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In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture

In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"). To put it a slightly different way, I can't pay my rent with options. You can offer me all the options in the world, but my landlord doesn't accept them as payment. Therefore, you cannot simply exchange salary for equity. I received an offer from a company a year or two ago, and they offered me a salary almost 50% below my then-current salary, and then some equity. When I tried to negotiate on salary, the CEO berated me for ignoring the equity. The problem is that as far as equity is concerned, it's worth $0 until you exit. There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. My landlord won't accept my lottery ticket as payment. Long story short, Aaron is correct: startups need to rethink the whole equity component. It's valuable -- but it's not valuable in the same way that salary is, especially in today's market.

drivingmenuts 11y ago
I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
- mpdehaan2 11y ago
  This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes). So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment. New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired). Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably). Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective. Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).
  - dj_axl 11y ago
    > you won't see that money for 8-10 years Amen. Not such a good notion to trade salary for options, when that extra salary could have been invested all that time. $10k in 2005 is equivalent to $17k in 2015, $21k if you consider dividends reinvested.
    - pjc50 11y ago
      The options are an investment. It's just that they're "out of the money" when issued. Modal payout is zero, the maximum possible has been tens or hundreds of millions; what is the expected value? Hard to say.
  - webb 11y ago
    Giving out stock can be far from free..
    - mpdehaan2 11y ago
      It's pretty free. Hacker News loves the corrections. All good. I founded and ran a good part of an A-round startup for a while. I'm aware what stock does to equity, but it has minimal value to employees if it's not going to be a thing, and for a startup watching burn rate, it's pretty freaking free. Are you going to give it all up and waste the option pool? Of course not. To me, I'd rather have employees with a good chunk of the equity because they were all doing a good chunk of the work, but I also want to see them treated well in stock. And you know your thing might not work out. Being stingy to employees with stock doesn't feel right. I don't believe in founders hording stock when everybody working for them built a good chunk of what they sell. They should keep a decent chunk, but sharing stock well is basic ethics and costs nothing on the burn rate. It's the same reason I don't believe CEO's should make 50x of what an employee makes in a given year. Stock is pretty cheap to give away in a startup. It's not cheap in a private company. I do especially object when it's used in lieu of market-rate compensation on the hope of future gain, with "we're giving you lots of stock" and then expecting the long hours and then it doesn't pay off for folks.
  - SoftwareMaven 11y ago
- markcerqueira 11y ago
  "until they vest." Don't options typically vest after one year of employment? Is that "too far in the future?"
  - mpdehaan2 11y ago
    The typical thing I've seen is 1/4 of your options will vest after 1 year, upon which 1/48 of your options vest every month thereafter. Other companies may do it differently. Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options. This has at least been the case at all startups I've seen. With the 1-year cliff in place, I'd rather options just be given to departing employees, as it seems like payment for their work.
    - x0x0 11y ago
      often much more than thousands -- I've personally spent $12k in strike price alone, not to mention the potential tax implications which can be ruinous if you aren't careful
    - erichurkman 11y ago
      The vast majority of new option grants for VC-backed companies are under the 1/48 monthly with a one year cliff. More companies are now switching to converting ISO grants to NSO after you leave a company, and allowing a longer term to exercise. Pinterest famously allows, in some cases, employees to have up to 7 years to exercise vested shares after leaving [0]. Most companies do not do this (yet). Exercising an ISO grant can be much more favorable taxation wise than exercising a non-qualified NSO grant. If you give shares to an employee, it will likely be a taxable event, as the IRS sees this as taxable compensation. Also, most grants are at non-trivial strike prices. If you're a super early employee, you might have grants at a very low price, usually a few cents. However, the vast majority of grants are at much higher strike prices where exercise costs are processed in the tens to hundreds of $thousands. Exercising and taxation are a difficult topic that very few fully grok. Source: work at eShares. [0] http://fortune.com/2015/03/23/pinterest-employee-taxes/ http://fortune.com/2015/03/23/pinterest-employee-taxes/
- JonFish85 11y ago
  But even if you're fully vested, if you can't sell your shares, they're essentially worthless (technically the term is probably "illiquid asset"). Until there's an "event" (IPO, acquisition, probably more), they can't be turned into real money.
  - joelgrus 11y ago
    And if you leave the company they actually cost you money, since you have to pay out of pocket to exercise them (for stock that may end up never being sellable) and you also have to pay AMT taxes based on the latest company valuation.
    - windust 11y ago
      Can't stress this enough. If you have Employee Incentive Options is way better to exercise them as soon as they are vested than to wait (if thinking of exercising at all). When you exercise them you pay AMT on what they are worth when exercised (of course the "fair price" is a hidden secret left for the CFO). As time passes, the "fair price" is probably going to keep increasing, but with no liquidity and inability to sell your options you are stuck with the AMT with the fair price at the moment of exercise
      - harryh 11y ago
        Don't wait until they vest. Do it as soon as they're assigned to you. Avoid the AMT completely.
        JonFish85 11y ago
        Which is a risk, especially in companies where the strike price is close to $100/share. If it's going to be in the $10k+ range, is it really worth it to potentially reduce your future tax burden? Maybe. But it's also possible that your shares aren't worth that exercise price. Speaking only for myself, in my experience I decided to wait to see if the price was ever justified before buying the shares, and if it means a higher tax, then so be it. Otherwise, if it means walking away from vested, unpurchased shares, so be it.
- wwweston 11y ago
  > I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by going out and getting new job offers every year or two, assuming reasonable negotiation skills.
  - MCRed 11y ago
    Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.
    - walshemj 11y ago
      To put this in perspective that's a lot less than last years share options (5 year plan) at BT. The last sharesave to vest returned >£100,000 Tax free if you had the max amount.
      - jackgavigan 11y ago
        BT as in British Telecom?
        walshemj 11y ago
        Yes though the changed to just BT for branding purposes a while back.
      - dogma1138 11y ago
        BT is a multi billion dollar company, not to mention that sharesave isn't the same as an equity compensation. Share As You Earn SAYE is a savings plan in the UK which allows employees to save money from their salary in company shares. The UK has really weird schemes because people have historically had no pension or savings plans from their employees (most PAYE workers still do not have pension as the date mandated by law is always being deferred). With SAYE as far as i know the employer is not allowed to grant you equity, what they can do is give a fixed yearly rate (usually heavily discounted) for share purchases, but it's not as sweet as it seems. The dividends and the equity rights from the shares belong to the employer not the employee, this is basically a way to allow employers issue shares (in large volumes) without losing control over the company, having to do payouts, and decreasing the market value of their normal shares as SAYE shares are not tradeable. It also allows employers to bypass various laws preventing normal employees from having too high of a share of the company, and ties employees to their employer since not only do they rely on it for their salary but also as their investment/savings provider and since SAYE plans are either 5 or 3 years long it pretty much means that invested employees will not living the company during the SAYE period unless they want to lose their investment (and yes they will lose it). BT's Sharesave is also a "unicorn" and from the current buy-in value it will probably won't repeat it self, yes a few people who saved up the max amount (225 GBP a month) gotten about 80K in return. But and this is a big but those were the 1st shares issues at 80p per share, when they matured the shares closed at over 300pp/s the last round of the SAYE program had a buyin of 250pp/s so pretty much no one will see these returns again. P.S. The money you gain for SAYE Isn't tax free you pay capital gains tax on it if you sell them once they are matured. Also since SAYE with all of it's bells and whistles is a company options plan (with heavy tax incentives to the employer) it's still a risk, some people got huge returns others didn't since the share price was lower than the option price.
- toephu2 11y ago
  Even if options vest, they could still be viewed as worthless. E.g., Pre-ipo company, 4 years pass, all your shares vest, however Company might tank in the next 5 years, goes bankrupt, never gets bought out nor goes IPO, your vested shares are worthless.
  - JoeAltmaier 11y ago
    OR even succeeds, get bought out for 40 million dollars, which all goes to pay investors' convertible debt. Net result: stock worthless.
    - stephengillie 11y ago
      It's like being paid in IOU: "1% of this lottery ticket's winnings". There's multiple layers of risk and trust, too many dependencies. The transaction is too complicated and takes too long to complete. So the probability for exceptions to occur is great, and handling for those exceptions will likely fail due to the complicated nature of the transaction.
      - MCRed 11y ago
        %0.01 Because even if it's %1 at the time you join, by the time the lottery ticket can be cashed in it will be diluted, plus liquidations preferences, etc.
    - serge2k 11y ago
      Or you take a discounted salary in exchange for stock, and after all is done you earn barely more than if you had just went somewhere else for full salary (if you are lucky you get that much).
    - danielweber 11y ago
      Or you have a disagreement with your boss and leave, and while you are gone the company devalues the shares of everyone who left "because they aren't contributing any more."
- ryanSrich 11y ago
  > Which is too far in the future to count on. Actually you should count on them always being worth $0. Not only for compensation purposes but for your personal psychology. It's better to tie yourself to reality.
  - bcheung 11y ago
    Sun Tzu would agree with you. People need to see things as they most likely are (worthless) not as they like to see things (I'm going to be rich).
  - vacri 11y ago
    There's been a couple of stories here in the past where employee stocks have literally been worth $0 when they vested, due to financial shennanigans pulled by the founders. options should be seen in the same vein as bonus money - they don't exist until the money is in your hands. Some people work at places where bonuses can be relied on like bedrock, but usually I see people struggle to get their promised bonuses.
    - tptacek 11y ago
      It's very easy for shares in a liquid-seeming exit to be worth nothing, even with no shenanigans. For instance: raise a B round, and then sell for low 8 figures. Liquidation preferences will wipe out most of the outcome. People lose perspective about this, because they only see the final number (and the "employee shares worth 0"), but if you raise 20MM and then sell for 20MM, it's not hard to see why the shares aren't worth anything.
      - s73v3r 11y ago
        Actually, it is hard. Why are the employees the only ones that have to take it on the chin?
        tptacek 11y ago
        The founders do too. The venture capitalists, on the other hand, are deploying money that isn't theirs. It feels like you can argue that to the extent they do anything to cushion the outcome for startup team members, they have to be doing it at the (ultimate) expense of pension fund stakeholders. I don't know how strictly true that is in most cases, but it's a factor worth considering.
- jjuhl 11y ago
  I agree. Pay me what I'm worth every month. Keep your options.
- threeeeawae 11y ago
  The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer. Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.
  - damoncali 11y ago
    This is nothing new. And it actually makes sense. You can't have people running around selling restricted shares willy nilly. It wold be a nightmare.
  - enjo 11y ago
    There are some very tricky legal issues for companies when employees start selling on the private market. I will admit that I'm not terribly well versed on them, but IIRC these private sales essentially forced Facebook into an IPO that they weren't necessarily ready for.
  - pbreit 11y ago
    Well, on one hand it is a pain the buns for the company in facilitating secondary transactions. On the other, it makes good sense that it should be doable. The secondary markets like Sharespost/Secondmarket don't seem to have made much progress in getting companies on board.
    - tonnesoffun 11y ago
      There are a few other secondary solutions, including mine (full disclosure: co-founder of EquityZen here). Ultimately the company (the issuer of the options) holds the cards on these transactions. For a robust secondary private market, you need to: - keep the company aware of the transactions, and understand their transaction process (right of first refusal, board approval, other transfer restrictions) - provide that the buyer has been vetted and is an appropriate entrant on the company's Cap Table - ensure that you are non encroaching on the company's own plans to provide systematic liquidity to their employees - keep an audit trail of the transaction process to ensure no leakage of sensitive (or non-public) information We're headed in the right direction. Pinterest deserves credit on a few different fronts: 1) Allowing employees to extend their window to exercise their options once they leave the company 2) Providing liquidity to their employees I'm curious to hear from any hiring managers on this thread: do you think that offering liquidity/financing solutions for exercising options/helps attract better talent?
- MCRed 11y ago
  IF there's enough liquidation preferences, even a successful exit in the $50M range could leave nothing more than a fraction of your annual salary for everyone but the founders. Every dollar taken in investment reduces the likelihood of regular employees cashing out unless it boosts the ultimate stock price and success chance of the company significantly. Too much money is chasing too many companies so the founders are tempted to take the money, roll the dice and hope they become a Facebook, even though the odds of that are extremely slim. This is the difference between a "startup" and a business. Startups used to be a phase of business, but it's become it's own thing now. A business will not take money it doesn't have to, realizing that profitability will fund growth. (And to be honest, I don't see a lot of mechanisms by which VC money funds growth-- all of the successes hit a viral growth loop or opened a massive unmet need... the VC money just made product development easier... mostly after the tornado started.)
- pbreit 11y ago
  Yeah, but no one ever got rich off salary.
  - MCRed 11y ago
    I've made more money investing in stocks and options than I have from options. Over 20 years as an employee (so excluding time as a founder) my returns from investments is 2-3X the return from startup stock options. And that's as only a part time investor. I like sure things (like I knew in 2001 from an understanding of economics that there would be a housing bubble and that it would eventually burst. I was never able to buy CDOs against the market, but I did profit from it until 2007 when things got crazy and I got out of the market-- a year early but I'll take it.) I suspect most people can't do this... but they can buy a house or two in up and coming areas, and put extra salary into that. Rent one out, get your mortgage paid by your tenants and you're building a real estate empire... slowly, but it can make you rich.
    - ryandrake 11y ago
      But that's not "getting rich off of salary". That's gambling on the stock market. Sure, there are plenty of people who hit that jackpot too, but let's not lump that together with the idea that 9-5 salary is a way to get rich.
      - MCRed 11y ago
        Investing in the stock market is not a game of chance. You may lack the skill or discipline to engage in that activity, and that's fine, don't do it, put your time elsewhere, such as the real estate method I described. Calling it gambling, however, is dishonest, and is popular among those who want to use that characterization to serve the purpose of denying people the opportunity to invest. For instance, despite working in startups for 20 years, regulations prevent me from being an angel investor (though it seems its common in california to simply ignore those regulations) ... because people like you think that I shouldn't be allowed to decide where to invest my money. Yet I could go to Las Vegas and blow $100k in a weekend. So, no, it's not gambling. It's investing. And shame on you for saying otherwise.
- branchless 11y ago
  > I tend to think of options as worthless That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.
  - nissimk 11y ago
    It's also information asymetry. A classic financial arbitrage move. The founders offering the employees options understand all of the terms and scenarios that people in this thread are discussing, but most potential employees are not aware of these factors. Many potential employees will discuss their offer with trusted "experts" in their personal network who also are not familiar with the multiple scenarios that can devalue these options. Making complex financial deals with another party who is less sophisticated is always great for business. That's why employees should be even more careful when negotiating compensation with startups. If you can't spot the sucker at the table then the sucker is you.
    - danielweber 11y ago
      And if the company decides to screw you over, it's really easy. If the pie is so huge that it's worth you getting a lawyer to fight back, generally 1) they aren't so selfish, and 2) they realize you will get that lawyer to fight for your piece. There's 10 ways for you to get devalued to 0 and you have to avoid all of them to make a payout.
  - tptacek 11y ago
    In my experience it's the opposite: the fact that employees generally either (a) regard options as worthless or (b) round allocations down to the nearest 100 basis points is a reason not to use them in compensation: the implied discount employees give them makes equity comp very expensive. In fact: for this reason, I'd be especially wary of companies trying to buy a few thousand dollars of annual fully loaded cost with large amounts of equity --- it suggests extreme naivete.
    - DenisM 11y ago
- kelnos 11y ago
  I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice. It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.
  - fragmede 11y ago
    If you're joining a series C that's close to IPO, they should be able to pay market-rate, or close to. You're also not really going to be getting a significant amount of stock from it, and it won't be worth all that much, relatively speaking.
    - eropple 11y ago
      I know a couple Boston-local companies with Series C's (one's on D now) that still try to play the "but options!" game as an excuse to not pay people. (A manager at one tried to guilt-trip me into working more by saying "you're one of our highest-paid engineers" at a number that was about market for a senior when I'd joined; they had multiple principal-level engineers on staff. When I left a few months later, my cash compensation jumped 25% when moving to a staff-level role.) Options are not how you pay people. Options are how, along with good raises, you keep them from leaving as the good parts of working for a small, nimble company leach out.
  - djb_hackernews 11y ago
    Saying they are worthless is being a realist. If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.
- dripton 11y ago
  I think of pre-IPO options as worth just more than zero. (I'd rather have them than not have them, but not by enough to give up significant salary). The possibility of dilution in most option agreements, combined with the time until vesting and the possibility of the company failing, means that it's impossible to put a solid floor under their value. I've made 5 figures from pre-IPO stock options twice. Nice, but hardly worth taking a pay cut for. Options in already-public companies are quite a bit less risky. I consider employee stock grants in a healthy public company to be worth about 75% of the current value of the stock. (The discount is because of the vesting period. If I change jobs, I lose some of the stock. If I stay at the job just to get the stock, when there's a better opportunity elsewhere, I lose that opportunity.)
- hellbanner 11y ago
  Yup. I ended up quitting my day job to work in a startup just a week before my options would have vested at the 2 year mark. That was several years ago and that company still hasn't been sold.. those options would still today be worth nothing.
- justonepost 11y ago
  This is waaay over simplifying things. How much options are we talking about? 10% of the company? That's hardly worthless. Public company? Private? What stage is the company at? Secondary markets exist all over the place.
- ridgeguy 11y ago
  I agree. The type of asset doesn't matter. Could be vested 10% options in an apparently great startup or Van Gogh's Starry Night. If you can't sell it when you want (because of restrictions or because nobody wants it or for whatever reason), its market worth is exactly zero.
- encoderer 11y ago
  I think you really have to put it in context. There are companies that are objectively "pre IPO". That's no guarantee, but it's a probability. So you can start to make educated guesses at Expected Value. If you're joining as the 5th or 50th guy, your options are probably a long-shot and they're not really worth considering. But if you're joining a pre-IPO company i suggest that you minimize salary and maximize options. There are a lot of great outcomes in the $50-250k/year range in option value. It's no lotto ticket, more like an extra salary in addition to your base salary. And it's tax advantaged! https://blog.wealthfront.com/college-vs-retirement-savings-silicon-valley/ https://blog.wealthfront.com/college-vs-retirement-savings-s...
- campers 11y ago
  Agree. Also the return on the options should also be compared to a risk-free/conservative rate from the additional savings from the higher salary. In somewhere with a high cost of living like SV increases in pay can significantly increase what you can save each year. Say you take a $100k offer and equity compared to a $120k salary offer. Now lets say on $100k you save $10k year, and if you're on $120k between tax and a bit of extra spending you save $20k. You've doubled your savings which you can put towards other investments. In this example its another $10k/year you could put into an investment property, stocks or whatever. Or just go to Vegas each year and play a game of roulette.
mikeash 11y ago
I wonder what the odds are that Mr. CEO was drawing an even crappier salary than what he offered you, since he no doubt had even more equity.
- mrkurt 11y ago
  The odds are good. Unfortunately, founders often take a very low salary. That's not necessarily bad, but the emotional effect can be "if I'm struggling, so should you". It's similar to people who don't take vacation and think it puts them on the moral high ground.
- harryh 11y ago
  The odds are very good. CEOs at venture funded startups tend to have small salaries.
andrewvc 11y ago
To employees options are a free lottery ticket. You could work your ass off and make your company a huge success, but due to vesting and liquidity preference wind up with nothing. Unless you have enough skin in the game (read, you are an investor or founder), your options mostly useless.
- tptacek 11y ago
  A company whose equity outcome is wiped out by liquidation preferences is practically by definition not a "huge success".
  - andrewvc 11y ago
    That is not actually the case! You found a company with idea X, which turns out to be a terrible idea that takes 3 rounds of funding to find out how terrible it indeed is. You pivot to idea XY, work your ass off and find traction! Take another round to grow and exit for 100mm. You're rich! All thanks to your great work! Too bad you were diluted to all hell in the previous rounds and you're not actually rich. My point is that the company's success is defined in terms of current revenue and future prospects. Your personal definition of success in determined by the delta in the value of your stock options between when they were issued and the present.
tetraodonpuffer 11y ago
> (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"). that implies that it is somehow better to work 24/7, when in fact often you get your best ideas when you are away from work, with friends, working out and so on, all things that are just as important to remain fresh and not burn out. Considering that until you exit you can't know how much your options are worth (due to valuation, dilution, quarter results during the lockdown period after going public, etc. etc. etc.) to me options are worth $0 and do not come into play at all when evaluating a job at a company. From my perspective it's all about what I'd be working on and with: is it something I believe in? is it something that has a chance of success? is it something I would see myself happy to work on every day? are the people I would work with people I can mesh well with? All of those are a lot more important than a lottery ticket. Another thing you might want to consider on the hiring side is that paying way below market salaries and offering options instead you are likely to attract employees that find that agreeable, which might or might not be who would help you be successful: sometimes it might be better hiring a single experienced developer at market than 2 less experienced ones that are willing to work for cheap, especially towards the beginning when it comes to making architectural decisions that might stick around for a long time and come back to bite you later.
jfoutz 11y ago
Yeah, i think it's important to do the math. And do that math together. Say, 1000 shares @$20. how many companies make it to IPO? let's be generous and say 10%. What are the odds you'll still be there in 4 years - even with the best of intentions 95%? That right there is down from $20,000 to $1900. Also, that's in future dollars, so inflation will eat away another 3-4%. $50 dollars a month more at some other company wins by over $500. They are not worthless, but it's important to value them accurately.
MCRed 11y ago
Worse, even with the %50 pay cut (or worse!) many startups expect you to take, the amount of options you're given are really trivial. It is possible to value options using black scholes or other valuation metrics. But every time I've run the numbers the present day value of the options is never even 1/10th of the value of the salary you're asked to give up. I've concluded the only way to do a startup is to be one of no more than 3 founders. Then, if the shares pay off, the return might be worth the risk.
- Balgair 11y ago
  Know of any good web-apps or other easier to use programs for the layman to calculate these things? Thank you for mentioning these formulas too. These give a person something to argue with.
  - toby 11y ago
    There's probably an even simpler model than that. Consider the pay cut you'd take to work at the startup... how much equity did the seed-round investors get for that much money? Multiply that by 1.5-2x (just a guess, perhaps someone has a better idea) to account for their liquidation preferences. If that's less than your equity stake, then take the corporate job and use the extra cash to invest in startups.
    - ryandrake 11y ago
      How would they, as likely a non-accredited investor, "use extra cash to invest in startups?"
    - Balgair 11y ago
      Good idea, but then you are relying on what they told you the investors put in for that equity. If you can find another method to verify that info, all the better. Also, you are correct in saying that you should get at least that valuation matching, if not more due to the seat you put in.
  - bcheung 11y ago
michaelochurch 11y ago
I prefer Wall Street's model of annual profit sharing. VC-istan: you can get dicked out of your bonus for reasons you don't understand (liquidation preferences, vesting resets and cliffing) or that are purely political and lose 6 years' worth of expected bonus. Wall Street: you can get dicked out of your bonus for reasons you don't understand or that are purely political and lose 11.9 months' worth of expected bonus. I'd rather have the losses be limited, and have more opportunities for negotiation and revision. Wall Street's system is just better. We may not like that industry, but the facts are clear.
- S4M 11y ago
  > I prefer Wall Street's model of annual profit sharing. The difference is that Wall Street has profits to share. A standard company has much less profits than Wall Street, and a startup loses money. Find a way to create a company that creates a positive value for the society while having Wall Street like profits, and I can guarantee you will become rich.
  - erobbins 11y ago
    > has profits a crazy concept in silicon valley
- jalonso510 11y ago
  It's perhaps even more clear if you just work in sales rather than engineering for a tech company. Then you have predefined, measurable performance goals and are paid for meeting or exceeding for them each quarter.
  - bkeroack 11y ago
    Be careful what you wish for. You might end up with "Scrum" and a de facto "story point" weekly/daily quota.
    - ConfuciusSay 11y ago
      Lines of code. >_<
j03m1 11y ago
This. A while ago I was looking for a job. I had offers from large companies at N00k per year with bonus. CEO of start up offered me 50% less of the combined salary and bonus and then explained he was making that up with equity. My counter point was that he was asking me to invest 50% of my total compensation over what could be 5+ years in the company and if that was the case the equity compensation should be higher to reflect that risk premium as well. We didn't see eye to eye on that and I work at a large company now.
eitally 11y ago
I think the bigger problem is that the current VC trend (which means the current startup trend) is to extend extra, long term rounds of private financing, which lead to positive exits pre-IPO, but only for preferred shareholders ... of which most individual contributors at startups are not, rendering "equity" almost completely worthless regardless.
abalone 11y ago
"it's worth $0 until you exit" Are lottery tickets worth $0 until the drawing happens? No. They are worth $2, or the price you paid for them. Likewise, pre-exit options do have value (as you note), but it is nonsense to simultaneously say they are worth $0. Maybe the reason this is harder to grok is options don't have an established market price like lottery tickets do. Their early-stage value is simply a negotiation between employer and recruit (note: it's not the strike price). But it's a mistake to conclude that they have no dollar value, yet are worth something, just because negotiating a dollar value is awkward and hard.
- mason55 11y ago
  > No. They are worth $2, or the price you paid for them. Depends how you're defining worth. The ticket has multiple "worths". The first is probably around $2 which is what you could theoretically sell it to someone else for. The second is the expected value of the payout based on the prizes, odds and number of tickets sold. This worth could be $1 or $1.74 or it could be greater than $2 (think about the case where the prize is really high).
  - abalone 11y ago
    My point is, none of those "worths" is $0. You cannot simultaneously say something has value but is worth $0 simply because it is illiquid.
- thoman23 11y ago
  There is no way you could sell a lottery ticket for the price you paid for it. You could probably sell a $2 lottery ticket for $1...maybe. I know I wouldn't buy it...I would just buy the $2 ticket at the store and avoid the complications of the ownership trail and possible fraud. I know, not exactly your main point.
djtriptych 11y ago
* Awaits movement of savvy landlords accepting options as payment
- danielweber 11y ago
  There was craziness like that during the first dot-com bubble. I remember a story of a dentist taking options as payment.
fezz 11y ago
I have lots of options from various startups over the past 15 years. IPOs that got pulled, owners that refused to sell when they had the chance, bad management choices, etc. Options are the equivalent of lottery tickets. Great if you number comes up, recycling if they dont.
acconrad 11y ago
As someone who was a 1st employee at a small startup (who made the mistake of accepting 50% below salary for a few percentage points of equity), this rings very true to me. However, my empathy goes out to early-stage (pre Series-A companies)...how do you get those engineers then if you, yourselves, have no money and know that equity doesn't pay the bills. Is it through revenue/profit sharing? Cause I would imagine if I wanted to start my own company, and I was looking for someone post-founders in a pre Series-A environment, I can't imagine my seed investments would give me enough cushion to hire near market rates. Just playing devil's advocate here, but I wholeheartedly agree we need to compensate startup employees better.
- rhizome 11y ago
  Just as a point of comparison, there are financial engineering positions from small companies that put in their ads, "extremely high compensation." Risk is usually advertised in the internet space by the absence of that kind of committment to and confidence in the employee's contributions.
varelse 11y ago
Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity. Calculate your expected return over the next 5 years. Most startups come up really short.
- totalrobe 11y ago
  $250 - $500k? Got anything to back up this claim?
  - chrisdbaldwin 11y ago
    FWIW I knew a systems architect/senior dev making ~$350k back in 2002. Those numbers are not as blown up as they seem.
    - totalrobe 11y ago
      I was hoping some of these big numbers would show up on the #talkpay twitter excitement a while back, but didn't see anything close.
      - chrisdbaldwin 11y ago
        I feel you. It seems like the very high paid tech workers prefer to be incognito. This makes sense since they must have an essential and scarce skill set to bring in that kind of money.
      - nostrademons 11y ago
        There is a very strong incentive when you make that kind of money to not let anybody know that you make that kind of money. There's zero upside and lots of downsides - jealousy, people asking for money, awkward conversations, competition in your niche skillset, etc.
  - dreamdu5t 11y ago
    I don't know about 500k but 250k is achievable at big companies that are serious about tech talent and matching responsibility with compensation.
avz 11y ago
> I can't pay my rent with options. This indicates that what you're looking for at the moment is cash, not ownership over assets. This is fine. However, this preference is by no means universal. I imagine that beyond certain amount cash isn't useful anymore and you begin looking for ways to invest it anyway. Generally, cash loses value due to inflation, but offers high liquidity (you can spend it right away). Many other assets offer capital gains, but are a lot less liquid (you cannot easily sell them, e.g. the options in the blogpost). I wonder to what degree the preference for cash expressed by the author of the blogpost may be driven by low interest rates (which reduce the appeal of many types of illiquid assets) and low inflation (which increases the appeal of cash) thus tipping the balance of incentives in favor of cash. Probably not the whole story, but may be a factor?
- pekk 11y ago
  The point made was that options and salary are not fungible. Which is true, they're not. Working for a very constrained kind of investment asset is not the same as working for a salary.
- learnstats2 11y ago
  That liquidity is important at the point of compensation - if you hold cash, you can invest it in what you choose.
  - avz 11y ago
    You cannot always invest in what you choose. Generally, illiquid assets are both difficult to sell and difficult to buy. In particular, investing in pre-IPO startups may be hard unless the startup chooses to do crowd-founding, you know the founders or are a venture capitalist.
aaggarwal 11y ago
As a student, I used to see all high valuations of upcoming companies, and think that getting options at a startup is the best strategy for an employee, and one can get a shortcut to be rich. Then, I woke up and realized its not really true 99.9% of the time.
wmeredith 11y ago
I think of options as lottery tickets. Sure, things might turn out, but they're ultimately a tax on the financially ignorant.
eastbayjake 11y ago
> I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight" Just curious: are you under 25? Not meant as ad hominem -- I know tons of engineers who have this attitude from 22-25, but the closer I get to 30 the more I realize on a deep level that I'm going to die someday and I have a finite amount of time to love others, watch sunsets, laugh, meet interesting people, etc. It's gotten to the point where I have trouble relating to newly-minted engineers because they seem stoked to work until 9 PM in exchange for Nerf guns and the illusory promise of a liquidity event.
- sombremesa 11y ago
  To work hard doesn't necessarily mean long hours.
  - eastbayjake 11y ago
    Which is an excellent point that I deleted because it felt off-topic. I'm to the point where I want to work hard from 10-6 then go be a human, instead of working from 10-9 with lots of Nerf gun fights and Reddit breaks.
    - vlasev 11y ago
      Well, OP does talk about missing out on seeing his friends, so that would imply working long hours.
  - nvader 11y ago
    You're absolutely right, and I'm not sure that the parent would disagree with you. However, the grandparent specifically formulated the choice as a dilemma: (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"), and that is probably what the parent was referring to.
  - jmspring 11y ago
yarrel 11y ago
Options are deferred wages. If you're lucky.
jlarocco 11y ago
> There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. In reality, not even that is true for most options and most employees. For most companies, even doing well and going to an IPO or acquisition isn't going to make more than a handful of employees rich. Unless you get in very early (employee 10 or earlier maybe) or the company does amazingly well (think Facebook or Microsoft), you're generally not going to get rich off of stock options. If the company does really well you'll buy a new car and pay off your house, but the chances of retiring early are pretty low.
ryan90 11y ago
There are plenty of people who join startups for the upside, and would gladly give up a certain amount of salary for options. Especially super-experienced people who are well-off, and would rather have more equity.

drivingmenuts 11y ago

I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.

mpdehaan2 11y ago
This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes). So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment. New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired). Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably). Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective. Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).
- dj_axl 11y ago
  > you won't see that money for 8-10 years Amen. Not such a good notion to trade salary for options, when that extra salary could have been invested all that time. $10k in 2005 is equivalent to $17k in 2015, $21k if you consider dividends reinvested.
  - pjc50 11y ago
    The options are an investment. It's just that they're "out of the money" when issued. Modal payout is zero, the maximum possible has been tens or hundreds of millions; what is the expected value? Hard to say.
- webb 11y ago
  Giving out stock can be far from free..
  - mpdehaan2 11y ago
    It's pretty free. Hacker News loves the corrections. All good. I founded and ran a good part of an A-round startup for a while. I'm aware what stock does to equity, but it has minimal value to employees if it's not going to be a thing, and for a startup watching burn rate, it's pretty freaking free. Are you going to give it all up and waste the option pool? Of course not. To me, I'd rather have employees with a good chunk of the equity because they were all doing a good chunk of the work, but I also want to see them treated well in stock. And you know your thing might not work out. Being stingy to employees with stock doesn't feel right. I don't believe in founders hording stock when everybody working for them built a good chunk of what they sell. They should keep a decent chunk, but sharing stock well is basic ethics and costs nothing on the burn rate. It's the same reason I don't believe CEO's should make 50x of what an employee makes in a given year. Stock is pretty cheap to give away in a startup. It's not cheap in a private company. I do especially object when it's used in lieu of market-rate compensation on the hope of future gain, with "we're giving you lots of stock" and then expecting the long hours and then it doesn't pay off for folks.
- SoftwareMaven 11y ago
markcerqueira 11y ago
"until they vest." Don't options typically vest after one year of employment? Is that "too far in the future?"
- mpdehaan2 11y ago
  The typical thing I've seen is 1/4 of your options will vest after 1 year, upon which 1/48 of your options vest every month thereafter. Other companies may do it differently. Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options. This has at least been the case at all startups I've seen. With the 1-year cliff in place, I'd rather options just be given to departing employees, as it seems like payment for their work.
  - x0x0 11y ago
    often much more than thousands -- I've personally spent $12k in strike price alone, not to mention the potential tax implications which can be ruinous if you aren't careful
  - erichurkman 11y ago
    The vast majority of new option grants for VC-backed companies are under the 1/48 monthly with a one year cliff. More companies are now switching to converting ISO grants to NSO after you leave a company, and allowing a longer term to exercise. Pinterest famously allows, in some cases, employees to have up to 7 years to exercise vested shares after leaving [0]. Most companies do not do this (yet). Exercising an ISO grant can be much more favorable taxation wise than exercising a non-qualified NSO grant. If you give shares to an employee, it will likely be a taxable event, as the IRS sees this as taxable compensation. Also, most grants are at non-trivial strike prices. If you're a super early employee, you might have grants at a very low price, usually a few cents. However, the vast majority of grants are at much higher strike prices where exercise costs are processed in the tens to hundreds of $thousands. Exercising and taxation are a difficult topic that very few fully grok. Source: work at eShares. [0] http://fortune.com/2015/03/23/pinterest-employee-taxes/ http://fortune.com/2015/03/23/pinterest-employee-taxes/
JonFish85 11y ago
But even if you're fully vested, if you can't sell your shares, they're essentially worthless (technically the term is probably "illiquid asset"). Until there's an "event" (IPO, acquisition, probably more), they can't be turned into real money.
- joelgrus 11y ago
  And if you leave the company they actually cost you money, since you have to pay out of pocket to exercise them (for stock that may end up never being sellable) and you also have to pay AMT taxes based on the latest company valuation.
  - windust 11y ago
    Can't stress this enough. If you have Employee Incentive Options is way better to exercise them as soon as they are vested than to wait (if thinking of exercising at all). When you exercise them you pay AMT on what they are worth when exercised (of course the "fair price" is a hidden secret left for the CFO). As time passes, the "fair price" is probably going to keep increasing, but with no liquidity and inability to sell your options you are stuck with the AMT with the fair price at the moment of exercise
    - harryh 11y ago
      Don't wait until they vest. Do it as soon as they're assigned to you. Avoid the AMT completely.
      - JonFish85 11y ago
        Which is a risk, especially in companies where the strike price is close to $100/share. If it's going to be in the $10k+ range, is it really worth it to potentially reduce your future tax burden? Maybe. But it's also possible that your shares aren't worth that exercise price. Speaking only for myself, in my experience I decided to wait to see if the price was ever justified before buying the shares, and if it means a higher tax, then so be it. Otherwise, if it means walking away from vested, unpurchased shares, so be it.
wwweston 11y ago
> I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by going out and getting new job offers every year or two, assuming reasonable negotiation skills.
- MCRed 11y ago
  Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.
  - walshemj 11y ago
    To put this in perspective that's a lot less than last years share options (5 year plan) at BT. The last sharesave to vest returned >£100,000 Tax free if you had the max amount.
    - jackgavigan 11y ago
      BT as in British Telecom?
      - walshemj 11y ago
        Yes though the changed to just BT for branding purposes a while back.
    - dogma1138 11y ago
      BT is a multi billion dollar company, not to mention that sharesave isn't the same as an equity compensation. Share As You Earn SAYE is a savings plan in the UK which allows employees to save money from their salary in company shares. The UK has really weird schemes because people have historically had no pension or savings plans from their employees (most PAYE workers still do not have pension as the date mandated by law is always being deferred). With SAYE as far as i know the employer is not allowed to grant you equity, what they can do is give a fixed yearly rate (usually heavily discounted) for share purchases, but it's not as sweet as it seems. The dividends and the equity rights from the shares belong to the employer not the employee, this is basically a way to allow employers issue shares (in large volumes) without losing control over the company, having to do payouts, and decreasing the market value of their normal shares as SAYE shares are not tradeable. It also allows employers to bypass various laws preventing normal employees from having too high of a share of the company, and ties employees to their employer since not only do they rely on it for their salary but also as their investment/savings provider and since SAYE plans are either 5 or 3 years long it pretty much means that invested employees will not living the company during the SAYE period unless they want to lose their investment (and yes they will lose it). BT's Sharesave is also a "unicorn" and from the current buy-in value it will probably won't repeat it self, yes a few people who saved up the max amount (225 GBP a month) gotten about 80K in return. But and this is a big but those were the 1st shares issues at 80p per share, when they matured the shares closed at over 300pp/s the last round of the SAYE program had a buyin of 250pp/s so pretty much no one will see these returns again. P.S. The money you gain for SAYE Isn't tax free you pay capital gains tax on it if you sell them once they are matured. Also since SAYE with all of it's bells and whistles is a company options plan (with heavy tax incentives to the employer) it's still a risk, some people got huge returns others didn't since the share price was lower than the option price.
toephu2 11y ago
Even if options vest, they could still be viewed as worthless. E.g., Pre-ipo company, 4 years pass, all your shares vest, however Company might tank in the next 5 years, goes bankrupt, never gets bought out nor goes IPO, your vested shares are worthless.
- JoeAltmaier 11y ago
  OR even succeeds, get bought out for 40 million dollars, which all goes to pay investors' convertible debt. Net result: stock worthless.
  - stephengillie 11y ago
    It's like being paid in IOU: "1% of this lottery ticket's winnings". There's multiple layers of risk and trust, too many dependencies. The transaction is too complicated and takes too long to complete. So the probability for exceptions to occur is great, and handling for those exceptions will likely fail due to the complicated nature of the transaction.
    - MCRed 11y ago
      %0.01 Because even if it's %1 at the time you join, by the time the lottery ticket can be cashed in it will be diluted, plus liquidations preferences, etc.
  - serge2k 11y ago
    Or you take a discounted salary in exchange for stock, and after all is done you earn barely more than if you had just went somewhere else for full salary (if you are lucky you get that much).
  - danielweber 11y ago
    Or you have a disagreement with your boss and leave, and while you are gone the company devalues the shares of everyone who left "because they aren't contributing any more."
ryanSrich 11y ago
> Which is too far in the future to count on. Actually you should count on them always being worth $0. Not only for compensation purposes but for your personal psychology. It's better to tie yourself to reality.
- bcheung 11y ago
  Sun Tzu would agree with you. People need to see things as they most likely are (worthless) not as they like to see things (I'm going to be rich).
- vacri 11y ago
  There's been a couple of stories here in the past where employee stocks have literally been worth $0 when they vested, due to financial shennanigans pulled by the founders. options should be seen in the same vein as bonus money - they don't exist until the money is in your hands. Some people work at places where bonuses can be relied on like bedrock, but usually I see people struggle to get their promised bonuses.
  - tptacek 11y ago
    It's very easy for shares in a liquid-seeming exit to be worth nothing, even with no shenanigans. For instance: raise a B round, and then sell for low 8 figures. Liquidation preferences will wipe out most of the outcome. People lose perspective about this, because they only see the final number (and the "employee shares worth 0"), but if you raise 20MM and then sell for 20MM, it's not hard to see why the shares aren't worth anything.
    - s73v3r 11y ago
      Actually, it is hard. Why are the employees the only ones that have to take it on the chin?
      - tptacek 11y ago
        The founders do too. The venture capitalists, on the other hand, are deploying money that isn't theirs. It feels like you can argue that to the extent they do anything to cushion the outcome for startup team members, they have to be doing it at the (ultimate) expense of pension fund stakeholders. I don't know how strictly true that is in most cases, but it's a factor worth considering.
jjuhl 11y ago
I agree. Pay me what I'm worth every month. Keep your options.
threeeeawae 11y ago
The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer. Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.
- damoncali 11y ago
  This is nothing new. And it actually makes sense. You can't have people running around selling restricted shares willy nilly. It wold be a nightmare.
- enjo 11y ago
  There are some very tricky legal issues for companies when employees start selling on the private market. I will admit that I'm not terribly well versed on them, but IIRC these private sales essentially forced Facebook into an IPO that they weren't necessarily ready for.
- pbreit 11y ago
  Well, on one hand it is a pain the buns for the company in facilitating secondary transactions. On the other, it makes good sense that it should be doable. The secondary markets like Sharespost/Secondmarket don't seem to have made much progress in getting companies on board.
  - tonnesoffun 11y ago
    There are a few other secondary solutions, including mine (full disclosure: co-founder of EquityZen here). Ultimately the company (the issuer of the options) holds the cards on these transactions. For a robust secondary private market, you need to: - keep the company aware of the transactions, and understand their transaction process (right of first refusal, board approval, other transfer restrictions) - provide that the buyer has been vetted and is an appropriate entrant on the company's Cap Table - ensure that you are non encroaching on the company's own plans to provide systematic liquidity to their employees - keep an audit trail of the transaction process to ensure no leakage of sensitive (or non-public) information We're headed in the right direction. Pinterest deserves credit on a few different fronts: 1) Allowing employees to extend their window to exercise their options once they leave the company 2) Providing liquidity to their employees I'm curious to hear from any hiring managers on this thread: do you think that offering liquidity/financing solutions for exercising options/helps attract better talent?
MCRed 11y ago
IF there's enough liquidation preferences, even a successful exit in the $50M range could leave nothing more than a fraction of your annual salary for everyone but the founders. Every dollar taken in investment reduces the likelihood of regular employees cashing out unless it boosts the ultimate stock price and success chance of the company significantly. Too much money is chasing too many companies so the founders are tempted to take the money, roll the dice and hope they become a Facebook, even though the odds of that are extremely slim. This is the difference between a "startup" and a business. Startups used to be a phase of business, but it's become it's own thing now. A business will not take money it doesn't have to, realizing that profitability will fund growth. (And to be honest, I don't see a lot of mechanisms by which VC money funds growth-- all of the successes hit a viral growth loop or opened a massive unmet need... the VC money just made product development easier... mostly after the tornado started.)
pbreit 11y ago
Yeah, but no one ever got rich off salary.
- MCRed 11y ago
  I've made more money investing in stocks and options than I have from options. Over 20 years as an employee (so excluding time as a founder) my returns from investments is 2-3X the return from startup stock options. And that's as only a part time investor. I like sure things (like I knew in 2001 from an understanding of economics that there would be a housing bubble and that it would eventually burst. I was never able to buy CDOs against the market, but I did profit from it until 2007 when things got crazy and I got out of the market-- a year early but I'll take it.) I suspect most people can't do this... but they can buy a house or two in up and coming areas, and put extra salary into that. Rent one out, get your mortgage paid by your tenants and you're building a real estate empire... slowly, but it can make you rich.
  - ryandrake 11y ago
    But that's not "getting rich off of salary". That's gambling on the stock market. Sure, there are plenty of people who hit that jackpot too, but let's not lump that together with the idea that 9-5 salary is a way to get rich.
    - MCRed 11y ago
      Investing in the stock market is not a game of chance. You may lack the skill or discipline to engage in that activity, and that's fine, don't do it, put your time elsewhere, such as the real estate method I described. Calling it gambling, however, is dishonest, and is popular among those who want to use that characterization to serve the purpose of denying people the opportunity to invest. For instance, despite working in startups for 20 years, regulations prevent me from being an angel investor (though it seems its common in california to simply ignore those regulations) ... because people like you think that I shouldn't be allowed to decide where to invest my money. Yet I could go to Las Vegas and blow $100k in a weekend. So, no, it's not gambling. It's investing. And shame on you for saying otherwise.
branchless 11y ago
> I tend to think of options as worthless That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.
- nissimk 11y ago
  It's also information asymetry. A classic financial arbitrage move. The founders offering the employees options understand all of the terms and scenarios that people in this thread are discussing, but most potential employees are not aware of these factors. Many potential employees will discuss their offer with trusted "experts" in their personal network who also are not familiar with the multiple scenarios that can devalue these options. Making complex financial deals with another party who is less sophisticated is always great for business. That's why employees should be even more careful when negotiating compensation with startups. If you can't spot the sucker at the table then the sucker is you.
  - danielweber 11y ago
    And if the company decides to screw you over, it's really easy. If the pie is so huge that it's worth you getting a lawyer to fight back, generally 1) they aren't so selfish, and 2) they realize you will get that lawyer to fight for your piece. There's 10 ways for you to get devalued to 0 and you have to avoid all of them to make a payout.
- tptacek 11y ago
  In my experience it's the opposite: the fact that employees generally either (a) regard options as worthless or (b) round allocations down to the nearest 100 basis points is a reason not to use them in compensation: the implied discount employees give them makes equity comp very expensive. In fact: for this reason, I'd be especially wary of companies trying to buy a few thousand dollars of annual fully loaded cost with large amounts of equity --- it suggests extreme naivete.
  - DenisM 11y ago
kelnos 11y ago
I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice. It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.
- fragmede 11y ago
  If you're joining a series C that's close to IPO, they should be able to pay market-rate, or close to. You're also not really going to be getting a significant amount of stock from it, and it won't be worth all that much, relatively speaking.
  - eropple 11y ago
    I know a couple Boston-local companies with Series C's (one's on D now) that still try to play the "but options!" game as an excuse to not pay people. (A manager at one tried to guilt-trip me into working more by saying "you're one of our highest-paid engineers" at a number that was about market for a senior when I'd joined; they had multiple principal-level engineers on staff. When I left a few months later, my cash compensation jumped 25% when moving to a staff-level role.) Options are not how you pay people. Options are how, along with good raises, you keep them from leaving as the good parts of working for a small, nimble company leach out.
- djb_hackernews 11y ago
  Saying they are worthless is being a realist. If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.
dripton 11y ago
I think of pre-IPO options as worth just more than zero. (I'd rather have them than not have them, but not by enough to give up significant salary). The possibility of dilution in most option agreements, combined with the time until vesting and the possibility of the company failing, means that it's impossible to put a solid floor under their value. I've made 5 figures from pre-IPO stock options twice. Nice, but hardly worth taking a pay cut for. Options in already-public companies are quite a bit less risky. I consider employee stock grants in a healthy public company to be worth about 75% of the current value of the stock. (The discount is because of the vesting period. If I change jobs, I lose some of the stock. If I stay at the job just to get the stock, when there's a better opportunity elsewhere, I lose that opportunity.)
hellbanner 11y ago
Yup. I ended up quitting my day job to work in a startup just a week before my options would have vested at the 2 year mark. That was several years ago and that company still hasn't been sold.. those options would still today be worth nothing.
justonepost 11y ago
This is waaay over simplifying things. How much options are we talking about? 10% of the company? That's hardly worthless. Public company? Private? What stage is the company at? Secondary markets exist all over the place.
ridgeguy 11y ago
I agree. The type of asset doesn't matter. Could be vested 10% options in an apparently great startup or Van Gogh's Starry Night. If you can't sell it when you want (because of restrictions or because nobody wants it or for whatever reason), its market worth is exactly zero.
encoderer 11y ago
I think you really have to put it in context. There are companies that are objectively "pre IPO". That's no guarantee, but it's a probability. So you can start to make educated guesses at Expected Value. If you're joining as the 5th or 50th guy, your options are probably a long-shot and they're not really worth considering. But if you're joining a pre-IPO company i suggest that you minimize salary and maximize options. There are a lot of great outcomes in the $50-250k/year range in option value. It's no lotto ticket, more like an extra salary in addition to your base salary. And it's tax advantaged! https://blog.wealthfront.com/college-vs-retirement-savings-silicon-valley/ https://blog.wealthfront.com/college-vs-retirement-savings-s...
campers 11y ago
Agree. Also the return on the options should also be compared to a risk-free/conservative rate from the additional savings from the higher salary. In somewhere with a high cost of living like SV increases in pay can significantly increase what you can save each year. Say you take a $100k offer and equity compared to a $120k salary offer. Now lets say on $100k you save $10k year, and if you're on $120k between tax and a bit of extra spending you save $20k. You've doubled your savings which you can put towards other investments. In this example its another $10k/year you could put into an investment property, stocks or whatever. Or just go to Vegas each year and play a game of roulette.

mikeash 11y ago

I wonder what the odds are that Mr. CEO was drawing an even crappier salary than what he offered you, since he no doubt had even more equity.

mrkurt 11y ago
The odds are good. Unfortunately, founders often take a very low salary. That's not necessarily bad, but the emotional effect can be "if I'm struggling, so should you". It's similar to people who don't take vacation and think it puts them on the moral high ground.
harryh 11y ago
The odds are very good. CEOs at venture funded startups tend to have small salaries.

andrewvc 11y ago

To employees options are a free lottery ticket. You could work your ass off and make your company a huge success, but due to vesting and liquidity preference wind up with nothing. Unless you have enough skin in the game (read, you are an investor or founder), your options mostly useless.

tptacek 11y ago
A company whose equity outcome is wiped out by liquidation preferences is practically by definition not a "huge success".
- andrewvc 11y ago
  That is not actually the case! You found a company with idea X, which turns out to be a terrible idea that takes 3 rounds of funding to find out how terrible it indeed is. You pivot to idea XY, work your ass off and find traction! Take another round to grow and exit for 100mm. You're rich! All thanks to your great work! Too bad you were diluted to all hell in the previous rounds and you're not actually rich. My point is that the company's success is defined in terms of current revenue and future prospects. Your personal definition of success in determined by the delta in the value of your stock options between when they were issued and the present.

tetraodonpuffer 11y ago

> (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"). that implies that it is somehow better to work 24/7, when in fact often you get your best ideas when you are away from work, with friends, working out and so on, all things that are just as important to remain fresh and not burn out. Considering that until you exit you can't know how much your options are worth (due to valuation, dilution, quarter results during the lockdown period after going public, etc. etc. etc.) to me options are worth $0 and do not come into play at all when evaluating a job at a company. From my perspective it's all about what I'd be working on and with: is it something I believe in? is it something that has a chance of success? is it something I would see myself happy to work on every day? are the people I would work with people I can mesh well with? All of those are a lot more important than a lottery ticket. Another thing you might want to consider on the hiring side is that paying way below market salaries and offering options instead you are likely to attract employees that find that agreeable, which might or might not be who would help you be successful: sometimes it might be better hiring a single experienced developer at market than 2 less experienced ones that are willing to work for cheap, especially towards the beginning when it comes to making architectural decisions that might stick around for a long time and come back to bite you later.

jfoutz 11y ago

Yeah, i think it's important to do the math. And do that math together. Say, 1000 shares @$20. how many companies make it to IPO? let's be generous and say 10%. What are the odds you'll still be there in 4 years - even with the best of intentions 95%? That right there is down from $20,000 to $1900. Also, that's in future dollars, so inflation will eat away another 3-4%. $50 dollars a month more at some other company wins by over $500. They are not worthless, but it's important to value them accurately.

MCRed 11y ago

Worse, even with the %50 pay cut (or worse!) many startups expect you to take, the amount of options you're given are really trivial. It is possible to value options using black scholes or other valuation metrics. But every time I've run the numbers the present day value of the options is never even 1/10th of the value of the salary you're asked to give up. I've concluded the only way to do a startup is to be one of no more than 3 founders. Then, if the shares pay off, the return might be worth the risk.

Balgair 11y ago
Know of any good web-apps or other easier to use programs for the layman to calculate these things? Thank you for mentioning these formulas too. These give a person something to argue with.
- toby 11y ago
  There's probably an even simpler model than that. Consider the pay cut you'd take to work at the startup... how much equity did the seed-round investors get for that much money? Multiply that by 1.5-2x (just a guess, perhaps someone has a better idea) to account for their liquidation preferences. If that's less than your equity stake, then take the corporate job and use the extra cash to invest in startups.
  - ryandrake 11y ago
    How would they, as likely a non-accredited investor, "use extra cash to invest in startups?"
  - Balgair 11y ago
    Good idea, but then you are relying on what they told you the investors put in for that equity. If you can find another method to verify that info, all the better. Also, you are correct in saying that you should get at least that valuation matching, if not more due to the seat you put in.
- bcheung 11y ago

michaelochurch 11y ago

I prefer Wall Street's model of annual profit sharing. VC-istan: you can get dicked out of your bonus for reasons you don't understand (liquidation preferences, vesting resets and cliffing) or that are purely political and lose 6 years' worth of expected bonus. Wall Street: you can get dicked out of your bonus for reasons you don't understand or that are purely political and lose 11.9 months' worth of expected bonus. I'd rather have the losses be limited, and have more opportunities for negotiation and revision. Wall Street's system is just better. We may not like that industry, but the facts are clear.

S4M 11y ago
> I prefer Wall Street's model of annual profit sharing. The difference is that Wall Street has profits to share. A standard company has much less profits than Wall Street, and a startup loses money. Find a way to create a company that creates a positive value for the society while having Wall Street like profits, and I can guarantee you will become rich.
- erobbins 11y ago
  > has profits a crazy concept in silicon valley
jalonso510 11y ago
It's perhaps even more clear if you just work in sales rather than engineering for a tech company. Then you have predefined, measurable performance goals and are paid for meeting or exceeding for them each quarter.
- bkeroack 11y ago
  Be careful what you wish for. You might end up with "Scrum" and a de facto "story point" weekly/daily quota.
  - ConfuciusSay 11y ago
    Lines of code. >_<

j03m1 11y ago

This. A while ago I was looking for a job. I had offers from large companies at N00k per year with bonus. CEO of start up offered me 50% less of the combined salary and bonus and then explained he was making that up with equity. My counter point was that he was asking me to invest 50% of my total compensation over what could be 5+ years in the company and if that was the case the equity compensation should be higher to reflect that risk premium as well. We didn't see eye to eye on that and I work at a large company now.

eitally 11y ago

I think the bigger problem is that the current VC trend (which means the current startup trend) is to extend extra, long term rounds of private financing, which lead to positive exits pre-IPO, but only for preferred shareholders ... of which most individual contributors at startups are not, rendering "equity" almost completely worthless regardless.

abalone 11y ago

"it's worth $0 until you exit" Are lottery tickets worth $0 until the drawing happens? No. They are worth $2, or the price you paid for them. Likewise, pre-exit options do have value (as you note), but it is nonsense to simultaneously say they are worth $0. Maybe the reason this is harder to grok is options don't have an established market price like lottery tickets do. Their early-stage value is simply a negotiation between employer and recruit (note: it's not the strike price). But it's a mistake to conclude that they have no dollar value, yet are worth something, just because negotiating a dollar value is awkward and hard.

mason55 11y ago
> No. They are worth $2, or the price you paid for them. Depends how you're defining worth. The ticket has multiple "worths". The first is probably around $2 which is what you could theoretically sell it to someone else for. The second is the expected value of the payout based on the prizes, odds and number of tickets sold. This worth could be $1 or $1.74 or it could be greater than $2 (think about the case where the prize is really high).
- abalone 11y ago
  My point is, none of those "worths" is $0. You cannot simultaneously say something has value but is worth $0 simply because it is illiquid.
thoman23 11y ago
There is no way you could sell a lottery ticket for the price you paid for it. You could probably sell a $2 lottery ticket for $1...maybe. I know I wouldn't buy it...I would just buy the $2 ticket at the store and avoid the complications of the ownership trail and possible fraud. I know, not exactly your main point.

djtriptych 11y ago

* Awaits movement of savvy landlords accepting options as payment

danielweber 11y ago
There was craziness like that during the first dot-com bubble. I remember a story of a dentist taking options as payment.

fezz 11y ago

I have lots of options from various startups over the past 15 years. IPOs that got pulled, owners that refused to sell when they had the chance, bad management choices, etc. Options are the equivalent of lottery tickets. Great if you number comes up, recycling if they dont.

acconrad 11y ago

As someone who was a 1st employee at a small startup (who made the mistake of accepting 50% below salary for a few percentage points of equity), this rings very true to me. However, my empathy goes out to early-stage (pre Series-A companies)...how do you get those engineers then if you, yourselves, have no money and know that equity doesn't pay the bills. Is it through revenue/profit sharing? Cause I would imagine if I wanted to start my own company, and I was looking for someone post-founders in a pre Series-A environment, I can't imagine my seed investments would give me enough cushion to hire near market rates. Just playing devil's advocate here, but I wholeheartedly agree we need to compensate startup employees better.

rhizome 11y ago
Just as a point of comparison, there are financial engineering positions from small companies that put in their ads, "extremely high compensation." Risk is usually advertised in the internet space by the absence of that kind of committment to and confidence in the employee's contributions.

varelse 11y ago

Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity. Calculate your expected return over the next 5 years. Most startups come up really short.

totalrobe 11y ago
$250 - $500k? Got anything to back up this claim?
- chrisdbaldwin 11y ago
  FWIW I knew a systems architect/senior dev making ~$350k back in 2002. Those numbers are not as blown up as they seem.
  - totalrobe 11y ago
    I was hoping some of these big numbers would show up on the #talkpay twitter excitement a while back, but didn't see anything close.
    - chrisdbaldwin 11y ago
      I feel you. It seems like the very high paid tech workers prefer to be incognito. This makes sense since they must have an essential and scarce skill set to bring in that kind of money.
    - nostrademons 11y ago
      There is a very strong incentive when you make that kind of money to not let anybody know that you make that kind of money. There's zero upside and lots of downsides - jealousy, people asking for money, awkward conversations, competition in your niche skillset, etc.
- dreamdu5t 11y ago
  I don't know about 500k but 250k is achievable at big companies that are serious about tech talent and matching responsibility with compensation.

avz 11y ago

> I can't pay my rent with options. This indicates that what you're looking for at the moment is cash, not ownership over assets. This is fine. However, this preference is by no means universal. I imagine that beyond certain amount cash isn't useful anymore and you begin looking for ways to invest it anyway. Generally, cash loses value due to inflation, but offers high liquidity (you can spend it right away). Many other assets offer capital gains, but are a lot less liquid (you cannot easily sell them, e.g. the options in the blogpost). I wonder to what degree the preference for cash expressed by the author of the blogpost may be driven by low interest rates (which reduce the appeal of many types of illiquid assets) and low inflation (which increases the appeal of cash) thus tipping the balance of incentives in favor of cash. Probably not the whole story, but may be a factor?

pekk 11y ago
The point made was that options and salary are not fungible. Which is true, they're not. Working for a very constrained kind of investment asset is not the same as working for a salary.
learnstats2 11y ago
That liquidity is important at the point of compensation - if you hold cash, you can invest it in what you choose.
- avz 11y ago
  You cannot always invest in what you choose. Generally, illiquid assets are both difficult to sell and difficult to buy. In particular, investing in pre-IPO startups may be hard unless the startup chooses to do crowd-founding, you know the founders or are a venture capitalist.

aaggarwal 11y ago

As a student, I used to see all high valuations of upcoming companies, and think that getting options at a startup is the best strategy for an employee, and one can get a shortcut to be rich. Then, I woke up and realized its not really true 99.9% of the time.

wmeredith 11y ago

I think of options as lottery tickets. Sure, things might turn out, but they're ultimately a tax on the financially ignorant.

eastbayjake 11y ago

> I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight" Just curious: are you under 25? Not meant as ad hominem -- I know tons of engineers who have this attitude from 22-25, but the closer I get to 30 the more I realize on a deep level that I'm going to die someday and I have a finite amount of time to love others, watch sunsets, laugh, meet interesting people, etc. It's gotten to the point where I have trouble relating to newly-minted engineers because they seem stoked to work until 9 PM in exchange for Nerf guns and the illusory promise of a liquidity event.

sombremesa 11y ago
To work hard doesn't necessarily mean long hours.
- eastbayjake 11y ago
  Which is an excellent point that I deleted because it felt off-topic. I'm to the point where I want to work hard from 10-6 then go be a human, instead of working from 10-9 with lots of Nerf gun fights and Reddit breaks.
  - vlasev 11y ago
    Well, OP does talk about missing out on seeing his friends, so that would imply working long hours.
- nvader 11y ago
  You're absolutely right, and I'm not sure that the parent would disagree with you. However, the grandparent specifically formulated the choice as a dilemma: (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"), and that is probably what the parent was referring to.
- jmspring 11y ago

yarrel 11y ago

Options are deferred wages. If you're lucky.

jlarocco 11y ago

> There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. In reality, not even that is true for most options and most employees. For most companies, even doing well and going to an IPO or acquisition isn't going to make more than a handful of employees rich. Unless you get in very early (employee 10 or earlier maybe) or the company does amazingly well (think Facebook or Microsoft), you're generally not going to get rich off of stock options. If the company does really well you'll buy a new car and pay off your house, but the chances of retiring early are pretty low.

ryan90 11y ago

There are plenty of people who join startups for the upside, and would gladly give up a certain amount of salary for options. Especially super-experienced people who are well-off, and would rather have more equity.