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Is there a good formula for figuring out taking a lower salary in exchange for options? For example: . Current Salary On Open Market = X Startup Salary = Y

Is there a good formula for figuring out taking a lower salary in exchange for options? For example: . Current Salary On Open Market = X Startup Salary = Y Option Value Today = Z . 4(X) = 4(Y)+Z(2) this is obviously the big IF, if people are saying think of it as windfall, maybe 1.5??

JonFish85 13y ago
I have to think that putting it into a formula is difficult. It all depends on risk, obviously: how certain is a person that the company will be worth something? On top of that, you have ability to get by at a given salary. If you have enough saved to live for 5 years with $1/yr salary, then you can afford more of a risk than if you can live for 6 months without a salary. Or if you can afford to live at half your salary, but without saving for retirement, where does that leave you? It entirely depends on the person and how risk-averse (or not) they are.
- kylelibra 13y ago
  Good point, so I guess 2* would actually be some sort of factor of your willingness to take risk.
imaffett 13y ago
See the other posts. Someone had a good one "Treat options like confetti". I own a few options in companies I was at. One went under and the other did a "tech deal" and then divested it's assets. Both cases my options are worth about $0 :)
svachalek 13y ago
If you were going to do it from a pure accounting perspective, you'd take the expected value of the options + salary and compare directly. You should probably also figure in high value benefits like 401(k) match. The problem there is, the expected value is more or less the current market value of the options (if you believe in anything approaching an efficient market), which is more or less the strike price times the number of shares. So, often these are in the neighborhood of $10k over 4 years or $2500/yr. In other words, don't try to talk yourself into it from an accounting perspective.
- spacehome 13y ago
  Maybe. But just looking at expected value ignores risk. Most people are risk averse, especially at the amounts of money we're talking about here.
  - svachalek 13y ago
    Expected value is not $millions. Expected value is a few hundred $k (usually, if you are realistic about the potential of the business and your tiny share as an employee) MULTIPLIED by the relatively small chance of hitting that exit, say 1%. In short, a few thousand dollars, which is approximately what you get by multiplying out the strike price. IMHO it takes risk into account in a very sobering way.
    - spacehome 13y ago
      > Expected value is not $millions. Speak for yourself.
dmourati 13y ago
Yes, take X. Treat Z as zero or just say something like, "I wouldn't be interested in joining without an equity share."

JonFish85 13y ago

I have to think that putting it into a formula is difficult. It all depends on risk, obviously: how certain is a person that the company will be worth something? On top of that, you have ability to get by at a given salary. If you have enough saved to live for 5 years with $1/yr salary, then you can afford more of a risk than if you can live for 6 months without a salary. Or if you can afford to live at half your salary, but without saving for retirement, where does that leave you? It entirely depends on the person and how risk-averse (or not) they are.

kylelibra 13y ago
Good point, so I guess 2* would actually be some sort of factor of your willingness to take risk.

imaffett 13y ago

See the other posts. Someone had a good one "Treat options like confetti". I own a few options in companies I was at. One went under and the other did a "tech deal" and then divested it's assets. Both cases my options are worth about $0 :)

svachalek 13y ago

If you were going to do it from a pure accounting perspective, you'd take the expected value of the options + salary and compare directly. You should probably also figure in high value benefits like 401(k) match. The problem there is, the expected value is more or less the current market value of the options (if you believe in anything approaching an efficient market), which is more or less the strike price times the number of shares. So, often these are in the neighborhood of $10k over 4 years or $2500/yr. In other words, don't try to talk yourself into it from an accounting perspective.

spacehome 13y ago
Maybe. But just looking at expected value ignores risk. Most people are risk averse, especially at the amounts of money we're talking about here.
- svachalek 13y ago
  Expected value is not $millions. Expected value is a few hundred $k (usually, if you are realistic about the potential of the business and your tiny share as an employee) MULTIPLIED by the relatively small chance of hitting that exit, say 1%. In short, a few thousand dollars, which is approximately what you get by multiplying out the strike price. IMHO it takes risk into account in a very sobering way.
  - spacehome 13y ago
    > Expected value is not $millions. Speak for yourself.

dmourati 13y ago

Yes, take X. Treat Z as zero or just say something like, "I wouldn't be interested in joining without an equity share."