6 ms·

Hedging Against Getting Paid in Stock

55 points by barisser 11y ago

lordnacho 11y ago
This will work if you're paid in the stock of a big company, which will have a market in its options as well. But then why not just short the things if you don't want to have the stock? It doesn't work for non-listed startups. Lots of idiosyncratic risk, and no liquid market in the shares.
- fredkbloggs 11y ago
  The cost of borrowing stock to short it is often higher than the corresponding option premiums. You also generally need less on deposit to execute the options strategy (that is, your value at risk will be lower, as will your margin interest cost). I could retort with an equally glib "why don't employers just pay their employees in cash?"
  - lordnacho 11y ago
    Well, they're trying to pay you in stocks to make you feel like you need to work harder. (I don't get what you are retorting to?) If you work for a public company, you can short circuit this by removing the risk (via options or shorting) and effectively taking the money immediately. I suppose they might have something in the contract to stop this from happening, but I don't know what the standard practice is.
    - eropple 11y ago
      Most companies that are trying to pay you through equity are doing so not (just) to make you feel like you need to work harder--which is a joke for the obvious reasons--but, and this is no less important, so they don't have to pay you in cash. Cash is expensive and in the present. Stock is a question mark nobody has to care about for years.
      - fredkbloggs 11y ago
        Except that cash has never in all of recorded human history been cheaper. So the "cash is expensive" argument doesn't really hold water. Put another way, something else must explain why equity compensation is more common now than in the past, especially in light of how cheap cash is.
        sokoloff 11y ago
        Cash for secured, credit-worthy borrowers is extremely cheap. Cash for startups with strongly and increasingly negative cashflow is NOT cheap.
        s73v3r 11y ago
        In this case, cash is still more expensive because they have to have the cash, and they have to have it now. It costs almost nothing to issue the tiny percentage of stock you'd receive, and they don't have to worry about actually paying anything for a while, if ever.
  - encoderer 11y ago
    I have a small disagreement with your first point. It can happen, and even more often there are no shares to borrow from your broker at all, but it's not "often" that way. Options trades are not brokered between two clients the way equities are. You're trading with a market maker, and that's true whether you're buying to open or selling to open. When a market maker sells you a put, the first thing he does is offload that risk by shorting the stock. He's not paid to take directional risk. And that put premium needs to cover the carrying cost of that short position, in addition to things like implied volatility, time value, etc. You are right that you get leverage with options, but there is no free lunch.
- AdieuToLogic 11y ago
  > This will work if you're paid in the stock of a big company If by "this will work" you mean you will likely have the SEC, IRS, the company's own litigation department, and perhaps the FBI filing various civl and criminal charges against you, then yes it will work. As "prostoalex" stated earlier, this is insider trading. Even if the person doing it thinks it isn't, it will be up to them and their lawyer to prove otherwise (a.k.a. "the defendant"). And that kind of proof don't come cheap (think $200,000+ USD depending on how pissed off the employer is).
fredkbloggs 11y ago
Many if not most publicly-traded companies explicitly prohibit their employees from hedging out their risk in this fashion. Check the fine print of your employee handbook before doing it. And if you are a section 16 employee, you should already know that you are almost certainly prohibited from doing it. What, did you think you were the first to think of this?
- JesperRavn 11y ago
  In addition to rules set by the company, selling short the company you work for (or doing the equivalent with options) is a legal grey area. The best advice is simply to sell as early as possible (note, this is not financial advice).
  - fredkbloggs 11y ago
    Only as gray as the definition of "material nonpublic information", which has a much stricter legal definition than the plain-language meaning would imply. Always consult qualified counsel, of course. But in general the best advice is not to accept equity as compensation for services. Anyone who cannot compensate you in cash is by definition desperate.
    - JesperRavn 11y ago
      In a lot of big tech companies, stock is a big part of compensation. This is usually in the form of Restricted Stock Units (RSUs) [0], which are just stock which you receive at various vesting dates. I don't know why companies choose to pay compensation in this way (instead of cash). Maybe because it's easier to write the contract that way (an RSU grant is a contract) than to write the equivalent contract for cash compensation. I suspect there is no good reason at all for this. But the important thing is that during salary negotiation, asking for everything in cash is not an option. So actually turning down equity based compensation (at least in this case, I'm not commenting on pre-IPO situations) is extremely bad advice. Equity should be discounted because of the risk, but RSUs are worth real money and should be treated as such. [0] https://www.linkedin.com/pulse/20140918211244-22433455-your-restricted-stock-unit-questions-answered https://www.linkedin.com/pulse/20140918211244-22433455-your-...
gopi 11y ago
This is what Mark Cuban did when he sold broadcast.com to yahoo in a all stock sale - http://www.quora.com/How-did-Mark-Cuban-save-his-wealth-from-the-dot-com-crash http://www.quora.com/How-did-Mark-Cuban-save-his-wealth-from...
deleted 11y ago
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m3talridl3y 11y ago
Before getting into the software industry, being paid in stock seemed like a no-brainer, because I looked at tech salaries and thought that you people were all making, at a baseline, well above what it costs to live a comfortable existence, so why wouldn't you play the odds a bit and try for a valuable payout when your stock options mature? Then I got a tech job and realized that, no, most people in tech are still just making ends meet due to the insane cost of living that descends like a dark cloud anywhere a thriving tech scene springs up.
- encoderer 11y ago
  Where I'm sitting, in SF, I see an industry of upper middle class people who are more "wealthy" than "not wealthy." Now, there are plenty of people with paper-money options and below market salaries (which are still above $100k unless you're a masochist), but mid+ level engineers who are willing to work in a company with liquid or semi-liquid equity and that is doing alright for itself are having no trouble, even in todays insane real estate market.
fishcakes 11y ago
I think the spirit of this is misguided and goes against the spirit of the compensation. The stock based compensation is designed to align everyone's incentives as well as filter for individuals who believe in the prospects of the company. Hedging out your stock based compensation goes directly against this, and misaligns you with the rest of your company. I think if you don't believe in the companies prospects it is best to take another job or ask for more cash and less equity.
- mahyarm 11y ago
  No not really. Being an employee itself is a 'hedge against risk'. As an employee with this kind of 'insurance' you still want the company to do well and have the stock go up in value because it personally benefits you.

55 points by barisser 11y ago

This will work if you're paid in the stock of a big company, which will have a market in its options as well. But then why not just short the things if you don't want to have the stock? It doesn't work for non-listed startups. Lots of idiosyncratic risk, and no liquid market in the shares.

fredkbloggs 11y ago
The cost of borrowing stock to short it is often higher than the corresponding option premiums. You also generally need less on deposit to execute the options strategy (that is, your value at risk will be lower, as will your margin interest cost). I could retort with an equally glib "why don't employers just pay their employees in cash?"
- lordnacho 11y ago
  Well, they're trying to pay you in stocks to make you feel like you need to work harder. (I don't get what you are retorting to?) If you work for a public company, you can short circuit this by removing the risk (via options or shorting) and effectively taking the money immediately. I suppose they might have something in the contract to stop this from happening, but I don't know what the standard practice is.
  - eropple 11y ago
    Most companies that are trying to pay you through equity are doing so not (just) to make you feel like you need to work harder--which is a joke for the obvious reasons--but, and this is no less important, so they don't have to pay you in cash. Cash is expensive and in the present. Stock is a question mark nobody has to care about for years.
    - fredkbloggs 11y ago
      Except that cash has never in all of recorded human history been cheaper. So the "cash is expensive" argument doesn't really hold water. Put another way, something else must explain why equity compensation is more common now than in the past, especially in light of how cheap cash is.
      - sokoloff 11y ago
        Cash for secured, credit-worthy borrowers is extremely cheap. Cash for startups with strongly and increasingly negative cashflow is NOT cheap.
      - s73v3r 11y ago
        In this case, cash is still more expensive because they have to have the cash, and they have to have it now. It costs almost nothing to issue the tiny percentage of stock you'd receive, and they don't have to worry about actually paying anything for a while, if ever.
- encoderer 11y ago
  I have a small disagreement with your first point. It can happen, and even more often there are no shares to borrow from your broker at all, but it's not "often" that way. Options trades are not brokered between two clients the way equities are. You're trading with a market maker, and that's true whether you're buying to open or selling to open. When a market maker sells you a put, the first thing he does is offload that risk by shorting the stock. He's not paid to take directional risk. And that put premium needs to cover the carrying cost of that short position, in addition to things like implied volatility, time value, etc. You are right that you get leverage with options, but there is no free lunch.
AdieuToLogic 11y ago
> This will work if you're paid in the stock of a big company If by "this will work" you mean you will likely have the SEC, IRS, the company's own litigation department, and perhaps the FBI filing various civl and criminal charges against you, then yes it will work. As "prostoalex" stated earlier, this is insider trading. Even if the person doing it thinks it isn't, it will be up to them and their lawyer to prove otherwise (a.k.a. "the defendant"). And that kind of proof don't come cheap (think $200,000+ USD depending on how pissed off the employer is).

fredkbloggs 11y ago

Many if not most publicly-traded companies explicitly prohibit their employees from hedging out their risk in this fashion. Check the fine print of your employee handbook before doing it. And if you are a section 16 employee, you should already know that you are almost certainly prohibited from doing it. What, did you think you were the first to think of this?

JesperRavn 11y ago
In addition to rules set by the company, selling short the company you work for (or doing the equivalent with options) is a legal grey area. The best advice is simply to sell as early as possible (note, this is not financial advice).
- fredkbloggs 11y ago
  Only as gray as the definition of "material nonpublic information", which has a much stricter legal definition than the plain-language meaning would imply. Always consult qualified counsel, of course. But in general the best advice is not to accept equity as compensation for services. Anyone who cannot compensate you in cash is by definition desperate.
  - JesperRavn 11y ago
    In a lot of big tech companies, stock is a big part of compensation. This is usually in the form of Restricted Stock Units (RSUs) [0], which are just stock which you receive at various vesting dates. I don't know why companies choose to pay compensation in this way (instead of cash). Maybe because it's easier to write the contract that way (an RSU grant is a contract) than to write the equivalent contract for cash compensation. I suspect there is no good reason at all for this. But the important thing is that during salary negotiation, asking for everything in cash is not an option. So actually turning down equity based compensation (at least in this case, I'm not commenting on pre-IPO situations) is extremely bad advice. Equity should be discounted because of the risk, but RSUs are worth real money and should be treated as such. [0] https://www.linkedin.com/pulse/20140918211244-22433455-your-restricted-stock-unit-questions-answered https://www.linkedin.com/pulse/20140918211244-22433455-your-...

gopi 11y ago

This is what Mark Cuban did when he sold broadcast.com to yahoo in a all stock sale - http://www.quora.com/How-did-Mark-Cuban-save-his-wealth-from-the-dot-com-crash http://www.quora.com/How-did-Mark-Cuban-save-his-wealth-from...

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m3talridl3y 11y ago

Before getting into the software industry, being paid in stock seemed like a no-brainer, because I looked at tech salaries and thought that you people were all making, at a baseline, well above what it costs to live a comfortable existence, so why wouldn't you play the odds a bit and try for a valuable payout when your stock options mature? Then I got a tech job and realized that, no, most people in tech are still just making ends meet due to the insane cost of living that descends like a dark cloud anywhere a thriving tech scene springs up.

encoderer 11y ago
Where I'm sitting, in SF, I see an industry of upper middle class people who are more "wealthy" than "not wealthy." Now, there are plenty of people with paper-money options and below market salaries (which are still above $100k unless you're a masochist), but mid+ level engineers who are willing to work in a company with liquid or semi-liquid equity and that is doing alright for itself are having no trouble, even in todays insane real estate market.

fishcakes 11y ago

I think the spirit of this is misguided and goes against the spirit of the compensation. The stock based compensation is designed to align everyone's incentives as well as filter for individuals who believe in the prospects of the company. Hedging out your stock based compensation goes directly against this, and misaligns you with the rest of your company. I think if you don't believe in the companies prospects it is best to take another job or ask for more cash and less equity.

mahyarm 11y ago
No not really. Being an employee itself is a 'hedge against risk'. As an employee with this kind of 'insurance' you still want the company to do well and have the stock go up in value because it personally benefits you.