
Stock options: a balanced approach - luu
http://yosefk.com/blog/stock-options-a-balanced-approach.html
======
poof131
A part of the article I disagree with is that I don't see Goldman and
BlackRock’s involvement as a good sign. These late stage investors have terms
that no employee gets. [1, 2] Employees who joined late are going to get
screwed as ratchet clauses kick in. The PE folks are showing themselves to be
better negotiators than the founders who focus too much on valuation and the
happy path. The large number of unicorns and the numerous late stage deals
will probably be one of the notable things about this bubble. It’s the worst
of both worlds for employees, no upside of joining early and no government /
regulatory protections found in a public market. As more people get screwed we
may see a shift from ‘unicorn’ being a positive recruiting tool to a negative,
which could push companies to IPO earlier despite the supposed Sarbanes Oxley
fears. The brunt of the late stage startup risk is on the employees. The
founders have taken money off the table, the VCs have their win, the PE firms
have their ratchets, while the employees joining late get a handful of options
at a fictional valuation.

[1] [http://www.businessinsider.com/investors-who-got-in-
square-a...](http://www.businessinsider.com/investors-who-got-in-square-
at-a-6-billion-valuation-2015-11) [2]
[http://www.bloomberg.com/news/articles/2015-11-19/square-
emp...](http://www.bloomberg.com/news/articles/2015-11-19/square-employees-
find-some-of-their-stock-options-under-water)

~~~
_yosefk
One big question I didn't discuss is how to evaluate the prospects of the
employing company, and I didn't discuss it because I didn't come up with good
advice. Companies differ tremendously.

In particular, I personally was spoiled working for a company where the
founders are very good negotiators, apparently even better ones than the
various i-bankers they dealt with. For instance, they never took any VC money,
presumably under the assumption that VCs might decide to gut the company if it
doesn't become profitable in a time frame which for them seemed too short.
They also made sure to raise tons of money years and years before running out
of already-raised money; the conventional wisdom is you're not a bank and you
should only raise capital when you absolutely need it, you shouldn't have
stashes of idle cash, but the problem with this approach is that you raise
money when you're desperate and this diminishes your bargaining power
tremendously. Raising money long before it's really needed resulted in really
good deals for them.

I was also spoiled working for a company with a simple business model and
pretty predictable revenues so it wasn't that hard to put a conservative lower
bound on its future value.

Anyway, I only addressed the really wrong arguments that I heard a lot, that
after a late-stage investor gets on board the stock "can't possibly rise any
more" (meaning, the late-stage investor is at best going to not lose money but
can't possibly make any, so they're much dumber than you are); and, "even if
it rises, it'll just rise a little" (which neglects the arithmetic of how your
capital gain is calculated.) Your argument is different and I confess that I
don't have any stats to either support or refute it.

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ryporter
The author makes an interesting point about equity as lottery tickets.

 _" They call stock options a lottery ticket. I call it insurance. It sucks to
have worked at a startup which did make it big and to not have made anything
off it. Incidentally, I know quite a lot of people who either forfeited their
stock options or sold them very cheaply, on the theory that equity is
worthless. Trust me, if you're working for a startup, this is the one accident
you want to be insured against."_

Calling it "insurance" is probably taking it too far, but there is merit to
this analogy, and it certainly is the case that equity is not worthless. With
many startups, you can negotiate a decent base salary, and still receive
enough equity to make you very well of if the company does take off.

~~~
thedufer
The point of insurance is to decrease volatility. Stock options do the
opposite of this. I don't understand how this comparison makes any sense.

~~~
brockwhittaker
This is not correct. Stock options can decrease volatility and serve as
insurance against large increases or decreases. That is the point of hedging.

For example if I have 100 shares of AAPL @108 and I'm nervous of it dropping
below $80 in the near future, I may buy a MAR16 put option at $90/share for a
few pennies in the hopes that if the stock does actually decrease to a level
that makes me feel uncomfortable, the options will increase enough to offset
the stock loses.

So they very much can be insurance. It just depends on how you play them.

~~~
rahimnathwani
Your comment makes sense if you're talking about using publicly-traded
derivatives to hedge long or short positions in a diversified portfolio.

The comment to which you replied was talking about employee stock options,
which are not generally used to hedge a short position, and often represent a
large part of someone's overall wealth and/or income.

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dawhizkid
If you think your options will be worthless at time 0, why would you join the
company?

The right mindset IMO is to only join a company you think will make it big but
be prepared to accept fate if it doesn't and your options are made worthless.

~~~
lanstein
A million times yes. So obvious and yet I don't remember seeing this once in
the last batch of stock option posts.

My personal favorite signal: there has to be some number of people that are
saying 'I LOVE your product!' Similar to what Paul Buchheit says on many
people liking vs some people loving your product.

~~~
_yosefk
I love neither Windows nor MS Office, but I paid handsomely for these. Also, I
don't know people who particularly love to integrate an ARM core into their
chip, and I doubt that Apple, Qualcomm, NVIDIA etc. etc. love to pay $30M for
an ARM architecture license which gives them the privilege to then reimplement
the core themselves, but they all pay up.

On the other hand, I love independent animation, but I don't pay that much to
creators and the average independent animation lover might pay less than me. I
also love vim (perverse, I know) but I wouldn't pay for it what I pay for
Office (Office opens documents that nothing else does and that I must open,
while text files can be edited in endless free programs.)

This goes to show that love and money don't always go hand in hand, and is an
example of the more general problem with picking winner companies: they're all
very different. That's why I didn't say much about it: it's very hard to give
good, general advice on this. (And if I could give such advice, I'd be off
investing in companies with no time left for blogging.) That said, someone
contemplating to work for a specific company might research that company and
come up with specific reasons to like it; a bit like how you can prove that a
given program terminates even though you can't generalize your strategy for an
arbitrary program.

------
tacos
Compares working at Google to a startup in Israel. States "... prices aren't
much lower overall, AFAIK" then writes another 2000 words to justify his
position.

[http://www.numbeo.com/cost-of-
living/compare_cities.jsp?coun...](http://www.numbeo.com/cost-of-
living/compare_cities.jsp?country1=Israel&country2=United+States&city1=Tel+Aviv-
yafo&city2=San+Francisco%2C+CA)

    
    
        Consumer Prices in San Francisco, CA are 25.44% higher than in Tel Aviv-yafo
        Rent Prices in San Francisco, CA are 213.57% higher than in Tel Aviv-yafo
        Groceries Prices in San Francisco, CA are 69.48% higher than in Tel Aviv-yafo

~~~
beagle3
From your link:

Local Purchasing Power in San Francisco, CA is 17.10% higher than in Tel Aviv-
yafo

That's basically what matters. And 17% is not a huge difference. "Prices"
might have been the wrong term to use - but "Purchasing Power" is comparable.

~~~
tacos
Highlighted, with a box around it, and at the _very top_ of my link:

"You would need around 31,022.61₪ in San Francisco, CA to maintain the same
standard of life that you can have with 17,000.00₪ in Tel Aviv-yafo (assuming
you rent in both cities)."

------
jvns
I'm really curious about

> I do know people who managed to find an outside investor who helped them buy
> their stock options

Is this a common thing?

~~~
hamburglar
I've done it, but my options agreement with the company put such restrictions
on trading the stock that it couldn't have happened without the very willing
participation/assistance of the execs. I don't actually understand all of the
details, but I know there were issues with both right of first refusal and
also prohibitions on private stock transactions that the company had to
explicitly waive. In the end, I just had to trust a lawyer to reassure me that
in the end, I would no longer have any options but I would have a whole bunch
of cash, because all the mechanics were both over my head and arranged by
someone else.

