7 ms·

How Stock Options Work

49 points by jdcampolargo 1y ago

JonChesterfield 1y ago
This really shouldn't get the fundamental point wrong > When an employee exercises an option, the company must issue a new share of stock that can be publicly traded. No. When you exercise, you get the stock, but it's definitely not guaranteed to be publicly traded. For example Graphcore gave people options, which if exercised became stock in graphcore. If you then found a buyer and asked GC to approve the sale, they declined. Not public. Later they revalued that stock at zero. To a better approximation, stock options work if you trust the company to pay out.
- jdcampolargo 1y ago
  > stock options work if you trust the company to pay out. 100%
- cyberax 1y ago
  > For example Graphcore gave people options, which if exercised became stock in graphcore. If you then found a buyer and asked GC to approve the sale, they declined. Not public. Later they revalued that stock at zero. From looking at Wiki, the company is basically bankrupt with just $2.7m revenue for 450 employees. So their stock is literally worth nothing. If they do get acquired by Softbank, employees will get a portion of the sale according to the amount of shares they own. The company valuation won't make any difference.
  - JonChesterfield 1y ago
    Wiki is out of date. Softbank acquired graphcore ages ago for many million dollars. Employees got zero times however many shares they owned. For related reading, see "drag along" for why the voting rights attached to shares mean nothing. https://sifted.eu/articles/graphcore-conditional-sale-agreed-news https://sifted.eu/articles/graphcore-conditional-sale-agreed...
    - cyberax 1y ago
      Well, it's not much different. The investors with preferred stock got some money back, taking a loss overall. So this was basically a bankruptcy with employees and founders getting nothing.
      - JonChesterfield 1y ago
        "Founder liquidity" is worth looking up. If you're curious about this specific case, UK companies register accounts that can be read by anyone. I'm mostly calling this out as an example of why "public" is an important error in the op. Were the shares publicly tradable, the employees that chose to could have exited.
        cyberax 1y ago
        I'm not familiar at all with the UK law, but in the US the founders typically get common stock. They can't have it treated preferentially during acquisitions. "Founders' stock" refers to the preferential tax treatment (TLDR: almost zero taxes via QSBS).
M3L0NM4N 1y ago
This should be titled, "How Employee Stock Options Work"
- Sohcahtoa82 1y ago
  Not to mention how much it leaves unanswered. What happens to your options if the company goes public or gets acquired before you exercise? What if you exercise but decide you want to sell but the company isn't public?
neilv 1y ago
It's from 2007; if someone showed you this today, as what you needed to know as a hire, they'd be scamming you. This seems like only the "first slide's" worth of what a tech employee needs to know about stock options, and not the most important things. It's also worded imperfectly in parts, with the effect of being misleading. If you start by looking at the lede and first paragraph, it's unclear who this is for, and seems more like a child's "book report", with no regard for the reader, nor sufficient understanding of the space that's relevant to the reader. Perhaps this wasn't garbage in 2007, but I'm flagging it in 2025.
- wiseowise 1y ago
  What would you suggest in 2025?
  - daveguy 1y ago
    Always consider stock options to be worthless.
    - deleted 1y ago
      [deleted]
    - lurking_swe 1y ago
      That’s too broad of a statement. For a startup, YES, i agree. It may end up at $0 if the company goes bust. And that’s very common - especially in tech. However there are some publicly traded (and fairly large) companies that have been around for a while, that also offer stock options (NQSOs) to their employees. Typically they get to choose between RSUs, NQSOs, or a mix. In these cases options are not worthless because the risk of the company going bankrupt is very slim.
      - daveguy 1y ago
        Yeah, I was going to go into all that crap, but they're all still just options to buy at whatever market price you start at. Market go up. Market go down. Just consider stock options to be worthless when negotiating. I'm not saying don't accept them, just don't factor them in as "compensation". Factor them in as chips already laid on roulette table, at best.
untitled2 1y ago
>How Stock Options Work They don't.
- JonChesterfield 1y ago
  Would you like people to work really hard for you without paying them competitively?
  - anotherhue 1y ago
    But this opportunity provides incredible exposure!
alecco 1y ago
Of course Stanford [1] paints it like a Disney movie without mentioning: * Share Class & Rights (e.g. common stock, voting, etc) * Tax issues and how they are structured (a friend had to pay a lot even before exercising due to bad legal paperwork) * Dilution * "Market price" nonsense for private companies * Other risks when exercising * Liquidity * Boom/bust cycles * Lots of growing changes might get them to "have to let you go" and you get nothing to show for Basically, you should talk to an experienced lawyer before taking any offer like this. [1] Stanford to continue legacy admissions and... https://news.ycombinator.com/item?id=44846130 https://news.ycombinator.com/item?id=44846130
braza 1y ago
I know that we're writing on the Y Combinator-sponsored forum, but after the events of the Windsurf/Google fiasco, the exits of Instacart, and how the acquihire is scaling, is there any indication that SO is a really good incentive nowadays?
- jiveturkey 1y ago
  I can cherry-pick examples also. Figma, CoreWeave, Voyage AI. Today, yesterday, stock options have always been a lottery ticket.
bootlooped 1y ago
Atrocious formatting
jiveturkey 1y ago
This is apparently content for this class: https://explorecourses.stanford.edu/search?view=catalog&filter-coursestatus-Active=on&q=ENGR%20145:%20Technology%20Entrepreneurship&academicYear=20242025 https://explorecourses.stanford.edu/search?view=catalog&filt... This is embarrassingly bad. Factually wrong on substantive points.
TacticalCoder 1y ago
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49 points by jdcampolargo 1y ago

This really shouldn't get the fundamental point wrong > When an employee exercises an option, the company must issue a new share of stock that can be publicly traded. No. When you exercise, you get the stock, but it's definitely not guaranteed to be publicly traded. For example Graphcore gave people options, which if exercised became stock in graphcore. If you then found a buyer and asked GC to approve the sale, they declined. Not public. Later they revalued that stock at zero. To a better approximation, stock options work if you trust the company to pay out.

jdcampolargo 1y ago
> stock options work if you trust the company to pay out. 100%
cyberax 1y ago
> For example Graphcore gave people options, which if exercised became stock in graphcore. If you then found a buyer and asked GC to approve the sale, they declined. Not public. Later they revalued that stock at zero. From looking at Wiki, the company is basically bankrupt with just $2.7m revenue for 450 employees. So their stock is literally worth nothing. If they do get acquired by Softbank, employees will get a portion of the sale according to the amount of shares they own. The company valuation won't make any difference.
- JonChesterfield 1y ago
  Wiki is out of date. Softbank acquired graphcore ages ago for many million dollars. Employees got zero times however many shares they owned. For related reading, see "drag along" for why the voting rights attached to shares mean nothing. https://sifted.eu/articles/graphcore-conditional-sale-agreed-news https://sifted.eu/articles/graphcore-conditional-sale-agreed...
  - cyberax 1y ago
    Well, it's not much different. The investors with preferred stock got some money back, taking a loss overall. So this was basically a bankruptcy with employees and founders getting nothing.
    - JonChesterfield 1y ago
      "Founder liquidity" is worth looking up. If you're curious about this specific case, UK companies register accounts that can be read by anyone. I'm mostly calling this out as an example of why "public" is an important error in the op. Were the shares publicly tradable, the employees that chose to could have exited.
      - cyberax 1y ago
        I'm not familiar at all with the UK law, but in the US the founders typically get common stock. They can't have it treated preferentially during acquisitions. "Founders' stock" refers to the preferential tax treatment (TLDR: almost zero taxes via QSBS).

M3L0NM4N 1y ago

This should be titled, "How Employee Stock Options Work"

Sohcahtoa82 1y ago
Not to mention how much it leaves unanswered. What happens to your options if the company goes public or gets acquired before you exercise? What if you exercise but decide you want to sell but the company isn't public?

neilv 1y ago

It's from 2007; if someone showed you this today, as what you needed to know as a hire, they'd be scamming you. This seems like only the "first slide's" worth of what a tech employee needs to know about stock options, and not the most important things. It's also worded imperfectly in parts, with the effect of being misleading. If you start by looking at the lede and first paragraph, it's unclear who this is for, and seems more like a child's "book report", with no regard for the reader, nor sufficient understanding of the space that's relevant to the reader. Perhaps this wasn't garbage in 2007, but I'm flagging it in 2025.

wiseowise 1y ago
What would you suggest in 2025?
- daveguy 1y ago
  Always consider stock options to be worthless.
  - deleted 1y ago
    [deleted]
  - lurking_swe 1y ago
    That’s too broad of a statement. For a startup, YES, i agree. It may end up at $0 if the company goes bust. And that’s very common - especially in tech. However there are some publicly traded (and fairly large) companies that have been around for a while, that also offer stock options (NQSOs) to their employees. Typically they get to choose between RSUs, NQSOs, or a mix. In these cases options are not worthless because the risk of the company going bankrupt is very slim.
    - daveguy 1y ago
      Yeah, I was going to go into all that crap, but they're all still just options to buy at whatever market price you start at. Market go up. Market go down. Just consider stock options to be worthless when negotiating. I'm not saying don't accept them, just don't factor them in as "compensation". Factor them in as chips already laid on roulette table, at best.

untitled2 1y ago

>How Stock Options Work They don't.

JonChesterfield 1y ago
Would you like people to work really hard for you without paying them competitively?
- anotherhue 1y ago
  But this opportunity provides incredible exposure!

alecco 1y ago

Of course Stanford [1] paints it like a Disney movie without mentioning: * Share Class & Rights (e.g. common stock, voting, etc) * Tax issues and how they are structured (a friend had to pay a lot even before exercising due to bad legal paperwork) * Dilution * "Market price" nonsense for private companies * Other risks when exercising * Liquidity * Boom/bust cycles * Lots of growing changes might get them to "have to let you go" and you get nothing to show for Basically, you should talk to an experienced lawyer before taking any offer like this. [1] Stanford to continue legacy admissions and... https://news.ycombinator.com/item?id=44846130 https://news.ycombinator.com/item?id=44846130

braza 1y ago

I know that we're writing on the Y Combinator-sponsored forum, but after the events of the Windsurf/Google fiasco, the exits of Instacart, and how the acquihire is scaling, is there any indication that SO is a really good incentive nowadays?

jiveturkey 1y ago
I can cherry-pick examples also. Figma, CoreWeave, Voyage AI. Today, yesterday, stock options have always been a lottery ticket.

bootlooped 1y ago

Atrocious formatting

jiveturkey 1y ago

This is apparently content for this class: https://explorecourses.stanford.edu/search?view=catalog&filter-coursestatus-Active=on&q=ENGR%20145:%20Technology%20Entrepreneurship&academicYear=20242025 https://explorecourses.stanford.edu/search?view=catalog&filt... This is embarrassingly bad. Factually wrong on substantive points.

TacticalCoder 1y ago

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