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> 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.

by 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.
hackernewds 3y ago
40% chance to double your money in 4 years is an expected value of 20% compound growth a year. Seems like a solid bet vs VTI
- dahinds 3y ago
  Your calculation assumes that the other 60% of the time you get to keep your original investment, but there's a good chance that you lose it all. This is also the calculation for an investor, and is not really relevant for an employee option holder.
  - thedufer 3y ago
    In fact, it sounds like the 40% includes all exits, including those that returned only 1x. That would mean that the 60% is all 0s, and that the chart shows a negative total return in all rows, without even discounting for the holding period.
- jawns 3y ago
  But the way it works per individual is that you have a 40% chance of "winning" and a 60% chance of losing your investment completely. VTI carries the risk that your investment could lose value in the short term, but over a longer time period, I'll take VTI over stock options any day.
  - deschutes 3y ago
    Better odds and no work at a game of chance. That's pretty damning.
- lostemptations5 3y ago
  This really depends on an individuals risk tolerance.
- baq 3y ago
  Volatility adjusted is probably quite shit.
- 3y ago
dan-robertson 3y ago
Yeah, the real reason that kind of advice is useful for lots of people is that those people aren’t risk neutral. It’s also hard to value the options correctly. There’re a bunch of reasonable things Ben Kuhn has written about startup stock options, with the main premise being that if your salary suffices and you intend to give the rest to charity (and want to increase the amount you give) then you are risk neutral and so you should try to value the options properly. Eg this post and several linked from it: https://www.benkuhn.net/offer/ https://www.benkuhn.net/offer/
dasil003 3y ago
> Financial advisors counsel people all the time not to put their eggs in one basket. One nuanced take that I've found useful: diversify to preserve wealth, but concentrate to build it. To be clear, I'm not advocating against the default view that stock options are lottery tickets, because from a pure financial point of view that's close enough to the truth. However, it's important to understand that outlier wealth comes from ownership of businesses, and the whole point of being at an early stage startup (whether as founder or early employee) is to be an agent in the success of an outlier business. There's no way around the fact that this is a fundamentally risky proposition. The odds are always against you—especially given how much one can make in FAANG, it's a particularly difficult time to make any kind of expected-value argument for working at a startup. That said, there will be more outliers in the future. Many people who work on those will see generational wealth far exceeding the rank and file of FAANG. They will have gotten there via a drive to do something new and different, and working together to achieve something that the majority of rational people deemed impossible. Despite future dismissals about luck, or odds, or averages, or reproducibility, noone can take away what they will have accomplished through the sweat of their brows and choices made along the way in the face of massive uncertainty. Ultimately, the best reason to join (or found) a startup is because you really want to try to do a hard thing with a group of people you trust and admire enough to go into the trenches with for the next 2-5 years. It can pay off, but the mentality necessary for success is diametrically opposed to good financial advice.
- earnesti 3y ago
  > The odds are always against you—especially given how much one can make in FAANG, it's a particularly difficult time to make any kind of expected-value argument for working at a startup. This kind of advice often assumes that it is easy for anyone to get a FAANG job. I got rich from a startup, before that I was working for a bigger companies and I'm very sure that I would never have been successful in that game. I'm fairly sure that corporate jobs work out for quite different persons.

by jawns 3y ago

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.

hackernewds 3y ago

40% chance to double your money in 4 years is an expected value of 20% compound growth a year. Seems like a solid bet vs VTI

dahinds 3y ago
Your calculation assumes that the other 60% of the time you get to keep your original investment, but there's a good chance that you lose it all. This is also the calculation for an investor, and is not really relevant for an employee option holder.
- thedufer 3y ago
  In fact, it sounds like the 40% includes all exits, including those that returned only 1x. That would mean that the 60% is all 0s, and that the chart shows a negative total return in all rows, without even discounting for the holding period.
jawns 3y ago
But the way it works per individual is that you have a 40% chance of "winning" and a 60% chance of losing your investment completely. VTI carries the risk that your investment could lose value in the short term, but over a longer time period, I'll take VTI over stock options any day.
- deschutes 3y ago
  Better odds and no work at a game of chance. That's pretty damning.
lostemptations5 3y ago
This really depends on an individuals risk tolerance.
baq 3y ago
Volatility adjusted is probably quite shit.
3y ago

dan-robertson 3y ago

Yeah, the real reason that kind of advice is useful for lots of people is that those people aren’t risk neutral. It’s also hard to value the options correctly. There’re a bunch of reasonable things Ben Kuhn has written about startup stock options, with the main premise being that if your salary suffices and you intend to give the rest to charity (and want to increase the amount you give) then you are risk neutral and so you should try to value the options properly. Eg this post and several linked from it: https://www.benkuhn.net/offer/ https://www.benkuhn.net/offer/

dasil003 3y ago

> Financial advisors counsel people all the time not to put their eggs in one basket. One nuanced take that I've found useful: diversify to preserve wealth, but concentrate to build it. To be clear, I'm not advocating against the default view that stock options are lottery tickets, because from a pure financial point of view that's close enough to the truth. However, it's important to understand that outlier wealth comes from ownership of businesses, and the whole point of being at an early stage startup (whether as founder or early employee) is to be an agent in the success of an outlier business. There's no way around the fact that this is a fundamentally risky proposition. The odds are always against you—especially given how much one can make in FAANG, it's a particularly difficult time to make any kind of expected-value argument for working at a startup. That said, there will be more outliers in the future. Many people who work on those will see generational wealth far exceeding the rank and file of FAANG. They will have gotten there via a drive to do something new and different, and working together to achieve something that the majority of rational people deemed impossible. Despite future dismissals about luck, or odds, or averages, or reproducibility, noone can take away what they will have accomplished through the sweat of their brows and choices made along the way in the face of massive uncertainty. Ultimately, the best reason to join (or found) a startup is because you really want to try to do a hard thing with a group of people you trust and admire enough to go into the trenches with for the next 2-5 years. It can pay off, but the mentality necessary for success is diametrically opposed to good financial advice.

earnesti 3y ago
> The odds are always against you—especially given how much one can make in FAANG, it's a particularly difficult time to make any kind of expected-value argument for working at a startup. This kind of advice often assumes that it is easy for anyone to get a FAANG job. I got rich from a startup, before that I was working for a bigger companies and I'm very sure that I would never have been successful in that game. I'm fairly sure that corporate jobs work out for quite different persons.