkel 5y ago
    Let's be more specific. Equity and options only have opportunity cost to the degree that accepting them means entering into an agreement which limits your opportunities. Generally, equity on its own does not require agreements like this. Accepting a job offer does. I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't. (Excepting externalities like taxes which are variable between jurisdictions.)
    - dahart 5y ago
      Taking equity as an engineer specifically means that you’re foregoing salary in favor of potential future earnings. Not only is it widely agreed to be an opportunity cost, it’s specifically designed that way, as a gamble with the potential to benefit both parties. It can and does routinely make people worse off than they would be, if they had chosen to take a salary instead.
      - barrkel 5y ago
        Taking a salary implies you're forgoing a salary. There's nothing special about equity in this respect. In a conversation about equity specifically, holding everything else constant, it does not have a negative EV by itself.
        dahart 5y ago
        > Taking a salary implies you're forgoing a salary You lost me there. How does taking a salary imply that you’re foregoing a salary? That sentence doesn’t make sense. You seem to be conflating the expected value of equity with the general financial outcome of having a job, or you might not know precisely what expected value means. (That’s okay! I’m not judging.) You can’t say that equity is positive EV just because you didn’t lose money and ended up with some salary. To calculate EV, you must compare it to what happens when you don’t take equity. That is the definition of Expected Value: the probability of an event multiplied by the outcome gain/loss. Since accepting lower salary has a probability of 100%, and the probability of the value of shares being greater than $0 has a probability less than 100%, it is obvious and tautological that the EV of some equity can be negative. If I take a half salary, and a bunch of equity to compensate for the low salary, and the company never goes public, then it’s a negative outcome, I lose 50% of the money compared to taking a full salary with no equity. (Even if I collected, say, $1M in salary in the mean time.) This is what actually happens all the time, equity ends up worth less than the value that it was traded for. Given that most startups fail and never go public, that means that the average EV of equity over all startups probably is negative.
        dahart 5y ago

by anm89 5y ago

barrkel 5y ago

Equity (in reality, options, not stock) doesn't have a negative EV. What it has is an opportunity cost, but that's the whole package vs your alternative, not options. FAANG RSUs are free money.

dahart 5y ago
Expected Value is what you get when you account for the opportunity cost, the opportunity cost is precisely what can turn equity into a negative EV.
- anm89 5y ago
  Right. A thing that only has upside (options, let's forget about extreme tax situations for now) can't have negative EV on it's own. The implication is that it's negative EV when factoring the opportunity cost.
- barrkel 5y ago
  Let's be more specific. Equity and options only have opportunity cost to the degree that accepting them means entering into an agreement which limits your opportunities. Generally, equity on its own does not require agreements like this. Accepting a job offer does. I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't. (Excepting externalities like taxes which are variable between jurisdictions.)
  - dahart 5y ago
    Taking equity as an engineer specifically means that you’re foregoing salary in favor of potential future earnings. Not only is it widely agreed to be an opportunity cost, it’s specifically designed that way, as a gamble with the potential to benefit both parties. It can and does routinely make people worse off than they would be, if they had chosen to take a salary instead.
    - barrkel 5y ago
      Taking a salary implies you're forgoing a salary. There's nothing special about equity in this respect. In a conversation about equity specifically, holding everything else constant, it does not have a negative EV by itself.
      - dahart 5y ago
        > Taking a salary implies you're forgoing a salary You lost me there. How does taking a salary imply that you’re foregoing a salary? That sentence doesn’t make sense. You seem to be conflating the expected value of equity with the general financial outcome of having a job, or you might not know precisely what expected value means. (That’s okay! I’m not judging.) You can’t say that equity is positive EV just because you didn’t lose money and ended up with some salary. To calculate EV, you must compare it to what happens when you don’t take equity. That is the definition of Expected Value: the probability of an event multiplied by the outcome gain/loss. Since accepting lower salary has a probability of 100%, and the probability of the value of shares being greater than $0 has a probability less than 100%, it is obvious and tautological that the EV of some equity can be negative. If I take a half salary, and a bunch of equity to compensate for the low salary, and the company never goes public, then it’s a negative outcome, I lose 50% of the money compared to taking a full salary with no equity. (Even if I collected, say, $1M in salary in the mean time.) This is what actually happens all the time, equity ends up worth less than the value that it was traded for. Given that most startups fail and never go public, that means that the average EV of equity over all startups probably is negative.
      - dahart 5y ago