
Options vs. Cash - darwhy
https://danluu.com/startup-options/
======
paul
"If you look at companies that have made a lot of people rich, like Microsoft,
Google, and Facebook, almost none of the employees who became rich had an
instrumental role in the company’s success. "

100% false.

~~~
defen
This article[0] from almost 10 years ago estimated that the Google IPO
resulted in 1,000 people having more than $5 million worth of Google shares.

So I guess it hinges on how you define "instrumental" and "almost none". It's
a tautology to say that "instrumental" means "they contributed to the effort",
so I would say "instrumental" means "it seems like no one else could have done
it" and "almost none" means less than 5%. If you had to take a wild guess
about Google, what percentage of that 1,000 would you estimate were
instrumental? Furthermore, presumably there are more Google millionaires now,
10 years later. I wonder what percentage of those were also instrumental in
Google's success?

[0]
[http://www.nytimes.com/2007/11/12/technology/12google.html](http://www.nytimes.com/2007/11/12/technology/12google.html)

~~~
lazaroclapp
I am not sure "it seems like no one else could have done it" applies to Nobel
Prize type discoveries or Moon Landing like feats of engineering, much less to
software companies.

Don't get me wrong, I don't mean to say that many employees at companies like
Google are not brilliant or not extremely effective in their work, but "no one
else could have done it" is a useless test that relies on mythologizing
people. The way I figure out, the people getting rich (as employees) are those
that: a) took the risk to get in early enough, b) performed their jobs
competently enough to stay long term and to give the company a chance to
succeed, c) got lucky enough in that all the imponderable external factors
also resulted in that particular company succeeding. That doesn't mean they
weren't "instrumental", in the sense of being the people who actually happened
to get the work done. But that's different from "irreplaceable".

------
i_dont_know_
I started off once thinking "yay, X% means I get X% of the company!" and then
I found out the shares can be diluted. Then I learned "non-dillutable".

Then I learned about vesting periods, windows for exercising options, and a
whole slew of financial terms and devices; each one seemed to come with its
own unique "gotcha" that, if you didn't know about, would cost you nearly
everything.

Everyone I talk to about these always says "well, don't do that one thing, or
if you do that one thing be sure you do it in this way and you're set". The
cumulative knowledge you need becomes pretty high pretty quickly though, and
the chances of me doing the right legal and financial incantation at the right
moment becomes lower.

Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job
I don't like because it might pay off later. I can calculate the expected
value and risks with cash without tons of research. I know my legal recourses
if I get screwed out of cash.

~~~
jasode
_> "yay, X% means I get X% of the company!" and then I found out the shares
can be diluted. _

There seems to be a common misunderstanding about dilution.

Dilution is not really the issue. In fact, dilution is a _positive sign_. It
means more investors value the company and want to buy into the ownership.

How do current owners who collectively own 100% of the shares "sell" _more
shares_ to future owners?!? By way of dilution. That means _everybody gets
diluted_ including the founders, the angels, the VCs, and yes the employees
too.

More important than dilution is the shares multiplied by price.

~~~
oillio
I hear this argument a lot. Mostly from people trying to sell the idea of a
highly dilutive funding round.

Sure, further rounds are a sign the company is doing well. The important word
being "sign," they don't actually make the company more valuable (what the
company does with the money they raise does). If you own a lot of stock, you
probably already know if the company is doing well or not. In that respect,
the round just puts a number on what you already know.

The math is simple. All things being equal, owning more % of a company == more
money. To try to spin dilution in any other way is stretching the truth pretty
far, and is rather manipulative IMHO.

~~~
jasode
_> All things being equal, owning more % of a company == more money._

The point is all things _are not equal_. To restate a sibling comment,
dilution means you own a smaller % of a _more valuable_ company.

If it helps, think of "dilution == sell_equity". Dilution is the perspective
of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's
side (investor's ownership goes from 0% to y%).

 _> To try to spin dilution in any other way is stretching the truth pretty
far, and is rather manipulative IMHO._

Dilution explanation doesn't require "spin" nor mental trickery. It is the
_natural side effect_ of how companies sell equity to grow.

E.g. Larry Page's ownership of Google Inc got _diluted_ from 50% in 1998 down
to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the
IPO[1]. If Larry insisted on _" no dilution"_, no VC would invest money to
help the search engine grow and therefore, he would own 50% of a worthless
company.

So all things _not being equal_ :

    
    
      50% of $0 = $0
      16% of $20 billion = ~$3 billion.
    

Obviously $3 billion is _more money_ than $0. Thinking that 50% is better than
16% doesn't make sense for companies that require outside investors to grow.
Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc.

Let's imagine Larry Page had a different conversation with Sequoia Capital to
match this misunderstood fixation over _" anti dilution"_

>1998: Larry owns 50% + Sergei owns 50% = 100%

>1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million"

>Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind
that both Sergei and I have anti-dilution clauses so our ownership both stays
at 50%."

> Sequoia responds, "So you want me to buy 0% of the company for $12.5
> million? Uh, you guys are idiots"

Somebody in that imaginary conversation doesn't understand "dilution" or
"equity" or simple math.

[1] [http://www.nbcnews.com/id/5033780/ns/business-
stocks_and_eco...](http://www.nbcnews.com/id/5033780/ns/business-
stocks_and_economy/t/google-founders-sitting-billion-stakes/)

~~~
joncrocks
Sure, but dilution without representation can be a big risk for a regular
employee. You might get a smaller slice of a bigger pie, but it may also
represents a smaller real-world valuation if you get diluted too far.

If you have no say over how much you're diluted (like most employees), you
could be diluted away to nothing. You have no control. So you must calculate
worth accordingly.

Is everyone to get diluted equally. No? Well then, calculate worth
accordingly.

In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING
THE SHARES TO BEGIN WITH.

~~~
jasode
_> You might get a smaller slice of a bigger pie, but it may also represents a
smaller real-world valuation if you get diluted too far._

Show example math of how someone could get "diluted too far" resulting in less
total value (shares x price) after an investment round that prices the company
higher than before. If the total value was truly less, it means it was "down
round" which is a different beast.

 _> , you could be diluted away to nothing._

Show how it is mathematically possible to dilute employee's 1% ownership in to
0% without illegal tricks.

When Mark Zuckerberg tried to dilute Eduardo (without also diluting the other
owners), he tried to hide the reduced % via a newly created company. He got
sued for the financial deception and lost.

~~~
gnopgnip
It is a lot different if some of the founders/past investors have anti
dilution clauses

------
htormey
Working at a startup as an employee with the expectation your gonna get rich
is a fools game.

Negotiate for the best deal on options you can get (I.e quantity, terms like
early excercise etc) but treat them as a lottery ticket.

A startup is a good way to learn rapidly so focus more on the quality of the
people you will be working with, technologies used, what your role will be,
vcs backing it etc.

In the long run the network and experience you build from doing this will
probably have a greater impact on your networth. Especially if you yourself
want to start a startup.

~~~
nwenzel
I'm a founder at a high-growth startup in Mountain View. I always tell
potential hires, "options are worth nothing until they're worth something.
And, they may never be worth anything."

I think that's the opposite of the unrealistic optimism job candidates get.
But I think it also helps set the stage for a culture of transparency and
honesty very early. Even before that person becomes an employee.

I'm curios to know what HN'ers think of that explanation vs hearing only the
optimistic case. Does it make you second guess the company prospects?

~~~
asah
Taken literally, this implies comparing offers strictly on cash+benefits,
which typically skews things in favor of large companies.

~~~
wolco
Benefits could mean other things.

Many of us will take less money for remote options or more say in product
development.

At my last company I left a few months before they sold. Been wondering if I
made a mistake not buying my options. I was finally able to get the final
selling price. It was half price per stock than the options were valued at.
Looking back I made the right choice even thought it feels like I missed an
opportunity.

------
asah
I know 100+ people from a dozen companies who've made $1mm+ on equity. None of
my friends would write a post like this.

That said, valuing equity is complicated:

\- most offers include a healthy mix of cash and equity and benefits. Evaluate
the whole package.

\- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are
fine and many companies are offering them. Clever hack: counter the offer with
a demand that the company pay 2% of the cost of exercising for each month
you're employed, grossed up for taxes.

\- watch out for illiquidity: whales often delay IPO which locks up employees.
This compounds the exercise issue. Clever hack: counter the offer with a
requirement that the company offer to buy back the equity at the most recent
preferred share price, if the company accepts investment at a valuation
exceeding $100mm.

Stay positive!

~~~
cjbprime
> I know 100+ people from a dozen companies who've made $1mm+ on equity. None
> of my friends would write a post like this.

This is addressed in the post:

> Another common objection is something like “I know lots of people who’ve
> made $1m from startups”. Me too, but I also know lots of people who’ve made
> much more than that working at public companies. This post is about the
> relative value of compensation packages, not the absolute value.

~~~
susw
How different are startup salaries vs public company salaries? Is that $1m at
Public Company the total salary over a certain period, or is it extra salary
on top of the potential salary at Startup Company? The quote seems to say it
is extra (relative).

If I am supposed to make $1m more at Public Company over -- say -- a 10 year
period, then that means my salary at Public Company would have to be $100k
_more_ per year than at Startup Company. Is the difference between startup and
public really that big?

~~~
phamilton
Yes. Assume $300k total comp at Facebook/Google/Netflix for a Senior Engineer.
Getting $200k at a non unicorn startup is very rare for a Senior Engineer.
$180k is more often the cap and $160k is the norm.

And while $300k assumes fairly high performance at a top public company, it's
certainly not the upper bound.

~~~
susw
TIL. Those numbers are definitively higher than I would expect. Here in Norway
the average for someone with a technical or scientific degree and 5-9 years of
experience in private sector is 690 000 NOK [1], or about 80 000 USD. The 90th
percentile for 10 years experience is 915 000 NOK or 107 000 USD. So for me
the idea of making another 100 000 USD more at another company is quite
foreign.

[1] [https://www.tekna.no/en/salary-and-negotiations/salary-
stati...](https://www.tekna.no/en/salary-and-negotiations/salary-statistics/)

~~~
kod
Those numbers are accurate for the U.S.

Possibly even a little low for the Facebook / Netflix / etc tier.

------
mabbo
Oh look, the thing I should have read before joining a startup.

I left [large corporation], who had been paying me very well, to go try out
the startup world. I found a cool local company doing something that sounded
neat. I looked at the pay (better on a per-paycheck basis) and the options
(better than the stock I was getting in the corporate world) and said "this is
a great idea! If the startup succeeds, the options will be worth a lot!".

It's a great company with great people and I don't regret that, but the
financial implications of the change are starting to sink in. I'm getting a
bit more per paycheck, but on the whole I suspect my tax returns over the next
few years will add up to less than I was making before, even if the startup
succeeds.

~~~
gregmac
> I'm getting a bit more per paycheck, but on the whole I suspect my tax
> returns over the next few years will add up to less than I was making
> before, even if the startup succeeds.

That sounds counter-intuitive -- why would that be? Did you have some expense
you could claim at [large corporation] that you can no longer claim?

~~~
mabbo
Most of the big post-IPO companies hand out stock on a regular basis as a
bonus or a top-up to the actual pay.

The corp in question for me was Amazon. Around 1/3 of my pay (more some years)
was in the form of AMZN stock that vested every six months. Stock, not Stock
Options. No paying for it, no decisions, just boom, you now own X more stocks
and how would you like to pay the income tax on that?

~~~
iaw
What's worth more? A $200K lump sum in 20 years or $10K every year for the
next 10?

The answer depends on how much interest you can earn on the $10K/year. At
around ~7% the $10K/year is worth more than the $200K in 20 years.

Your stock grants from Amazon are equivalent to the $10K/year, the options, if
you get them, are equivalent to the $200K. The actual weighting is impossible
to get precisely but the way you approach it can give you better accuracy than
just comparing apples to oranges.

Good news, even if it's horrible, ~2 years is the typical employee tenure so
you probably wont be there long. If you are and it's going to be successful
you'll be able to renegotiate based on foregone comp at Amazon.

~~~
loeg
Even assuming a $200k payout after 20 years is a very optimistic startup
outcome.

------
martincmartin
"...compensation package has a higher expected value..."

Expected value is a good measure when you're summing over lots of instances,
e.g. if you're a VC fund investing in lots of startups.

As an employee, where you're working for a single startup at a time, robust
statistics[1] suggests that the median is a better measure of what you'll
expect to make: you have a 50/50 chance of making more/less than the median.

More than half of startups either fail, or don't succeed wildly enough for
options to be worth more than the equivalent salary.

(If you work for 5 startups in your career, the best measure might be "sample
5 startups and sum the options payout to produce a value; repeat that many
times and take the median of the result." But that's a lot harder to intuit,
and is no doubt closer to the median than the expected value.)

[1]
[https://en.wikipedia.org/wiki/Robust_statistics](https://en.wikipedia.org/wiki/Robust_statistics)

~~~
jdavis703
Why take the median? For me personally all I need is one year where I make a
couple million bucks. What I really care about for my personal financial
position is either the sum or mean, because that's what hits my bank account.

~~~
martincmartin
Because you'll only work at a handful of startups in your lifetime. You will
not make the sum / mean over all startups, only the ones you work at.

------
drblast
Nobody would ever advise you to take a large percentage of your income and buy
options or even stock in a single company in the hopes that that company
succeeds enough to make you rich. That's gambling.

Being an employee of the company in question doesn't suddenly make that a good
idea. It's an even worse idea since your entire financial future is tied to
the company's outcome.

They should pay you _more_ to take that kind of risk.

~~~
ben174
It is indeed gambling. But it's an opportunity to buy a lottery ticket that
has a much higher payout than one you could buy off the shelf. The odds may
not be great, but if you happen to hit, the payoff can be very large.

------
lostcolony
This is an interesting way to flip the perspective, to ask why do startups
think offers of options are enticing (as compared to just cash).

But for the potential employee, the advice remains the same; ignore the
options when it comes to evaluating a compensation package (and only those who
are informed enough to go "weeeeelll..." and have actual reasons for why in a
~particular~ instance they should do differently, should ever consider doing
otherwise).

------
jonbarker
In startups your risk is that 95% of the value of your labor goes into a pool
of options whose underlying security (startup stock) never achieves any
liquidity event. Also, you do have to factor into your analysis the fact that
the tech giants also have options, which are likely not to expire worthless,
and also have some upside as well, since they are listed on public exchanges.
If startups thought more like Buffett "preferred holding period is forever"
they would counterintuitively actually compensate employees with cash more
competitively once they achieved positive cash flow (this actually seems to be
occurring in a few companies, there are just too few positive cash flow
startup examples for quality analysis on this front). More startup employees I
know are actually just enjoying their work and salary instead of making a
giant sacrifice on a longshot bet in exchange for work they don't think is
sustainable. That being said I think what Bezos wrote about amazon's work
ethic will always hold true "you can choose to work harder, longer, or smarter
but in our case you can't choose 2 out of 3" \- paraphrased from memory.
Ultimately startups and big companies are trying to design compensation
packages that create maximum productivity and the best description I've heard
of this is to "take the issue of money off the table". Hard to do that with
under market salaries and iffy stock options.

~~~
arjunrc
Do you have a link for the comment from Bezos?

It would be good to get some context on what he said.

~~~
jonbarker
[https://www.amazon.com/p/feature/z6o9g6sysxur57t](https://www.amazon.com/p/feature/z6o9g6sysxur57t)
"It’s not easy to work here (when I interview people I tell them, “You can
work long, hard, or smart, but at Amazon.com you can’t choose two out of
three”)"

~~~
circlefavshape
I don't understand this quote. Does he mean that you have to choose ONE of the
three? Or that you have to do all three (which means his "or" is misplaced)?
Or that Amazon.com chooses for you, rather than you choosing yourself?

~~~
arkades
He means all 3.

His "or" isn't misplaced, because it's a play on an existing phrase: "better,
faster, cheaper - you only get to choose two." Meaning you cannot optimize on
all 3 dimensions.

Here he is saying that Amazon expects you to excel at all 3, by providing a
contrast to a known idiom that says you cannot.

------
tschellenbach
Options are a complex topic, this article gets a lot wrong.

1\. The base offer. Many startups pay competitive or close to competitive
salaries + equity. 2\. The value of the options depends on your ability to
pick the right startup and you believe that you can make a difference to the
company. I have a friend who picked the right startup 4 times in a row. 3\.
Stock options are typically priced at 25% of the last round. The reason this
is possible via 409a valuations has to do with the differences between common
stock and preferred. 4\. Issues with investors right impacting the value of
your stock options are more problematic with later stage startups. Warning
signs are companies that raised a lot of capital but didn't live up to their
expectations. Those companies will often be under pressure to accept terms in
later stage financing that could destroy founder and stock option pool upside.
5\. Venture Deals by Brad Feld is a great read to understand different
investment terms. 6\. Yes you get more equity if you create your own company.
Doing so is extremely risky, stressful and hard though. I'd guess that even
with the extra equity, on average, you'll make more money working for one of
the big companies. 7\. So in a nutshell, starting companies, joining early
stage companies. It really depends on your ability to pick the right company
and perhaps more importantly your ability to make a difference.

Well that, and a bit of luck :)

~~~
Bahamut
I don't think I have ever seen a startup offer a competitive salary/equity
package here in the Bay Area for a software engineer. I have found that the
best I could do is trade compensation for a good work-life balance since
salary is not competitive and stock is so volatile for a startup, whereas at
big companies salary often is much more in line with the market and stock has
actual liquid value.

~~~
tschellenbach
Interesting, I typically don't see that here in Boulder.

------
walshemj
What strikes me as odd given the USA's reputation as the home of the self made
millionaire that the taxation of employee options is so broken.

Treating options on shares as Income when they are not is just stupid options
are a high risk instrument that well be worth nothing as opposed to a higher
sallery.

Why is there not a PAC made up of tech industry employees lobbying for reform
of Federal and state laws and arguable tech employers should be doing this.

And I should point out that politicaly I am on the left here compared to 95% f
the average HN reader.

~~~
richardwhiuk
The alternative is that the tax is entirely on exercise of the option.

~~~
URSpider94
It IS entirely on the exercise of the option.

Granting and vesting of ISO's are not taxable events. Exercise of ISO's is
taxable under the AMT rules, but only if you are above the AMT threshold
(admittedly, this is true for a lot of people)

If you're not hitting the AMT threshold, then you only pay tax when you sell
the resulting shares.

------
zone411
This is a very interesting discussion for me, as I'm about to incorporate a
new AI startup and I'm thinking how to spend my own seed money.

The author's argument in the "Incentive alignment" section doesn't seem
strong. "However, as far as I can tell, paying people in options almost
totally decouples job performance and compensation." Is there any data to
support this or just this author's feelings? Just because the masseuse from
Google made millions, it doesn't mean that other people who did well, like
their chief legal officer, business operations, and product management
executives, who made $160 million, were not instrumental in its success. It
just means that not all options were optimally allocated.

~~~
mattmcknight
Exactly, this ignores where options are awarded for performance.

------
Waterluvian
I'm treating my options like a free lottery ticket with not decent odds.
That's it. They don't exist when I plan my finances.

I doubt this is optimal, as options can be evaluated to some extent and risk
can be appropriately brought on and managed. But it works for me when trying
to do math about my present and future opportunities.

------
moron4hire
You don't have to over-complicate the analysis. The fact that they give you
the options instead of cash is proof the options are worth less than the cash.
This is Econ 101: bad currency drives out good as good currency gets horded.

~~~
draw_down
Well, kind of the whole idea is that maybe they will be worth more than the
cash in the future.

~~~
moron4hire
When a company gives you options instead of cash, they are making a bet with
you that they can make a better return on the cash than you can. They are
hoping they can convince you that _cash_in_your_hand_now <
value_of_shares_in_the_future_, but in order for them to even consider making
the bet, they have to expect that _value_of_shares_in_the_future <
cash_in_their_hand_now_.

~~~
draw_down
Yes, and things don't go as expected 100% of the time. Again, that's the whole
idea here.

------
gtrubetskoy
If you're having to debate in your head "options vs cash", then the answer is
definitely cash. Because if the options were worth something, that thought
wouldn't even come up. Also, companies where options are of actual value
generally do not give you such a choice, they give you plenty of both
(provided you are worth it), the objective is to retain you because you are
valuable, not to pay you the minimum possible value by presenting tricky
choices of "options or cash".

------
izolate
Is there any way to nicely state that you're not interested in equity and
prefer cash? I haven't found it. It seems to put off employers who think of
equity as an incentive.

And I've met some fantastic companies who have done this, so it's not about
bad employers either.

~~~
asah
Yes, just explain that you have bills to pay, and while you wish you could
participate more in the equity, you're at a point in life where you need cash.

Typically, startups have a mix of employees who are skewed to more cash or
more equity.

------
allsunny
This isn’t my unique thought, I read it somewhere on the internet at some
point where it was put much more eloquently, but it makes sense intuitively:
The idea is that if you do enough start-ups, one (or if you’re lucky, more) of
them will “hit.” I’ve been to a few rodeos at this point in my career. I’ve
had one minor hit, and one big hit. It certainly worked better for me than if
I’d worked for just cash. YMMV, but I will say not all start-ups are created
equal. Sniff out the finances and product viability as much as you can before
you join. I like the lottery ticket analogy because it’s true that you’re
gambling a bit, I don’t like the analogy because the odds are nowhere even
close to the same.

~~~
danyim
Did you mean to say the odds of striking it rich are nowhere close to a
lottery in a favorable or unfavorable light?

------
geoffreyy
Would making secondary market accessible to employees after a cliff - i.e. 2
years - solve this issue of "lottery tickets" we hear all the time?

If we let employees access liquidity events by having the board organizing
restricted secondary sales every year, then their options will have a higher
probability to have real value?

After all, VCs have lot less risk than employees... We can't diversify our
portfolio like they can. They want to invest their money, we want liquidity.
Giving us financial flexibility would have only pros IMO and would be a
powerful recruiting tool as well.

At my current company, I pushed a lot for employees to get 10yr exercise
window extension, which we now have. Now we need to push to get liquidity. I
feel like it is our responsibility as employees to keep things moving for a
fairer future.

We help adding value to the company, I think it will be fair to be able to
sell our options even if the company is still private.

There are also companies like Equity Zen [1] that help giving employees
liquidity. I wonder if that is a good alternative too?

Basically if we can unlock the value of options before an exit, options stop
being lottery tickets and everyone is happy.

[1] [https://equityzen.com](https://equityzen.com)

------
Mikho
Just week ago there was discussion about options and people shared this tool
([https://tldroptions.io/](https://tldroptions.io/)) to calculate amount of
money an employee gets based on round and % of the company as options.

Despite the fact that in reality even in best case scenario the sum is rather
small -- like 0.01% of a Series A startup with $1B exit will give you like
$40K for your 6 year work -- more important issue is different liquidation
preferences VCs get for their money.

So, each of many many VCs that invested in a startup by the time of exit
exercises own liquidation preferences to scrape every possible dollar -- and
in many cases disproportionately more than their fair shares of the startup
due to liquidation preferences. As a result there is not so much money left to
share among employees after all investors in aggregate get out their money and
exercised preferences.

And this is best case scenario. So, a startup needs to have multi-billion exit
for employees could make any real money.

~~~
emmett
If you join a startup immediately following a Series A and you only get 0.01%,
you almost certainly got screwed. We were fairly stingy with equity, and an
engineer joining then would have gotten around 0.5%, 50x what you're basing
your math on. And over a 4 year vesting period, not a 6 year one.

$2mm ($40k x 50) for your 4 years of work is substantially less bad. And
employees who stayed with us tended to get new equity grants over time as
well.

So yeah, don't take a startup job for tiny amounts of equity. You should get
significant equity for joining that early with that much risk.

------
zxcvvcxz
I've never been a fan of being an employee at an early-stage startup. The
options on average have close to zero value, the salaries are lower, and the
hours/working conditions are worse [than at generic big company].

So now as a startup founder I'm thinking, why even give my employees options
at all? Me and my co-founder are the ones that believe most in the company's
upside, so the more shares for us, the better. The plan I've come up with is
to 1) try and raise those salaries as best I can to market rates, with the
added perks of flexibility, and 2) create a plan for profit sharing in the
future.

Profit sharing agreements make more sense to me for a number of reasons. First
of all, like equity, its value may never materialize. But secondly, there's
actual liquidity and numbers behind it as a possible outcome. Also without the
employee stock option pool, I can sell a bit more equity for more cash for
better salaries.

What do people think of this idea?

~~~
jy1
"Me and my co-founder are the ones that believe most in the company's upside."

This compensation scheme will just select for employees that aren't bought
into the future of the company.

------
stratigos
Or here is a better one:

"Sorry we cant actually fulfill the contractural obligations we are (sort of)
legally bound to fulfill, and cant pay you like we promised. So will you take
a much smaller amount of money and a bunch of worthless stock options instead?
By the way our stock options are going to be worth millions in a few months,
so this is actually a better deal for you."

Its like some weird pathogen has infected the whole industry with this!

------
tdeck
> A company that gives you 1M options with a strike price of $10 might claim
> that those are “worth” $10M.

I've had a perspective employer make this exact claim to me. I.E. that I could
value my options package by multiplying the strike price by the number of
options. I had to go back and clarify that, in fact, those options are worth
$0 at the current strike price.

It's hard to see this as anything other than gross incompetence or deliberate
deception at this point. Options aren't some new thing that only a few people
are doing. Besides, if you're giving them out, you had better bother to learn
how they work. I'm curious as to how common these claims are because it's
pretty egregious.

(and yes, they were options and not RSUs)

------
rguzman
i think options do a couple of things: 1) they let employees invest in
startups using their _time_ instead of their money, which is handy when you
aren't rich and 2) they allow the company to have a legal framework around an
IOU: take less salary now, bigger payout later maybe.

thought experiment: knowing everything you know about e.g. stripe right now,
would you buy $100k worth of stripe back in ~2012? in 2012 it was a risky
proposition to do so, but many people at the time understood why stripe was
likely to be big and successful and invested money in it. i'd rather live in
the world where there is a mechanism to invest in such a company besides being
an accredited investor with access.

many people go wrong when thinking about options in that they don't try to
consider the fundamentals of the investment. working at an early-stage startup
isn't just a job, it is a way to do risky investments using your time.

all that said, what Dan proposes at the beginning makes a lot of sense: the
startup should be willing to give you cash instead of options (provided they
have the cash).

~~~
lostcolony
Given what you know about Bitcoin now, would you buy $100k worth of bitcoin in
2010? Of course you would.

Except...I didn't tell you that your investment would be held by Mt. Gox. You
lost your investment.

There is always risk. Always. 97% of startups fail. They are extremely high
risk. The earlier you buy in, the higher the potential payout, but the more
likely you are to be backing one that will fail. Even the successful ones,
after dilution, may or may not be worth more than the cash over how long it
took to IPO/be bought out.

You say you get to make risky investments with time; yes...but that's even
worse than money. Money is fungible. Time isn't. You have a set amount in
life.

Having a 97% chance you're wasting it (actually, higher, since dilution + etc
means even a 'success' may mean you made less than the equivalent cash over
how long you worked at the place, the extra hours you put in compared to
working on side projects, etc) are some pretty long odds.

~~~
rguzman
> You say you get to make risky investments with time; yes...but that's even
> worse than money. Money is fungible. Time isn't. You have a set amount in
> life.

that isn't an argument against startups offering options. that only says that
you value your time in such a way that precludes you from investing it in
startups.

~~~
lostcolony
Sure, and I wasn't arguing against startups offering options. Just against
startups valuing them over cash, and expecting employees to do the same.

Really, I'd say the whole thing is a red herring; either way you're working.
Your time is being used. So the question is do you want to trade that time for
a guaranteed amount of money, or a -possible- amount of money (but, high
risk). The only way taking the options makes sense is if the salary is -still-
high enough to not get in the way of what you want to do, and you could walk
away having netted zero from your options and not feel cheated.

------
georgeecollins
"..why shouldn’t the startup go to an investor, sell their options for what
they claim their options to be worth, and then pay me in cash?"

Because an option held by an employee has more value because it functions as
an incentive.

~~~
marssaxman
The incentive effect is therefore entirely dependent on the employee's degree
of ignorance! Experience has shown me that "options are worthless" is a pretty
good rule of thumb, and I simply ignore everything but the so-called "base"
salary when I evaluate a job offer.

------
ares2012
I don't want to jump into a debate on a clearly biased post, but I feel that a
few things need to be clear: \- Many employees prefer options to cash, as it
provides the opportunity to make a lot of money. The chances that happens are
very low but many people want to take the chance. Just because it's not your
preference doesn't mean it's not attractive. \- Salaries increase over the
life of the company, so if you join a startup today with a lower salary but
many options then in a few years you'll have the salary you want AND the
options. So the question is whether the difference in salary for those years
is worth the opportunity for a big return. \- There is a different feeling of
working somewhere where you have ownership vs just a paycheck. In the early
stages of a company this is important to employees who really believe in the
mission. \- Most companies do sell shares to investors for cash to pay
employees, that is where the money for salaries come from. However, that
investment comes with many terms attached, including liquidation preferences,
which reduce the returns to employees long term. Giving employees options is
the most direct transfer of value if the company does have an exit.

Overall, it's a more complex issue than this post presents. If you don't want
equity, don't accept offers that include equity. If you do want equity, then
do. Simple.

~~~
sbob
The lottery is just a way of taxing poor people who don't know math. (c) :)

------
jellicle
Great article. The point can be distilled down to information asymmetry - the
company wants FROM YOU something that is relatively straightforward and clear
(your time) and wants to give TO YOU something that is complex and hard to
understand (a complicated financial instrument that may or may not turn out to
have value in the future).

As a general rule, you should stay away from such deals. The likelihood is
that the company knows more about the instrument than you do, and is using
that information to underpay you.

------
pmontra
I've been asked today if I'd take equity instead of some cash. My answer was a
polite no.

If I could work at the same time for ten startups then I would hedge the risk.
Most would fail, one would succeed, it could be worth it. But I can work for
only one startup so it's like betting on who would win 2018 NFL. There are
better choices than others, still it's down to luck.

~~~
ThrustVectoring
Would it be possible for workers to create a diversified pool of startup
equity grants? You'd pay in in-kind, and receive a portion of all cash flows
from group holdings proportional to what you put in.

There's obvious problems with how to fairly value the in-kind options, and how
to avoid making it a market for lemons.

The overall goal is something like if there's 11 co-founders and one makes it
big, you wind up with one person with $900M and ten worth $10M, rather than
one worth $1B. It's a small enough portion of equity that you're still
incentivized to make it big, and a big enough portion of enough equity slices
to cut out a lot of the variance.

------
TimPC
It just goes to show that just because you think you know how to evaluate
stock doesn't mean you do. I have a pretty good understanding of dilution, tax
implications, liquidation preferences and so on. But that 5% of equity issued
to employees => equity actually acted issued is shocking to me (I would have
guessed 35-40%). A friend once told me: unless you're a founder the right
estimate of equity is $0 (By which he meant: be comfortable with an offer in
every other aspect, then take equity. If you only have a 1/20 chance of
getting your equity I'd say that advice is more true than I initially
thought.)

------
tristanho
> If you look at companies that have made a lot of people rich, like
> Microsoft, Google, and Facebook, almost none of the employees who became
> rich had an instrumental role in the company’s success.

Is this true? Dan seems to kind of skim over this point without much proof or
thought (which is unlike him!)

I don't have any data on this either, but it seems like a pretty big
assumption to take for granted. The implication is that the early employees
added little value compared to investors/founders, but in my experience this
is the opposite. The team is literally who built the vast majority of the
product.

~~~
georgeecollins
I think he means by count of people, not amount of money made. In other words,
MSFT made Bill Gates very rich, plus thousands of others became part of the
one percent (multi-millionaires) without making a really amazing contribution.

------
justin_vanw
For one thing, the reason that options/shares aren't traded widely in earlier
stage companies is regulatory. If you have too many investors, or something,
you have more regulatory overhead to deal with. Small companies don't want to
have 5000 investors for this reason. However, I personally know people who
have sold their vested options at a significant profit in very early startups
(just after an A round).

Options are worth more than cash IF AND ONLY IF you have insights and evidence
that the company is going to outperform the current valuation of the company,
after being adjusted for risk.

For example, if you see that it is the best team ever assembled. Most startup
CEOs says their team is the best ever, but if you interact with the team for a
bit and see it is probably true.

For example, if the company needs you really badly, and they are able to give
you options based on a valuation that based on current information is a huge
underestimate. For example, a drug company that found out yesterday that they
got their FDA approval for their new blockbuster drug, and for some reason
they need to hire you very badly. This is iffy because they are probably not
able to offer any options if they are already far along on being acquired.

Overall, there are certainly startups where the signals would be available to
someone thinking of working there such that they would be able to determine if
it is likely that options have a promising expected value. I think this is
going to be a very low % of startups where that expected value is even
remotely close to what you would get at a large company, and very very few
where it would be much higher.

------
code4tee
Cash is nearly always better for the employee. Startups like options because:

1\. They can "pay" people with "free" pieces of paper that effectively cost
nothing from a cash standpoint

2\. It helps keep staff onboard by slapping golden handcuffs on

3\. In the event that these paper options turn into something with actual
value that only happens if the founders and investors make a ton of money
first, so at that point they don't really care what the options "cost". It's
like writing a paycheck that can only be cashed if the founders/investors get
rich. A great deal for them, not so great for you.

Net net all these things benefit the founders/investors and not the person
receiving the options. In nearly all cases people are getting options as part
of core comp because the company can't afford to pay out all that cash. It's
important potential employees understand that when agreeing to a base package
that is heavily in options vs cold cash. Options should be treated as a bonus
that may pay off but very likely won't, not base comp.

~~~
blennon
Startups also like options because they believe it creates an "ownership
mentality" among its employees. I believe this is mostly true.

I think equity compensation is also a selection mechanism. If I'm running an
early stage startup, I want everyone to have a stake in the game. Equity
compensation attracts employees with that mindset. Conversely, if a potential
employee would prefer all cash compensation to equity, that would be a big red
flag to me.

One of the struggles of offering equity to employees is finding a mechanism
that has no taxable value upon issue, benefits from capital gains, and is
legally sound.

One option is to organize as an LLC and offer a profits interest. These can be
issued with $0 taxable value and benefit from the upside of the company. They
can vest, and once vested they can participate in the gains of the company
(including distributed income, not just a sale). I believe these are
inherently more fair to the employees because there is no golden handcuff.
They don't need to be exercised and once they're vested, you can walk away
with them. On the downside, they are a little more cumbersome to set up.

~~~
state_less
I'd prefer plain old stock without restrictions and a larger proportion of it.

I think we ought to target a controlling interest for the employees (i.e.
employees own over 51% of the company) and shareholders vote on the weight of
their shares, like they normally do.

In sum, I'd rather see a founder worth $100 Million and 999 employees worth
$900k than a $800 Millionaire and 999 employees worth $200k. And I actually
think this would have an important impact on the economy by balancing out the
income inequality. In other words, not only would we see far more ~$1
Millionaires, but also more $100 Millionaires because now the money is moving
faster with all the fresh Millionaires buying goods/services.

~~~
warcher
As somebody who's founded a couple companies, there just aren't enough people
with the appetite for risk and drive needed to manage a controlling interest
in a company.

And on an economic level, if the net compensation level, including _crushing
levels of stress and overwork_ , was _so_ bad between founders and employees,
you'd see a lot more founders until the system balanced itself out. And you do
not. Most real good engineers just want a fat paycheck and a clear delineation
of responsibility. Trust me, a senior valley level salary and not riding that
ride is a good gig.

That said, the side of the bread with the butter on it is pretty clear. The
reasons for that are less clear until you've done it, but nobody's standing in
your way-- you want to be the daddy/get really rich, found a company.

~~~
pbecotte
Come now, you believe that more people don't found companies because of the
stress? It seems far more likely that most people don't have the capital
assets for that to be an option, except three groups... 1. The very young who
have very low expenses, the ones who cashed out already, and the ones who
started rich.

~~~
warcher
Untrue. Also untrue that you need funding-- you can replace funding with a
brutal workload and a lot of patience. I did it, ask me how, haha.

I mean, don't get me wrong, you are gonna sign up to be broke. For a _while_.
A lot of people have kinda boxed themselves in with a very comfortable middle-
to-upper-middle class lifestyle that closes a lot of doors via their household
burn rate. That's not the system being out to get you, that's a perfectly
valid life choice that you and you alone are responsible for.

~~~
warcher
Not that there isn't a whole _industry_ revolving around bleeding you white,
keeping you chained to the oars by debt until you're no longer useful. Those
issues are orthogonal.... I think.

------
123aswin123
Cash is king any day! If you aren't in the founding team!

~~~
asah
Sadly this is too often a valid heuristic.

At the same time, my friends and I did "pretty well" as employee 3,000+ at
this crazy search engine company that couldn't make it because "nobody clicks
on ads."

~~~
GFischer
I'd say that if you're employee 3.000, the company has already made it,
although, as a counterexample, Uber has 6.700 employees and I don't know if it
will bust or not.

------
pjc50
Options first really got started as a tax avoidance measure, but that loophole
was closed decades ago.

------
bitwize
I always find the "Bison dollars" analogy for options or equity vs. cash to be
appropriate.

The worth of Bison dollars is wholly dependent on how much faith you have that
Bison will enact his evil plan of holding the Queen for ransom and forcing the
Bank of England to accept the proposed exchange rate of five pounds to the
Bison dollar. Similarly, the value of stock or options is dependent on your
faith that the startup will grow. Whatever the case, you want to have enough
cash to make your expenses, as those odds are NOT in your favor. The VCs
funding the company are hedging their bets against several other similar
companies in the hopes that at least ONE will blow up and become a "unicorn".

------
erbo
This shows why I've long said, "Put not your faith in stock options."

Like it or not, options are basically Monopoly money. You can't get your
landlord to accept them, or the grocery store, or the credit card companies.

~~~
shemnon42
Well, some land lords used to accept options for rent...
[http://realtormag.realtor.org/commercial/feature/article/200...](http://realtormag.realtor.org/commercial/feature/article/2000/07/landlords-
swap-stock-options-for-rent)

------
dreamdu5t
Both. That's what the CEO and others get. Take a fat salary and options.

------
kelukelugames
Man I wish I knew more about options before I joined a pre IPO company. Kind
of like how I wish I knew about salary negotiation before my first job out of
college. It's like companies exist to scam us.

------
EternalData
Always good to break down how startup equity really works. It quickly becomes
apparent that working at startups isn't a great cash game (though it is a
decently good skills game).

------
silverlake
What we need is a way to pool employee stock options across startup companies
to diversify risk. Surely there's a financial engineer somewhere who can
create such a thing.

------
j45
Questions that come to mind..

If I do the math of taking the cash each time, do I end up close to what
diluted options would provide, or more?

How many people do I know where options translated to sizeable cash, even
after dilution?

Which statistic will I be a part of, where options have actionable worth, or
little/nothing?

The questions above we're proposed to me by a founder who had taken funding
and was diluted to the point where he realized his worth as a
consultant/freelancer/contractor may have ended up ahead.

------
gleb
Paying with options is equivalent to the start up selling stock to investors,
paying employee with cash, and then having employee invest the money back into
the company. As the article points out.

But there are differences. Avoiding income tax. Deferral of compensation to
drive retention. Giving employees a better deal than the investors. Letting
employees invest into an asset class the government normally prohibits them
from investing into. Those are some of the big ones.

~~~
analyst74
> Paying with options is equivalent to the start up selling stock to
> investors, paying employee with cash, and then having employee invest the
> money back into the company. As the article points out

No that's not the same, options are basically the right to invest at current
valuation. What you described is more like RSU.

~~~
gleb
Current common valuation - insignificant for early-stage companies. Late stage
companies do RSUs.

------
rdiddly
Risk and reward are proportional, unless there's somebody trying to make your
risk disproportionate to their reward.

------
ThrustVectoring
All I want from the equity package at a start-up is for it to be non-zero. If
a co-worker winds up with enough out of their equity package to become
financially independent, I'm going to be very upset unless I've at least
gotten enough for a car or vacation.

------
bogomipz
Could someone explain this statement to me:

>"Like most people, extra income gives me diminishing utility, but VCs have an
arguably nearly linear utility in income."

Specifically, what is this "utility" and how is it diminished by more cash
compensation exactly?

~~~
100k
Utility is a concept from economics:
[https://en.wikipedia.org/wiki/Utility](https://en.wikipedia.org/wiki/Utility)

You can think of it as "how much benefit I get from a thing".

What he is referring to is diminishing marginal utility, which is that as you
consume more and more of a good (in this case, income) you derive less benefit
from it.
[https://en.wikipedia.org/wiki/Marginal_utility](https://en.wikipedia.org/wiki/Marginal_utility)

This is backed up by psychology research indicating that people hit a
happiness plateau at some income level.

~~~
bogomipz
Ah ok utility as in utilitarian, that makes sense. Thanks for the explanation.

------
killjoywashere
So, basically, start-up hires should issue their own term sheet, by which they
agree to invest time in exchange for whatever else. Which suggests that human
capital is coming on par with the VCs themselves. Interesting...

------
m-j-fox
Be careful with those golden handcuffs: they only work if everyone thinks
they're real. A bad quarter or even a bad rumor can prompt staff to bail en
masse.

------
kumarski
Everyone should look at [http://equidateinc.com](http://equidateinc.com)

I think it is the direction of the future.

~~~
mbillie1
Their video not playing in Chrome does not inspire a great deal of confidence.

------
lamby
Somewhat of a social aside, CEOs don't tend to like it when you refer to one's
options as a "lottery ticket."

------
fabiandesimone
Some folks are commenting, cash.

I would personally prefer Bitcoin or ETH as I suspect the value of either will
be exponential in the future.

And for the company, if you buy a load of whichever say at beginning of your
company that you keep only to give out bonuses to their equivalent in cash
every time a new hire comes, you could actually give out the same amount of
cash for less tokens in the future.

------
ianamartin
Maybe I'm just getting old, but I'm starting to ignore companies that even
bring up equity early on in the process, or flat-out state that it's
calculated into the compensation package.

If I want to play the lottery, then I'll choose to do it with small bills on a
lark. Not gamble with a substantial portion of my regular income.

If I can't clearly evaluate the total compensation package I'm getting, I will
assume you are trying to screw me, and I'll probably walk away because of what
that says about your management and culture.

In my opinion, the value of the equity you're offering me is zero until proven
otherwise. And it's not my job to prove otherwise. It's yours. Your exciting
workplace, free beer, ping-pong tables, and gluten-free vegan breakfast/lunch
options are all as meaningless as your equity is.

The same thing goes for cutting-edge technologies (resume-driven development),
and at this point, I'm starting to feel the same way about religious devotion
to Agile.

All 3 of those things are red flags to me when I see them talked about in job
postings. At the risk of sounding like I was born in the 70s (I was), I'd like
to think that it's still possible to find a job in this field where you pay me
a decent salary for good, solid work, and then you get the fuck out of my way
so that I can do it.

In fact, I know these jobs are everywhere. They aren't sexy, they don't get
talked about in the press, and they are usually not primarily technology
companies. They are in-house teams where the client is the company, and the
product is anything technology can improve so that the company can function
better.

You're not going to get rich overnight. But many of these jobs offer a lot of
autonomy and flexibility (within reason) to explore new things at a reasonable
pace, a good quality of life, a decent wage, and a chance at retirement at an
okay time.

I know this is Hacker News and the audience is mainly geared towards exciting
new startups, but I want to give a shout out to the thousands of companies in
the U.S. who don't try to cloud your head with delusions of getting rich
quickly, don't give a shit about the latest js framework, don't bog you down
with daily rituals, and just let you focus on solving problems with solid
solutions and respectable code.

Perhaps I'm very much in the minority here, but I'm glad to have a place at a
company that does what I think is meaningful and positive work in the world,
pays me a solid 6 figures, and mostly lets our team do what we think is best,
so long as it accomplishes the things we promise to deliver. Equity was never
talked about. There was no discussion of perks of any kind. They told me what
their problems were and interviewed me to see if I could help fix them. Then
they told me what I would be paid and what the benefits are. They don't need
to worry about me leaving for something hotter or sexier or more exciting. The
only thing that would make me leave is if there were some drastic change in
management that suddenly made my life miserable.

~~~
dreamcompiler
Completely, thoroughly agree. I'm a senior engineer. You want my expertise?
Pay me. I care fuck all about your options, your free massages, and your
foosball tables. If that's all you have to offer, you're probably not a
serious company; you're just playing startup theater. Call me when you have a
real engineering problem to solve and you have $$ to pay for a solution
because you're paying $$$ every day you don't have a solution.

~~~
ianamartin
To be fair, I would consider free massages as a real benefit. Stupid and
probably indicative of a culture problem in most cases. But if my company
added those, I would work from home less often.

Also, Mike Monteiro from one of the world's best design companies:
[https://www.youtube.com/watch?v=jVkLVRt6c1U](https://www.youtube.com/watch?v=jVkLVRt6c1U)

TL;DR: Fuck you. Pay me.

------
draw_down
Can't they just tell you the current share price and your strike price? The
share price minus the strike price times the number of options is the value of
the package when vested, no?

~~~
analyst74
At offer stage, strike price = share price, which is estimated by an
independent third party at least once per year.

It used to be the case that strike price is significantly lower than share
price, making options much more valuable than they are today. But that was
deemed a tax loophole by IRA and became disallowed some while ago.

------
sheeshkebab
Start your own company vs. Cash, would be more interesting.

Rambling about options is a bunch of distracting noise.

~~~
s73ver
Most of us aren't going to start our own companies.

~~~
stratigos
"Ive got a great idea, its like Twitter, but _purple_!!!"

~~~
ryan606
"Snapchat, but for dogs!"

~~~
shemnon42
Shazam, but for food.

~~~
sheeshkebab
So, I guess the answer is - cash?

Either that or find something that people need and build it (rather than
bitching about options/vesting crap).

~~~
stratigos
Have you been in the industry a long time? No one is "bitching" about options.
Did you read the article? Its not crap, its maddening amounts of information
completely irrelevant to the fields of Computer Science and software
engineering. Yet, its a reality most of us must face, since there are a lot
more job openings for startups than any other sized business. And since its in
the business' interests to provide monopoly money instead of real money, this
problem doesnt seem to ever go away. If you ever get into freelancing, its
unlikely you will never be met with such offers. Its also likely your contract
will dissolve into said monopoly money at some point too.

If anything, we're "bitching" about wanting actual money for compensation, not
a raffle to a lottery that is highly likely to have no prize at all, and just
as likely to be worth far less than the typical compensation in cash.

------
analyst74
Options by definition are worthless when they are granted, because strike
price is the current estimated value of the stock.

~~~
rileymat2
This is not true, the right to purchase at the current price but not the
obligation has value in itself.

Of course this is no where near the sum of the strike price for the options.

~~~
analyst74
Right, with options you can choose not to exercise if valuation goes down,
avoiding a loss.

~~~
walshemj
With some options (Warrants of investment trusts for example) you can sell
those on the open market if they are in the money its also a way of leveraging
your investments.

------
neom
There is so much conflation in that first paragraph I couldn't get past it.
The way I think about it is that options are how you earn money for doing a
(/if you do a) good job. Much like doing a good job of picking a house in a
neighborhood that you believe will appreciate, doing the right amount of
renovation and renting it out while waiting, if you did this well you could
make money on the appreciating assets. In a startup, your two main assets are
time and people. Salary is how a company compensates you for the FACT that
you're doing a good job. Bonuses are how the company compensates you for going
above and beyond. In our company we have standard compensation packages based
on tenure, within the structure, there is no way for anyone to make any more
than anyone else outside of just being at the company for a long time. When
you're betting on a startup you're betting on the founders and the team, not
the VC, if you want a proper salary go work for a business that is already
built, don't work on building one. Hedge funds and banks pay really well.

