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The Guide to Stock Options Conversations

154 points by redbell 3y ago

JohnFen 3y ago
I find it pretty funny that this guide tries to make the case that "people prefer to treat stock options as a lottery ticket and not as an investment" is a bad or incorrect way to treat them, when pretty much the entire rest of the piece is pointing out why that's a reasonable way to treat them. Personally, I've been around the block a bunch of times and have had more than my share of options as part of compensation. My experience with them informs my attitude towards them: I don't count them as compensation when I'm looking at an offer from a potential employer. If the offer isn't good without the options, including the options doesn't make it better.
hobs 3y ago
Why are conversations not like this? Because shady folks want to take advantage of people's enthusiasm about maybe striking it rich and do what they can to let the target's imagination do the work.
- earnesti 3y ago
  I think the most common reason is, that people just want to avoid uncomfortable conversations. Back in the days I was a startup founder, my beliefs were always pretty different from the other stakeholders, and in the end everyone takes their own risks. Having this kind of conversation can be easily interpreted as a recommendation or discouragement, and I wanted to do neither. And while you can also explain the technicalities etc, in the end many people just want the answer "what should I do" from someone.
  - riehwvfbk 3y ago
    There's a reason these uncomfortable conversations are uncomfortable, and it's precisely that: you, as a founder, know that the odds of the employee striking it rich are slim, but have to sell them on joining the company.
deleted 3y ago
[deleted]
lucas_the_human 3y ago
In comp packages you also want to look for the exercise window clause. Some companies say you have to exercise your options within 90 days from leaving but I’ve worked at a startup where it was 5 years which is more employee friendly.
gumby 3y ago
I was counseled years ago to be VERY careful about these conversations. You can’t encourage, or come off as encouraging, any employee to exercise or not — if the bet goes the wrong way (company succeeds but empmdidnt exercise or vice versa) you / the company could be sued and it’s an SEC violation. One thing you should do is support early exercise (meaning exercise any time, even before you’ve vested; company can repurchase and the same price any unvested shares if you leave). This is especially good for early hires when the price is extremely low and 83(b) means you avoid a tax bill until you sell. In later stage companies this doesn’t help as much though. I do agree with the author that comp secrecy is not just stupid but destructive.
- hackernewds 3y ago
  tax bill before you sell scenario is valid for ISO. NSOs is a whole other ballgame, with its own tax benefits
jawns 3y ago
> The “Assume your equity will be worth nothing” mantra. Especially in 2024, people prefer to treat stock options as a lottery ticket and not as an investment. The post itself provides ample evidence for why this is a rational position, especially for people with even mild risk aversion. For instance, look at the table of "Startups that exited for more than they raised." Even among those who raised a Series E or later -- the most likely to exit -- only 40% experienced a favorable exit, and among those, the mean valuation growth was 2.26X. Under optimistic assumptions, that's a "double your money" scenario with 40% odds, which is a not even a great bet in the aggregate -- but a pretty terrible bet for any individual. Financial advisors counsel people all the time not to put their eggs in one basket. That's why index funds like VTI are so popular. They let you diversify your investments. Heck, putting so many eggs into the basket of your employer is risky even after it goes public! I had a publicly traded employer who had a 401(k) match paid in company stock. Every pay period, I sold that stock and bought index funds instead.
- throwarayes 3y ago
  Ugh yeah I turned down a job offer even from seemingly ethical and nice startup in large part because I’d be exchanging actual publicly traded RSU vesting in the future with equivalent in options. It’s hard to trade in somewhat certain money for likely fictional Stock Options. Though I’d possibly trade RSUs from company A for company B. There’s almost like a two tier employment system between those at FAANG or adjacent with actual likelihood of a healthy payout and those with options / lottery tickets.
  - cbsmith 3y ago
    > Ugh yeah I turned down a job offer even from seemingly ethical and nice startup in large part because I’d be exchanging actual publicly traded RSU vesting in the future with equivalent in options. I did the same thing. The options were from a company that had just IPO'd named Google. You may have heard of it. ;-)
  - hibikir 3y ago
    Yeah, the gamble only pays off for a company that has a growth so strong, and a plan so safe that the downside is quite low. They have to give you more options because they know they are worse than RSUs, so the pay really can end up being higher than FAANG, but still with some gambling involved. Those companies exist (See, Stripe 10 years ago), but there are so few of those, it's harder to find them than just go to FAANG.
OtherShrezzing 3y ago
>This calculation doesn’t take into account the dilution during future funding rounds. It's fairly useless to have these scenario planning conversations with your staff without describing dilution events - they're fairly inevitable. If you've told all the staff that there are three general scenarios, you're going to lose a lot of trust & goodwill when you hold the all-hands meeting where you announce "oh yeah, there's mystery scenario four, where your returns decrease in value, and there's nothing you can do about it, and we might do it again".
- bradlys 3y ago
  Ultimately, dilution doesn’t matter for 99% of employees. You could experience 10x dilution but if the price goes up 100x - you’re still up 10x. Would it be great if you went up 100x and no dilution? Sure but that’s not how it works.
  - saulpw 3y ago
    In actuality how it works is that the price goes up 10x and you experience 10x dilution. So everything seems up and to the right and the founders are 10x but when it comes time to cash out you're lucky to get a small bonus.
    - bradlys 3y ago
      Maybe in some cases but I often see founders getting diluted a lot as well. Many times when startups get acquired/whatever - founders will get next to nothing because the investors had liquidation preferences. The founders still go through with it though cause it allows you to start another company and raise rounds. If you become known as a founder who prioritizes himself over his investors - who is going to give you money…?
  - rustcleaner 3y ago
    Really need to move to a 1 "share" total (1 company 1 share), 16 decimal place volume, market cap*volume=price system; and not a market cap/float=price system. If a company really issues 0.5 cumulatively to employees, then half the company's equity is owned by employees. No decimal point fvckery to open the tent to the dilution camel's nose. You can use milliShares, microShares, nanoShares, etc, to avoid expressing a $10,000 0.000000134 Share position. There should only ever be one share: The Company. ADDENDUM: bonus if we get to a computational level that allows for arbitrary but valid rational numbers (with a data size cost to keep infinitesimals down) and replace fixed sized decimals, and modeling capabilities which allows us to list options contracts in a unified market, with arbitrary numeraires (think contracts for A priced in B instead of $) and expirations, and with any combination of strikes (compound positions), as one trade. BSM is continuous in all dimensions, and all it's really doing is expressing probabilities as price (plus a small uncertainty spread for risks and to goose out an edge out of Expected Value). This many expirations bins, many strikes bins, stuck to 100-share contracts, many (separate) stock vs USD bins, thing seems a bit too arbitrary when we have Wolfram Mathematica-tier abilities to handle the modeling for this stuff now. It's not 1989 anymore, get Tom Sosnoff on the phone I'm sure he'd pitch this innovative idea! Maybe I'll call it into his show soon...
datavirtue 3y ago
I don't think stock options should be seen as a retention incentive. Maybe they incentivize me to knock it out if the park but if I don't care about the company anymore at best they are "golden handcuffs" that prop up the illusion that the holders care about the company.
whiplash451 3y ago
Options conversations are hard for a good reason. The underlying mechanics are actually complex. You can’t explain an employee what the outcome would be for them without telling them about preferential shares, double-dipping, etc. Good luck building a company on full transparency on all this. Most investors would think you’re crazy and finance the startup next door.
- iamacyborg 3y ago
  All you’d need to do is have a glossary and an open cap table, no?
- whiterknight 3y ago
  I’ll be satisfied with a market cap thanks. They won’t even tell you how many shares there are.
  - whiplash451 3y ago
    That, I agree with. But the article is advocating for much more. Unfortunately, there is a fundamental problem with sharing market cap and number of outstanding shares with all employees (and prospective ones). This data would quickly leak to the competition and other unwanted hands.
    - whiterknight 3y ago
      Ok, then as an employee I must value your stock compensation at 0.
      - whiplash451 3y ago
        That's not what I meant. The company can (and should) share the share price with you as a new joiner. That helps you value the stock compensation.
hbrav 3y ago
> In some companies, the initial job contracts are misleading, and mention a nominal price of $0.01. Is he suggesting that the initial job contract does _not_ state the exercise price, and relies on the employee mistakenly thinking that $0.01 is the exercise price? This seems like it stems for a culture that we have of employees (or potential employees) just never asking questions about contracts that are presented to them. And I think there's a lot of employers that expect that to be the case too. I've once had a manager tell me with a straight face when I requested changes to a contract "I'm sorry, I can't get this changed. You'll just have to sign it." My reply of "I don't believe it's in my interests to sign that" was not something that was in his world-view.
- bionsystem 3y ago
  Could be a misread of certain 10K which state a par value of $0.01, which has no particular meaning at any point in time of the life of a company (it's just a convention).
varelse 3y ago
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benjaminwootton 3y ago
I think there is way too much scope for bad actors in this. The employer holds all of the information and all of the cards. I was a tier 1 significant common shareholder in my own company and saw a bunch of shenanigans. The rank and file employee with 0.00X% stock options subject to weird rules and tax doesn’t stand a chance. From the employees perspective, have to find a massive outlier in terms of company success and then hope to not get screwed or be diluted to hell. Lottery ticket odds are the right ballpark.
spxneo 3y ago
whew thought this was a guide on how to avoid getting manipulated on social media into buying calls and puts after reading DDs i think best thing to do is not offer illiquid stock options but a sliding scale revenue share. Of all the startups that I have been a part of, only 1 found buyers for the stock options but even then it was too little because it didn't IPO, it just sold to another player. It's down right misleading to offer pieces of paper with the right to buy a stock that has almost nil chance of seeing retailers without disclosing the odds. The odds are close to nil for startups looking to IPO. By doing revenue share, it forces you to be long term orientated, you are now focused on growing a steady stream of net positive cash flow. This puts you in a much better negotiating position, you can use leverage from banks to get anywhere from 30~60 cents on the dollar, to redistribute back into operations or bonuses. THEN you can accept that invite from a VC or PE (dont recommend it due to the time constrained nature of PEs that are incompatible with long term orientated management) and absolutely have the odds in your favour.
Linda231 3y ago
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dsr_ 3y ago
"All the (unneeded) secrecy around the compensation package - you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager." In the United States, this is not just unnecessary secrecy: this is completely illegal. Trying to forbid employee-to-employee conversations about compensation will land the company in trouble, and every manager should know this.
- rybosworld 3y ago
  A company I worked at years ago, the VP of the department sat in on all of my annual reviews with my manager. He would mostly just listen in. But at the end of the meeting he would always say something to the effect of: "as you know, you can't discuss your compensation with coworkers." I knew it was illegal for him to say that but, if it's not in writing then there's basically no recourse. I understand this to be a fairly common experience in the U.S. workforce. When it comes to labor laws in particular, the rate of enforcement is extremely low.
  - pizzafeelsright 3y ago
    Why would you want to know what you're making compared to your coworkers? You agreed to the pay. Want more? Ask more. If you're making 2x more than your "peers" would you take a cut to equal pay?
    - JohnFen 3y ago
      I don't want to know what my coworkers make, nor do I want them to know what I make. Too many feathers to potentially ruffle there. However, I'm all on board with the idea that people who do want to exchange this information should be free to do so without punishment from their employer.
    - mym1990 3y ago
      The point is that there is an information imbalance, which enables one side to have more power in negotiating. Sure I can say "give me more money" but if the employer presumes I have little information on my co-workers, they can just say no. But if I call the bluff and say, I want more money because I know a co-worker makes X, it is harder to say no for the employer, although obviously not impossible.
latchkey 3y ago
I've been in the tech industry for 30 years. I've also been mostly startup based my entire time. I've only ever had options "work out" a single time and that was because long after I left the company (I bought my vested options), it went public and my options converted into actual stock. However, the stock was absolute shit worthless for about 10 years, so I hung onto it thinking one day, I'd sell it and harvest the tax loss. Then, during covid, WSB came along and randomly pumped it and my limit order for the very tip of the market, was actually filled. Much to my amazement. Then, the stock went to the bottom again almost the next day. I think I "profited" about $5k total out of that deal across many years. My last company, was supposed to go through a SPAC, likely so that the execs could dump on retail. I spent like $30k on my options and near the end of everything in the hopes of getting some of it back, the whole deal fell through and I got laid off for the first time in my career. Maybe I just have bad luck in these things, but every time I picked a higher salary over more options... it worked out better in the long run, by a lot. Now that I'm CEO of my own business, I have zero plans to ever go public or even sell the company. I'd much rather have it be focused on stable revenue generation, and make sure to pay people well, and give company performance bonuses along the way. Yes, of course, we will also give options out, as the industry expects it, but I'm not going to make it a focus (by preferring good salaries, benefits and a stable gig). I'll be upfront about my plans for anyone joining. I would much rather be real with people than give them any sort of false hope. We are just starting, so let's see how that works out over time.
bradlys 3y ago
It’s a really fucking bad time to be joining startups. They’re picky, offering shit comp on top of it, and have very little chance of a sizable liquidation event for employees in a long time. Idk if I’ll join a startup again in the next few years. It’s basically taking salary only - which can be anywhere from 1/2-1/4 of my normal pay. Why waste your time? I hope one day startups will offer something of value again. For now, it’s a race to the bottom.
- cmmeur01 3y ago
  I think it’s more complicated than that and one big factor is location. In my midwestern experience startups are paying more cash than other businesses where software is a cost center.
  - bradlys 3y ago
    Well, sure. I’m talking mostly about the US coasts where most of the YC audience is. HN is a very SV focused website.
JonChesterfield 3y ago
Whoa no. Absolutely no telling employees the details. The whole point of stock options is that employees can't value them accurately and you probably don't have to pay them. That's the whole magic trick. Come work for us! We can only pay $50k in boring everyday money, but here's some tokens. We don't know what they're worth, and you can't spend them for many years or maybe not at all, but look at this picture suggesting they might be worth lots! Works really well on people new to the workforce. Actually giving employees a means of valuing it, notably that their options turn into a class of shares that get paid after lots of other people and a sketch of how dilution works out in the meantime, stops them thinking it's a lottery ticket. It becomes a very low chance of winning less money than the opportunity cost relative to working elsewhere. Much more fun for employees are RSUs. They have the same nice trick of becoming free when people quit. They let you adjust people's pay without annoying them as much as a salary freeze or reduction. A three or four year vesting period with roughly annual grants is near perfect as a salary retention tool. Also rsu induced pay inflation has really hurt the startup recruitment pitch which helps defang an existential threat to your public company. Not really what I want as an engineer but the incentive gradient is very clear.
- rustcleaner 3y ago
  >That's the whole magic trick. Come work for us! We can only pay $50k in boring everyday money, but here's some tokens. We don't know what they're worth, and you can't spend them for many years or maybe not at all, but look at this picture suggesting they might be worth lots! Works really well on people new to the workforce. If I have to be short theta, at least be a [company] man and make it something like 75-delta >720 DTE calls. Ideally let me sell 50-delta <360 DTEs to the new on-boards as well! :^) Long longer dated ITM calls protect downside in IV spike, and being short shorter (relatively) dated ATM calls pays me more theta than I pay for the ITM while the ITM gives me much needed vanna if the underlying shits the bed on my spread (assuming skew exists).
  - rustcleaner 3y ago
    The above is a diagonal. Another option could be to be in an equivalent vertical (both shorter expiry) and then long a 2-5 delta back-dated put to get vanna for downside protection.
theogravity 3y ago
Surprised it didn't mention anything about AMT, which may prevent one from exercising because they can't afford the tax hit from the spread.
mancerayder 3y ago
Is it that bad? I'm on a relatively reduced salary due to ISOs in a company that wants to exit in the next couple of years, and a stock valuation that keeps going up (per audits) in the last years. It's also still expanding quickly. The company even did a raise and let some of us sell a percentage of our shares to the private buyer. This is not Silicon Valley, but a fintech. Given I have not only my time but 10s of k of my money tied up in options due to strike price going up with each grant, in what way am I risking getting screwed? In the comments here, it seems like I have a 60+ percentage chance of getting screwed through a dilution or other. However it doesn't feel that way. What should I be on the lookout for? The Paperwork is dozens of pages long and I'm not an attorney.
- fragmede 3y ago
  I'm not an attorney either. The best way to answer the question is to find one that specializes in this arena, and ask them, rather than believe anything you read on the Internet, or from an LLM. Still, the whole thing could just go to zero. The finteching doesn't work out and the company and thus your options become worth zero. I hope that doesn't happen for you, but before dilution, you have up look at that as a very real possibility. Something could pivot out from under you and it could just stop working and being worth anything. Once you've stared that beast in the face, yeah, dilution is a thing that could happen, but it's not in anyone's interest to screw you over. If you get screwed over by your board, people are going to know, and not want to work with those people ever again. So dilution absolutely happens, but you just have you hope you're not gonna get screwed over. There's no legal guarantee that you won't though, so that's why the common advice is that that options are worth $0, until they aren't. So you have to look at options as a lottery ticket and ask how much you like the work and how much you like your coworkers, how much you like what the company does, and can you live off the pay you do get.
- pyrophane 3y ago
  Well, for the most part you agreed to your employer's stock plan when you were granted options, and so you are subject to whatever is in there but there isn't a lot you can do about that since you would have already signed it a while back. I would just refer to an attorney regarding anything would modify your shares or the agreement you already signed, because those things can't be arbitrarily modified without your consent. Also, the most common way employees get "screwed" is when the company underperforms and has to raise money on bad terms, but there isn't much you can do about that.
neilk 3y ago
There is no discussion of how the employees are the last to be paid, after founder class shares and investor liquidation preferences are settled. Borders on misinformation to tell people that owning x% in shares equals x% of liquidity event. Even many founders end up with very little to show from an acquisition.
- pyrophane 3y ago
  I don't think founders typically get liquidation preference like VCs do, but correct me please if I'm wrong.
seanhunter 3y ago
An article about startup employee stock options that doesn't mention the effect of liquidation prefs and only mentions dilution extremely briefly is really missing a huge amount of what anyone needs to actually value stock options. On a quick scan this doesn't look terrible [1], although it's focussed on the founder's perspective rather than the employee's. [1] https://www.joinarc.com/guides/liquidation-preferences https://www.joinarc.com/guides/liquidation-preferences
entangledqubit 3y ago
I would avoid this guide. I don't even see mentions about dilution and cap tables, let alone preference and a bunch of other risks. If you need a solid guide, I usually point at the Holloway Guide To Equity Compensation but I'm annoyed that it looks like they started charging for it (probably still worth both the time and money). The preview is worth checking out. That being said, I think there are a bunch of other aspects that aren't captured. I was under the impression that founders/management generally don't give any company specific guidance in order to not be on the hook for anything that may be construed as guidance or promises.
siliconc0w 3y ago
Startups are great when you're looking for a fast-paced high-trust environment where you're going to be given a lot of responsibility and will be able to grow your skillset. From a financial perspective, they're terrible unless you're an early employee or possibly a very senior/exec hire. Rarely companies might offer things like longer exercise windows but even then your options can become worthless even in an unlikely successful exit due to dilution/liquidation-prefs.
surfingdino 3y ago
It's worth pointing out that this post is written from the point of view of a US startup. If you are in the UK, just say no to stock options and ask for a salary that matches the market. UK startups keep on trying to get people to work for less with the promise of stock options despite there being little recent evidence of UK startups IPO-ing. I got screwed on startup stock options in the past, but not as badly as people who invested 5+ years of their lives into the company. The founder got enough to not have to work for the rest of his life, but the employees got zero pennies when the business was sold to competition. Stock options are not even a gamble, they are an IQ test, if you accept them you have failed.
- mgaunard 3y ago
  Receiving stocks in the UK means paying a lot of tax that you have to pay immediately (45% of the fair value) on an asset that is an illiquid investment. It is a bad idea and you're much better off getting stock options, so that you only pay tax when you exercise, and you would only exercise when you can sell, so you have money to pay the tax. Then the whole point of working for a startup is that you can have larger upside than in a more established firm, often 4x. Finally even in established firms it is common for high compensation to be paid out in shares/stock options (be it in the company itself or a fund) and/or deferred, which is not any different anyway, except the value is a bit more battle-tested.
nickjj 3y ago
I'm surprised the post doesn't mention a specific type of risk which is out of your control. I'm not well versed in options lingo, is there something to describe this scenario? You join with a very low strike price, such as $0.05 and get a lot of shares, let's say 200k to keep the math easy. At that strike price the value on paper is $10,000. Then a liquidity event occurs before your options vest and now instead of 200k shares @ $0.05 you have 3,333 shares at $3.00 because the valuation of the company changed. You still have $10,000 in options. The issue now is you've taken a huge loss in the multiplier effect. Having a stock go from $0.05 to $1 is a 20x jump. Hitting that would yield $200,000 in value. But the odds of $3 turning into $60 is so much lower, but that's what you would need the stock to hit to yield the same return in the end. In the end, over time you tend to get less stocks at a higher adjusted strike price with no real-world opportunity to exercise. Sometimes even if you have vested options you can only exercise a single digit percentage of your total shares so the total cash-out value is the equivalent of 1 day's worth of pay even after years of vested options.
- seanhunter 3y ago
  > Then a liquidity event occurs before your options vest and now instead of 200k shares @ $0.05 you have 3,333 shares at $3.00 because the valuation of the company changed. You still have $10,000 in options. A liquidity event wouldn't change your number of options in general. If you had 200k options before the liquidity event and you didn't sell any when the event happened, you still have 200k options after and their strike price doesn't change. The value of these options has changed because the value of the underlying stock has changed. It's absolutely not the case that your options get adjusted to keep the dollar value the same post-liquidity event unless there is a consolidation as described below. Your terminology is a bit imprecise so it's hard to be 100% sure what you mean but I think you're talking about dilution. It doesn't work quite the way you wrote it down but the net effect is similar to how you describe as long as you think in percentage terms rather than number of shares at a price terms. Say your 200k shares represents 1% of the company (so there are 20m shares) and an investor comes in and puts in 20m for 50% of the company. This values the company at 40m (post money) but dilutes you so now your 200k shares is only 1/2% of the company. In theory whether this is good or bad depends entirely on the true value of the company relative to the price the investor came in for. If the company is worth exactly 40m with the new money then it's easy to say that it must be worth 20m before the money (because it's just the same company but has been given $20m), and 1/2% of a company worth $40m is exactly the same as 1% of a company worth %20. In practise your position is generally worse afterwards because the investor will usually get a "liquidity preference" which means they will get all their money out before you get a dime. So you have a smaller percentage and your position on the cap table is a bit worse than it was before. The hope is that the money and whatever else the investor brings to the table makes the whole thing better in a way that compensates for that. There is one other scenario which can play out a bit like what you mentioned, which is a "reverse split" (also sometimes called a consolidation). This is somewhat rare and usually is only going to happen when the company isn't doing that great. So a split is where say the company has 100mil shares at $10 per share they split each of those into 10 new shares at $1 per share so if you had 200k options at 0.05, you now have 2m options at 0.005. Well a reverse split is the opposite of that so your 200k options at 0.05 become 20k options at 0.5 in the case of a "1 for 10" consolidation. Your stuff about the multiplier effect is not really how stock trading works. Market professionals think in terms of percentages in general, so having a stock go from $3 to $60 is exactly the same as having it go from $0.05 to $1.[1] When you say about only being able to exercise a certain percentage of vested stock - those restrictions are real but generally affect things more pre-IPO (and for a short lock-in period post-IPO) but in general exercise pre-IPO is very limited. But yes those sorts of restrictions are important and it's important to read your options agreement carefully to make sure you understand them. [1]One exception to this is "Pink Sheet" stocks which happen to be both very low-priced per share and very volatile. The reason they are so volatile is that because of their low price they can't get a normal stock listing and so are extremely illiquid and subject to fraud and market manipulation etc in ways that are more extreme than normal stocks. Stocks with extremely low prices like this could do a reverse split to get their price into a normal range but choose not to, which leads most people to think they prefer to avoid normal market scrutiny. The other exception are stocks like Berkshire Hathaway which are illiquid because they are so high-priced (per share). They could fix this problem by executing stock splits but Warren Buffett has had a sort of religious objection to doing this. It's irrational and it hurts liquidity in this stock.

154 points by redbell 3y ago

I find it pretty funny that this guide tries to make the case that "people prefer to treat stock options as a lottery ticket and not as an investment" is a bad or incorrect way to treat them, when pretty much the entire rest of the piece is pointing out why that's a reasonable way to treat them. Personally, I've been around the block a bunch of times and have had more than my share of options as part of compensation. My experience with them informs my attitude towards them: I don't count them as compensation when I'm looking at an offer from a potential employer. If the offer isn't good without the options, including the options doesn't make it better.

hobs 3y ago

Why are conversations not like this? Because shady folks want to take advantage of people's enthusiasm about maybe striking it rich and do what they can to let the target's imagination do the work.

earnesti 3y ago
I think the most common reason is, that people just want to avoid uncomfortable conversations. Back in the days I was a startup founder, my beliefs were always pretty different from the other stakeholders, and in the end everyone takes their own risks. Having this kind of conversation can be easily interpreted as a recommendation or discouragement, and I wanted to do neither. And while you can also explain the technicalities etc, in the end many people just want the answer "what should I do" from someone.
- riehwvfbk 3y ago
  There's a reason these uncomfortable conversations are uncomfortable, and it's precisely that: you, as a founder, know that the odds of the employee striking it rich are slim, but have to sell them on joining the company.

deleted 3y ago

[deleted]

lucas_the_human 3y ago

In comp packages you also want to look for the exercise window clause. Some companies say you have to exercise your options within 90 days from leaving but I’ve worked at a startup where it was 5 years which is more employee friendly.

gumby 3y ago

I was counseled years ago to be VERY careful about these conversations. You can’t encourage, or come off as encouraging, any employee to exercise or not — if the bet goes the wrong way (company succeeds but empmdidnt exercise or vice versa) you / the company could be sued and it’s an SEC violation. One thing you should do is support early exercise (meaning exercise any time, even before you’ve vested; company can repurchase and the same price any unvested shares if you leave). This is especially good for early hires when the price is extremely low and 83(b) means you avoid a tax bill until you sell. In later stage companies this doesn’t help as much though. I do agree with the author that comp secrecy is not just stupid but destructive.

hackernewds 3y ago
tax bill before you sell scenario is valid for ISO. NSOs is a whole other ballgame, with its own tax benefits

jawns 3y ago

> The “Assume your equity will be worth nothing” mantra. Especially in 2024, people prefer to treat stock options as a lottery ticket and not as an investment. The post itself provides ample evidence for why this is a rational position, especially for people with even mild risk aversion. For instance, look at the table of "Startups that exited for more than they raised." Even among those who raised a Series E or later -- the most likely to exit -- only 40% experienced a favorable exit, and among those, the mean valuation growth was 2.26X. Under optimistic assumptions, that's a "double your money" scenario with 40% odds, which is a not even a great bet in the aggregate -- but a pretty terrible bet for any individual. Financial advisors counsel people all the time not to put their eggs in one basket. That's why index funds like VTI are so popular. They let you diversify your investments. Heck, putting so many eggs into the basket of your employer is risky even after it goes public! I had a publicly traded employer who had a 401(k) match paid in company stock. Every pay period, I sold that stock and bought index funds instead.

throwarayes 3y ago
Ugh yeah I turned down a job offer even from seemingly ethical and nice startup in large part because I’d be exchanging actual publicly traded RSU vesting in the future with equivalent in options. It’s hard to trade in somewhat certain money for likely fictional Stock Options. Though I’d possibly trade RSUs from company A for company B. There’s almost like a two tier employment system between those at FAANG or adjacent with actual likelihood of a healthy payout and those with options / lottery tickets.
- cbsmith 3y ago
  > Ugh yeah I turned down a job offer even from seemingly ethical and nice startup in large part because I’d be exchanging actual publicly traded RSU vesting in the future with equivalent in options. I did the same thing. The options were from a company that had just IPO'd named Google. You may have heard of it. ;-)
- hibikir 3y ago
  Yeah, the gamble only pays off for a company that has a growth so strong, and a plan so safe that the downside is quite low. They have to give you more options because they know they are worse than RSUs, so the pay really can end up being higher than FAANG, but still with some gambling involved. Those companies exist (See, Stripe 10 years ago), but there are so few of those, it's harder to find them than just go to FAANG.

OtherShrezzing 3y ago

>This calculation doesn’t take into account the dilution during future funding rounds. It's fairly useless to have these scenario planning conversations with your staff without describing dilution events - they're fairly inevitable. If you've told all the staff that there are three general scenarios, you're going to lose a lot of trust & goodwill when you hold the all-hands meeting where you announce "oh yeah, there's mystery scenario four, where your returns decrease in value, and there's nothing you can do about it, and we might do it again".

bradlys 3y ago
Ultimately, dilution doesn’t matter for 99% of employees. You could experience 10x dilution but if the price goes up 100x - you’re still up 10x. Would it be great if you went up 100x and no dilution? Sure but that’s not how it works.
- saulpw 3y ago
  In actuality how it works is that the price goes up 10x and you experience 10x dilution. So everything seems up and to the right and the founders are 10x but when it comes time to cash out you're lucky to get a small bonus.
  - bradlys 3y ago
    Maybe in some cases but I often see founders getting diluted a lot as well. Many times when startups get acquired/whatever - founders will get next to nothing because the investors had liquidation preferences. The founders still go through with it though cause it allows you to start another company and raise rounds. If you become known as a founder who prioritizes himself over his investors - who is going to give you money…?
- rustcleaner 3y ago
  Really need to move to a 1 "share" total (1 company 1 share), 16 decimal place volume, market cap*volume=price system; and not a market cap/float=price system. If a company really issues 0.5 cumulatively to employees, then half the company's equity is owned by employees. No decimal point fvckery to open the tent to the dilution camel's nose. You can use milliShares, microShares, nanoShares, etc, to avoid expressing a $10,000 0.000000134 Share position. There should only ever be one share: The Company. ADDENDUM: bonus if we get to a computational level that allows for arbitrary but valid rational numbers (with a data size cost to keep infinitesimals down) and replace fixed sized decimals, and modeling capabilities which allows us to list options contracts in a unified market, with arbitrary numeraires (think contracts for A priced in B instead of $) and expirations, and with any combination of strikes (compound positions), as one trade. BSM is continuous in all dimensions, and all it's really doing is expressing probabilities as price (plus a small uncertainty spread for risks and to goose out an edge out of Expected Value). This many expirations bins, many strikes bins, stuck to 100-share contracts, many (separate) stock vs USD bins, thing seems a bit too arbitrary when we have Wolfram Mathematica-tier abilities to handle the modeling for this stuff now. It's not 1989 anymore, get Tom Sosnoff on the phone I'm sure he'd pitch this innovative idea! Maybe I'll call it into his show soon...

datavirtue 3y ago

I don't think stock options should be seen as a retention incentive. Maybe they incentivize me to knock it out if the park but if I don't care about the company anymore at best they are "golden handcuffs" that prop up the illusion that the holders care about the company.

whiplash451 3y ago

Options conversations are hard for a good reason. The underlying mechanics are actually complex. You can’t explain an employee what the outcome would be for them without telling them about preferential shares, double-dipping, etc. Good luck building a company on full transparency on all this. Most investors would think you’re crazy and finance the startup next door.

iamacyborg 3y ago
All you’d need to do is have a glossary and an open cap table, no?
whiterknight 3y ago
I’ll be satisfied with a market cap thanks. They won’t even tell you how many shares there are.
- whiplash451 3y ago
  That, I agree with. But the article is advocating for much more. Unfortunately, there is a fundamental problem with sharing market cap and number of outstanding shares with all employees (and prospective ones). This data would quickly leak to the competition and other unwanted hands.
  - whiterknight 3y ago
    Ok, then as an employee I must value your stock compensation at 0.
    - whiplash451 3y ago
      That's not what I meant. The company can (and should) share the share price with you as a new joiner. That helps you value the stock compensation.

hbrav 3y ago

> In some companies, the initial job contracts are misleading, and mention a nominal price of $0.01. Is he suggesting that the initial job contract does _not_ state the exercise price, and relies on the employee mistakenly thinking that $0.01 is the exercise price? This seems like it stems for a culture that we have of employees (or potential employees) just never asking questions about contracts that are presented to them. And I think there's a lot of employers that expect that to be the case too. I've once had a manager tell me with a straight face when I requested changes to a contract "I'm sorry, I can't get this changed. You'll just have to sign it." My reply of "I don't believe it's in my interests to sign that" was not something that was in his world-view.

bionsystem 3y ago
Could be a misread of certain 10K which state a par value of $0.01, which has no particular meaning at any point in time of the life of a company (it's just a convention).

varelse 3y ago

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benjaminwootton 3y ago

I think there is way too much scope for bad actors in this. The employer holds all of the information and all of the cards. I was a tier 1 significant common shareholder in my own company and saw a bunch of shenanigans. The rank and file employee with 0.00X% stock options subject to weird rules and tax doesn’t stand a chance. From the employees perspective, have to find a massive outlier in terms of company success and then hope to not get screwed or be diluted to hell. Lottery ticket odds are the right ballpark.

spxneo 3y ago

whew thought this was a guide on how to avoid getting manipulated on social media into buying calls and puts after reading DDs i think best thing to do is not offer illiquid stock options but a sliding scale revenue share. Of all the startups that I have been a part of, only 1 found buyers for the stock options but even then it was too little because it didn't IPO, it just sold to another player. It's down right misleading to offer pieces of paper with the right to buy a stock that has almost nil chance of seeing retailers without disclosing the odds. The odds are close to nil for startups looking to IPO. By doing revenue share, it forces you to be long term orientated, you are now focused on growing a steady stream of net positive cash flow. This puts you in a much better negotiating position, you can use leverage from banks to get anywhere from 30~60 cents on the dollar, to redistribute back into operations or bonuses. THEN you can accept that invite from a VC or PE (dont recommend it due to the time constrained nature of PEs that are incompatible with long term orientated management) and absolutely have the odds in your favour.

Linda231 3y ago

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dsr_ 3y ago

"All the (unneeded) secrecy around the compensation package - you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager." In the United States, this is not just unnecessary secrecy: this is completely illegal. Trying to forbid employee-to-employee conversations about compensation will land the company in trouble, and every manager should know this.

rybosworld 3y ago
A company I worked at years ago, the VP of the department sat in on all of my annual reviews with my manager. He would mostly just listen in. But at the end of the meeting he would always say something to the effect of: "as you know, you can't discuss your compensation with coworkers." I knew it was illegal for him to say that but, if it's not in writing then there's basically no recourse. I understand this to be a fairly common experience in the U.S. workforce. When it comes to labor laws in particular, the rate of enforcement is extremely low.
- pizzafeelsright 3y ago
  Why would you want to know what you're making compared to your coworkers? You agreed to the pay. Want more? Ask more. If you're making 2x more than your "peers" would you take a cut to equal pay?
  - JohnFen 3y ago
    I don't want to know what my coworkers make, nor do I want them to know what I make. Too many feathers to potentially ruffle there. However, I'm all on board with the idea that people who do want to exchange this information should be free to do so without punishment from their employer.
  - mym1990 3y ago
    The point is that there is an information imbalance, which enables one side to have more power in negotiating. Sure I can say "give me more money" but if the employer presumes I have little information on my co-workers, they can just say no. But if I call the bluff and say, I want more money because I know a co-worker makes X, it is harder to say no for the employer, although obviously not impossible.

latchkey 3y ago

I've been in the tech industry for 30 years. I've also been mostly startup based my entire time. I've only ever had options "work out" a single time and that was because long after I left the company (I bought my vested options), it went public and my options converted into actual stock. However, the stock was absolute shit worthless for about 10 years, so I hung onto it thinking one day, I'd sell it and harvest the tax loss. Then, during covid, WSB came along and randomly pumped it and my limit order for the very tip of the market, was actually filled. Much to my amazement. Then, the stock went to the bottom again almost the next day. I think I "profited" about $5k total out of that deal across many years. My last company, was supposed to go through a SPAC, likely so that the execs could dump on retail. I spent like $30k on my options and near the end of everything in the hopes of getting some of it back, the whole deal fell through and I got laid off for the first time in my career. Maybe I just have bad luck in these things, but every time I picked a higher salary over more options... it worked out better in the long run, by a lot. Now that I'm CEO of my own business, I have zero plans to ever go public or even sell the company. I'd much rather have it be focused on stable revenue generation, and make sure to pay people well, and give company performance bonuses along the way. Yes, of course, we will also give options out, as the industry expects it, but I'm not going to make it a focus (by preferring good salaries, benefits and a stable gig). I'll be upfront about my plans for anyone joining. I would much rather be real with people than give them any sort of false hope. We are just starting, so let's see how that works out over time.

bradlys 3y ago

It’s a really fucking bad time to be joining startups. They’re picky, offering shit comp on top of it, and have very little chance of a sizable liquidation event for employees in a long time. Idk if I’ll join a startup again in the next few years. It’s basically taking salary only - which can be anywhere from 1/2-1/4 of my normal pay. Why waste your time? I hope one day startups will offer something of value again. For now, it’s a race to the bottom.

cmmeur01 3y ago
I think it’s more complicated than that and one big factor is location. In my midwestern experience startups are paying more cash than other businesses where software is a cost center.
- bradlys 3y ago
  Well, sure. I’m talking mostly about the US coasts where most of the YC audience is. HN is a very SV focused website.

JonChesterfield 3y ago

Whoa no. Absolutely no telling employees the details. The whole point of stock options is that employees can't value them accurately and you probably don't have to pay them. That's the whole magic trick. Come work for us! We can only pay $50k in boring everyday money, but here's some tokens. We don't know what they're worth, and you can't spend them for many years or maybe not at all, but look at this picture suggesting they might be worth lots! Works really well on people new to the workforce. Actually giving employees a means of valuing it, notably that their options turn into a class of shares that get paid after lots of other people and a sketch of how dilution works out in the meantime, stops them thinking it's a lottery ticket. It becomes a very low chance of winning less money than the opportunity cost relative to working elsewhere. Much more fun for employees are RSUs. They have the same nice trick of becoming free when people quit. They let you adjust people's pay without annoying them as much as a salary freeze or reduction. A three or four year vesting period with roughly annual grants is near perfect as a salary retention tool. Also rsu induced pay inflation has really hurt the startup recruitment pitch which helps defang an existential threat to your public company. Not really what I want as an engineer but the incentive gradient is very clear.

rustcleaner 3y ago
>That's the whole magic trick. Come work for us! We can only pay $50k in boring everyday money, but here's some tokens. We don't know what they're worth, and you can't spend them for many years or maybe not at all, but look at this picture suggesting they might be worth lots! Works really well on people new to the workforce. If I have to be short theta, at least be a [company] man and make it something like 75-delta >720 DTE calls. Ideally let me sell 50-delta <360 DTEs to the new on-boards as well! :^) Long longer dated ITM calls protect downside in IV spike, and being short shorter (relatively) dated ATM calls pays me more theta than I pay for the ITM while the ITM gives me much needed vanna if the underlying shits the bed on my spread (assuming skew exists).
- rustcleaner 3y ago
  The above is a diagonal. Another option could be to be in an equivalent vertical (both shorter expiry) and then long a 2-5 delta back-dated put to get vanna for downside protection.

theogravity 3y ago

Surprised it didn't mention anything about AMT, which may prevent one from exercising because they can't afford the tax hit from the spread.

mancerayder 3y ago

Is it that bad? I'm on a relatively reduced salary due to ISOs in a company that wants to exit in the next couple of years, and a stock valuation that keeps going up (per audits) in the last years. It's also still expanding quickly. The company even did a raise and let some of us sell a percentage of our shares to the private buyer. This is not Silicon Valley, but a fintech. Given I have not only my time but 10s of k of my money tied up in options due to strike price going up with each grant, in what way am I risking getting screwed? In the comments here, it seems like I have a 60+ percentage chance of getting screwed through a dilution or other. However it doesn't feel that way. What should I be on the lookout for? The Paperwork is dozens of pages long and I'm not an attorney.

fragmede 3y ago
I'm not an attorney either. The best way to answer the question is to find one that specializes in this arena, and ask them, rather than believe anything you read on the Internet, or from an LLM. Still, the whole thing could just go to zero. The finteching doesn't work out and the company and thus your options become worth zero. I hope that doesn't happen for you, but before dilution, you have up look at that as a very real possibility. Something could pivot out from under you and it could just stop working and being worth anything. Once you've stared that beast in the face, yeah, dilution is a thing that could happen, but it's not in anyone's interest to screw you over. If you get screwed over by your board, people are going to know, and not want to work with those people ever again. So dilution absolutely happens, but you just have you hope you're not gonna get screwed over. There's no legal guarantee that you won't though, so that's why the common advice is that that options are worth $0, until they aren't. So you have to look at options as a lottery ticket and ask how much you like the work and how much you like your coworkers, how much you like what the company does, and can you live off the pay you do get.
pyrophane 3y ago
Well, for the most part you agreed to your employer's stock plan when you were granted options, and so you are subject to whatever is in there but there isn't a lot you can do about that since you would have already signed it a while back. I would just refer to an attorney regarding anything would modify your shares or the agreement you already signed, because those things can't be arbitrarily modified without your consent. Also, the most common way employees get "screwed" is when the company underperforms and has to raise money on bad terms, but there isn't much you can do about that.

neilk 3y ago

There is no discussion of how the employees are the last to be paid, after founder class shares and investor liquidation preferences are settled. Borders on misinformation to tell people that owning x% in shares equals x% of liquidity event. Even many founders end up with very little to show from an acquisition.

pyrophane 3y ago
I don't think founders typically get liquidation preference like VCs do, but correct me please if I'm wrong.

seanhunter 3y ago

An article about startup employee stock options that doesn't mention the effect of liquidation prefs and only mentions dilution extremely briefly is really missing a huge amount of what anyone needs to actually value stock options. On a quick scan this doesn't look terrible [1], although it's focussed on the founder's perspective rather than the employee's. [1] https://www.joinarc.com/guides/liquidation-preferences https://www.joinarc.com/guides/liquidation-preferences

entangledqubit 3y ago

I would avoid this guide. I don't even see mentions about dilution and cap tables, let alone preference and a bunch of other risks. If you need a solid guide, I usually point at the Holloway Guide To Equity Compensation but I'm annoyed that it looks like they started charging for it (probably still worth both the time and money). The preview is worth checking out. That being said, I think there are a bunch of other aspects that aren't captured. I was under the impression that founders/management generally don't give any company specific guidance in order to not be on the hook for anything that may be construed as guidance or promises.

siliconc0w 3y ago

Startups are great when you're looking for a fast-paced high-trust environment where you're going to be given a lot of responsibility and will be able to grow your skillset. From a financial perspective, they're terrible unless you're an early employee or possibly a very senior/exec hire. Rarely companies might offer things like longer exercise windows but even then your options can become worthless even in an unlikely successful exit due to dilution/liquidation-prefs.

surfingdino 3y ago

It's worth pointing out that this post is written from the point of view of a US startup. If you are in the UK, just say no to stock options and ask for a salary that matches the market. UK startups keep on trying to get people to work for less with the promise of stock options despite there being little recent evidence of UK startups IPO-ing. I got screwed on startup stock options in the past, but not as badly as people who invested 5+ years of their lives into the company. The founder got enough to not have to work for the rest of his life, but the employees got zero pennies when the business was sold to competition. Stock options are not even a gamble, they are an IQ test, if you accept them you have failed.

mgaunard 3y ago
Receiving stocks in the UK means paying a lot of tax that you have to pay immediately (45% of the fair value) on an asset that is an illiquid investment. It is a bad idea and you're much better off getting stock options, so that you only pay tax when you exercise, and you would only exercise when you can sell, so you have money to pay the tax. Then the whole point of working for a startup is that you can have larger upside than in a more established firm, often 4x. Finally even in established firms it is common for high compensation to be paid out in shares/stock options (be it in the company itself or a fund) and/or deferred, which is not any different anyway, except the value is a bit more battle-tested.

nickjj 3y ago

I'm surprised the post doesn't mention a specific type of risk which is out of your control. I'm not well versed in options lingo, is there something to describe this scenario? You join with a very low strike price, such as $0.05 and get a lot of shares, let's say 200k to keep the math easy. At that strike price the value on paper is $10,000. Then a liquidity event occurs before your options vest and now instead of 200k shares @ $0.05 you have 3,333 shares at $3.00 because the valuation of the company changed. You still have $10,000 in options. The issue now is you've taken a huge loss in the multiplier effect. Having a stock go from $0.05 to $1 is a 20x jump. Hitting that would yield $200,000 in value. But the odds of $3 turning into $60 is so much lower, but that's what you would need the stock to hit to yield the same return in the end. In the end, over time you tend to get less stocks at a higher adjusted strike price with no real-world opportunity to exercise. Sometimes even if you have vested options you can only exercise a single digit percentage of your total shares so the total cash-out value is the equivalent of 1 day's worth of pay even after years of vested options.

seanhunter 3y ago
> Then a liquidity event occurs before your options vest and now instead of 200k shares @ $0.05 you have 3,333 shares at $3.00 because the valuation of the company changed. You still have $10,000 in options. A liquidity event wouldn't change your number of options in general. If you had 200k options before the liquidity event and you didn't sell any when the event happened, you still have 200k options after and their strike price doesn't change. The value of these options has changed because the value of the underlying stock has changed. It's absolutely not the case that your options get adjusted to keep the dollar value the same post-liquidity event unless there is a consolidation as described below. Your terminology is a bit imprecise so it's hard to be 100% sure what you mean but I think you're talking about dilution. It doesn't work quite the way you wrote it down but the net effect is similar to how you describe as long as you think in percentage terms rather than number of shares at a price terms. Say your 200k shares represents 1% of the company (so there are 20m shares) and an investor comes in and puts in 20m for 50% of the company. This values the company at 40m (post money) but dilutes you so now your 200k shares is only 1/2% of the company. In theory whether this is good or bad depends entirely on the true value of the company relative to the price the investor came in for. If the company is worth exactly 40m with the new money then it's easy to say that it must be worth 20m before the money (because it's just the same company but has been given $20m), and 1/2% of a company worth $40m is exactly the same as 1% of a company worth %20. In practise your position is generally worse afterwards because the investor will usually get a "liquidity preference" which means they will get all their money out before you get a dime. So you have a smaller percentage and your position on the cap table is a bit worse than it was before. The hope is that the money and whatever else the investor brings to the table makes the whole thing better in a way that compensates for that. There is one other scenario which can play out a bit like what you mentioned, which is a "reverse split" (also sometimes called a consolidation). This is somewhat rare and usually is only going to happen when the company isn't doing that great. So a split is where say the company has 100mil shares at $10 per share they split each of those into 10 new shares at $1 per share so if you had 200k options at 0.05, you now have 2m options at 0.005. Well a reverse split is the opposite of that so your 200k options at 0.05 become 20k options at 0.5 in the case of a "1 for 10" consolidation. Your stuff about the multiplier effect is not really how stock trading works. Market professionals think in terms of percentages in general, so having a stock go from $3 to $60 is exactly the same as having it go from $0.05 to $1.[1] When you say about only being able to exercise a certain percentage of vested stock - those restrictions are real but generally affect things more pre-IPO (and for a short lock-in period post-IPO) but in general exercise pre-IPO is very limited. But yes those sorts of restrictions are important and it's important to read your options agreement carefully to make sure you understand them. [1]One exception to this is "Pink Sheet" stocks which happen to be both very low-priced per share and very volatile. The reason they are so volatile is that because of their low price they can't get a normal stock listing and so are extremely illiquid and subject to fraud and market manipulation etc in ways that are more extreme than normal stocks. Stocks with extremely low prices like this could do a reverse split to get their price into a normal range but choose not to, which leads most people to think they prefer to avoid normal market scrutiny. The other exception are stocks like Berkshire Hathaway which are illiquid because they are so high-priced (per share). They could fix this problem by executing stock splits but Warren Buffett has had a sort of religious objection to doing this. It's irrational and it hurts liquidity in this stock.