3 ms·

> why wouldn't you buy preferential shares? I'm left with the sense that this is a response to some other post, not mine? To be clear, I'm talking about scena

by jjav 3y ago

> why wouldn't you buy preferential shares? I'm left with the sense that this is a response to some other post, not mine? To be clear, I'm talking about scenarios where one would join a startup as a regular employee. Not talking about angel investing or anything like that.

robocat 3y ago
I am just saying that common shares are extremely high risk investments. When you start putting money into an investment I believe you should aim to get the same risk profile as other investors that are putting money in. If exercising your shares is a trivial cost, then it doesn't matter. If exercising shares costs a lot then it really really matters. Common shares have zero value until after the preferential shares are in the money. i.e. buying common shares is as risky as investing in call options. Angel investing is extreme risk, call options are extreme risk, and as a sweeping generalisation: common shares are riskier than those. I'm only mentioning Angel investing because we all know how risky that is, so it is a baseline to compare against. You answered JonChesterfield who's point was "here's some tokens". Your reply is entirely sensible and you are rightly saying those tokens can end up winning and you explain a good strategy to get valuable tokens and gamble some of your pot. I am attempting to amplify JonChesterfield's comment, perhaps I'm failing! Aside: I really appreciate your comment and I am commenting to help my own thinking. I have been trending towards doing Angel investments which requires understanding VC incentives. I'm past being an employee so I'm not sure how relevant my comments are to anyone! VCs and the VC ecosystem use the confusion between the details of public market shares, common shares, and preferential shares to the advantage of the VCs.
- jjav 3y ago
  I guess you're equating being an early employee to being an angel investor in that startup? In some sense, that's kind of true. But still, not how most employees of the company are going to think about it. You have to work somewhere. > If exercising your shares is a trivial cost, then it doesn't matter. Well yes, that was my point. That's why you'd ideally join very early, so you can early exercise and buy all the options up front for very little money.
  - robocat 3y ago
    > early exercise This article argues the opposite using financial arguments: https://www.investopedia.com/articles/optioninvestor/09/get-more-out-of-your-esos.asp https://www.investopedia.com/articles/optioninvestor/09/get-... It is a bit technical for my level of ignorance: and it seems irrelevant. Interesting how it points out that companies get a financial advantage on their books if you early exercise. I think it is saying that optionality has a value to the person that owns the option and that early exercise loses that value. I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly? Lottery tickets! Thank you. I appreciate learning from you and I hope I have learnt something from that article which I wouldn't have done otherwise (even if I don't understand the pricing details). My eyes tend to glaze over whenever volatility is mentioned. Relevant to public stocks and options in public markets. I suspect volatility is not a useful measure looking at investing in early-stage startups since value tends towards all or nothing. The distribution of returns for a single startup seems fairly wacko - hard to model.
    - jjav 3y ago
      > I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly? That's why I'm emphasizing the part about joining very early. Early exercise is ideal when you join when the stock is worth basically nothing, but doesn't make sense later in the startup's life. Which is why in the original post I say that IMO you don't want to join a startup in the middle of its growth. Only very early, or very late. For example: I joined one very early startup where my option price was a small fraction of a penny. I early exercised and bought many hundred thousand shares for less than $20. There's no downside, worst case I lose less than the price of lunch. The other reason to early exercise is freedom. You can leave without angst about losing your unexercised options. There are no golden handcuffs, you're free to move jobs.
      - robocat 3y ago
        > I early exercised and bought many hundred thousand shares for less than $20 Right. This is what has confused me. I had presumed that the options were a much more valuable part of your pay package (like tens of thousands to exercise early). Yeah, $20 is a good price for a lottery ticket! I would presume few VC run companies would give away shares that cheaply now?

by jjav 3y ago

robocat 3y ago

I am just saying that common shares are extremely high risk investments. When you start putting money into an investment I believe you should aim to get the same risk profile as other investors that are putting money in. If exercising your shares is a trivial cost, then it doesn't matter. If exercising shares costs a lot then it really really matters. Common shares have zero value until after the preferential shares are in the money. i.e. buying common shares is as risky as investing in call options. Angel investing is extreme risk, call options are extreme risk, and as a sweeping generalisation: common shares are riskier than those. I'm only mentioning Angel investing because we all know how risky that is, so it is a baseline to compare against. You answered JonChesterfield who's point was "here's some tokens". Your reply is entirely sensible and you are rightly saying those tokens can end up winning and you explain a good strategy to get valuable tokens and gamble some of your pot. I am attempting to amplify JonChesterfield's comment, perhaps I'm failing! Aside: I really appreciate your comment and I am commenting to help my own thinking. I have been trending towards doing Angel investments which requires understanding VC incentives. I'm past being an employee so I'm not sure how relevant my comments are to anyone! VCs and the VC ecosystem use the confusion between the details of public market shares, common shares, and preferential shares to the advantage of the VCs.

jjav 3y ago
I guess you're equating being an early employee to being an angel investor in that startup? In some sense, that's kind of true. But still, not how most employees of the company are going to think about it. You have to work somewhere. > If exercising your shares is a trivial cost, then it doesn't matter. Well yes, that was my point. That's why you'd ideally join very early, so you can early exercise and buy all the options up front for very little money.
- robocat 3y ago
  > early exercise This article argues the opposite using financial arguments: https://www.investopedia.com/articles/optioninvestor/09/get-more-out-of-your-esos.asp https://www.investopedia.com/articles/optioninvestor/09/get-... It is a bit technical for my level of ignorance: and it seems irrelevant. Interesting how it points out that companies get a financial advantage on their books if you early exercise. I think it is saying that optionality has a value to the person that owns the option and that early exercise loses that value. I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly? Lottery tickets! Thank you. I appreciate learning from you and I hope I have learnt something from that article which I wouldn't have done otherwise (even if I don't understand the pricing details). My eyes tend to glaze over whenever volatility is mentioned. Relevant to public stocks and options in public markets. I suspect volatility is not a useful measure looking at investing in early-stage startups since value tends towards all or nothing. The distribution of returns for a single startup seems fairly wacko - hard to model.
  - jjav 3y ago
    > I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly? That's why I'm emphasizing the part about joining very early. Early exercise is ideal when you join when the stock is worth basically nothing, but doesn't make sense later in the startup's life. Which is why in the original post I say that IMO you don't want to join a startup in the middle of its growth. Only very early, or very late. For example: I joined one very early startup where my option price was a small fraction of a penny. I early exercised and bought many hundred thousand shares for less than $20. There's no downside, worst case I lose less than the price of lunch. The other reason to early exercise is freedom. You can leave without angst about losing your unexercised options. There are no golden handcuffs, you're free to move jobs.
    - robocat 3y ago
      > I early exercised and bought many hundred thousand shares for less than $20 Right. This is what has confused me. I had presumed that the options were a much more valuable part of your pay package (like tens of thousands to exercise early). Yeah, $20 is a good price for a lottery ticket! I would presume few VC run companies would give away shares that cheaply now?