3 ms·

The choice of model is sketchy but the conclusion is right. Open up excel or python and do the expected value calculation numerically for any distribution you

The choice of model is sketchy but the conclusion is right. Open up excel or python and do the expected value calculation numerically for any distribution you like (that's plausible for a very early stage startup) and you will get pretty much the same price (~1). For later stage companies, options are poison. If you pay your CEO in options, his best strategy is to go to Las Vegas and put all of your company's assets on "black".

profquail 17y ago
For later stage companies, options are poison. If you pay your CEO in options, his best strategy is to go to Las Vegas and put all of your company's assets on "black". Why is that? Betting on black only has an 18/38 chance of winning (less than 50%), and losing means that his options are going to be out-of-the-money (in this case, they'd basically be worth nothing). Not to mention that doing such a thing would probably get him sued by the shareholders of the company (for not acting in their best interests), whether he won or not.
- voidmain 17y ago
  Let's say Dr. Evil is chosen as the new CEO of Microsoft, and receives in compensation ONE BILLION OPTIONS with a strike price of 23.69 (i.e. at the market) and an expiration in Jan '11. These options are trading on the market at about $4, so if Dr. Evil sits tight and continues on the company's current strategy we can assume his compensation will be $4 billion on average. If he uses the "roulette strategy", on the other hand, his expected return is 23.69 * 18/38 * 1e9 = $11.2 billion. That's much better, and not as much work. In a company with a lower implied volatility than Microsoft, the options would be worth less money initially and the roulette strategy would look even better by comparison. Now, the shareholder lawsuits could be a problem. So Dr. Evil will have to look for a way to disguise his strategy. Fortunately (for him), there are lots of reckless things a company can do that aren't quite as obvious as playing roulette.

profquail 17y ago

For later stage companies, options are poison. If you pay your CEO in options, his best strategy is to go to Las Vegas and put all of your company's assets on "black". Why is that? Betting on black only has an 18/38 chance of winning (less than 50%), and losing means that his options are going to be out-of-the-money (in this case, they'd basically be worth nothing). Not to mention that doing such a thing would probably get him sued by the shareholders of the company (for not acting in their best interests), whether he won or not.

voidmain 17y ago
Let's say Dr. Evil is chosen as the new CEO of Microsoft, and receives in compensation ONE BILLION OPTIONS with a strike price of 23.69 (i.e. at the market) and an expiration in Jan '11. These options are trading on the market at about $4, so if Dr. Evil sits tight and continues on the company's current strategy we can assume his compensation will be $4 billion on average. If he uses the "roulette strategy", on the other hand, his expected return is 23.69 * 18/38 * 1e9 = $11.2 billion. That's much better, and not as much work. In a company with a lower implied volatility than Microsoft, the options would be worth less money initially and the roulette strategy would look even better by comparison. Now, the shareholder lawsuits could be a problem. So Dr. Evil will have to look for a way to disguise his strategy. Fortunately (for him), there are lots of reckless things a company can do that aren't quite as obvious as playing roulette.