
Ask HN: Is it just me or do a lot of people not know how stock options work? - stockoptionsta
I work in a startup in San Francisco. We&#x27;re profitable &amp; growing, about 30 people now. I&#x27;m one of the first engineers so I have a good chunk of stock options.<p>A lot of times when I talk to my friends (mostly engineers, mostly in their middle 20s) about stock options they don&#x27;t even know the basics.<p>A few examples from my life:<p>* A coworker left the company right before the end of his first year. He had ISOs, and it wouldn&#x27;t be that expensive to buy them, but he still decided to leave right before the 1 year cliff date to go work in another company.<p>* A friend of mine did not sign his stock options paperwork when his employer gave it to him more than 1 year ago. I guess he was just lazy, didn&#x27;t want to sign something he did not fully understand. I don&#x27;t know all the details but I assume if he signs it now he loses 1 year of vesting, the grant price will be higher — just not the greatest decision &#x2F; attitude imo.<p>* Another friend left the company where she had stock options, 6 months later she found out that the company was sold. She remembered about the stock options and asked me for advice. She did not know much about the topic so I told her roughly what her options were, told her about the 90-day rule. I later found out that she ended up getting some money from her past employer.<p>I know that there&#x27;s a conversation [1][2] about changing some of the technicalities around stock options, but I think there might be an even bigger problem — many employees don&#x27;t understand the basics of stock options, hence they don&#x27;t value equity as much as employers &#x2F; investors do.<p>Or is it just me and my friends?<p>1. http:&#x2F;&#x2F;blog.samaltman.com&#x2F;employee-equity<p>2. http:&#x2F;&#x2F;blog.triplebyte.com&#x2F;fixing-the-inequity-of-startup-equity
======
mikestew
_many employees don 't understand the basics of stock options, hence they
don't value equity as much as employers / investors do_

The fact that I know the basics of stock options is precisely the reason I
don't value equity as much as employers or investors do. I can count on two
fingers the number of companies whose stock options put money in my pocket,
and one of them is Microsoft. I would need many hands to count the number of
ways a company can screw me out of a payday on options.

Point is, for the vast majority of people knowing or not knowing the first
thing about stock options won't make a lick of difference in their bottom
line. What people need to know about options: sign the paperwork when it's
given to you, and on the outside chance the options end up being worth
anything your coworkers will give you some half-assed advice, which is one's
trigger to go talk to a financial advisor.

Otherwise, spend your mental energy on how to increase your 401K contribution.
_That 's_ guaranteed to involve real money that you can benefit from, and you
should bone up on maximizing the potential.

~~~
vmarsy
big companies like Microsoft/Google/etc don't even offer most of their
employees stock options, but instead they offer RSU (Restricted Stocks Units).
Those are easier to understand, there's no exercising decision to be made, you
just need to know your vesting dates. The biggest decision is : Do you want to
sell your stocks before or after the 1 year Long term capital gain wait, but
that decision is common to all stocks.

~~~
emeritus
> The biggest decision is : Do you want to sell your stocks before or after
> the 1 year Long term capital gain wait, but that decision is common to all
> stocks.

The decision is more along the lines of sell now vs. sell later. The LTCG
decision is not nearly as important. The conventional wisdom is just to treat
the RSU as the same as salary by selling immediately upon vesting. Since
you're already employed and paid by them, holding equity in the company you
work for is unnecessary additional risk.

~~~
teej
If you're working in the Bay Area and making average wage for a software
developer, your marginal tax rate is going to be 28%+. If waiting 12 months
means you can lower your tax burden to the long term capital gains rate of
15%, that's a no brainer.

~~~
skorgu
AIUI, RSUs are treated as normal W-2 income when they vest.

~~~
emeritus
Right. Your cost basis is the price at vesting, so it's the same as if you
bought the stock at market with cash for the same price.

~~~
thesimpsons1022
so is the capital gains tax only on the profit from the stock? wouldnt it be
better just to sell instantly and not have so much of your money tied up into
one asset anyway? Sorry if these are basic questions

~~~
skorgu
Yep and yep. Not basic at all, this stuff is only simple once you already know
how it works.

------
planteen
Keep in mind when you say "stock options," it can mean different things. The
first thing that comes to my mind when you say "stock options" is options
trading on publicly traded companies. That is buying and/or selling contracts
of puts and/or calls.

The second is "stock options" at private companies as compensation, which is
what you are referring to. There are many variations on how this works.

I've seen companies, as a bonus, grant what amounts to a call option that
can't traded and only exercised at some point in the future. This may be free
or you might have to pay for it.

I was once given stock as a bonus at a startup, making me an owner. Being an
owner didn't pay me any sort of dividend, but it massively complicated my
income taxes by giving me a K-1 in May (after April 15th). Additionally, I
owed tax on my percentage of ownership, which was really a pain. The other
gotcha but I wasn't allowed to be an owner unless I worked there. So when I
quit, I got cashed out at "fair market value," which was a B.S. number they
made up and gave me a couple thousand dollars. I also got diluted by half
while I was an "owner." The experience made me very leery of ownership. Now I
just look for salary.

~~~
stockoptionsta
You're right, I thought it would be clear from the context that I'm talking
about employee stock options.

It seems like your experience with stock kind of proves my point and reveals
the employee side of this problem — because you didn't fully understand how
all these things work, and no one explained it to you — you had much different
expectations.

And now, instead of incentivizing you to stay, you employer leaves you
frustrated and basically incentivizes you to leave.

~~~
planteen
Yeah, I agree, that is a good way to put it. The K-1s were such a mess... I
think I got 15-20 pages worth of complex tax documents. It was especially
messy since we had a part ownership of another company in a different state. I
don't consider myself a financial dunce either (I can handle W-2s and 1099s
fine). Employee stock purchase & RSU awards at big companies are honestly so
much more straightforward (and fair).

The way I got diluted also made me really take the advice to heart I always
hear on HN - when there is a buyout, the executives will be the ones at the
table arguing for themselves to get paid. But nobody is going to be there for
you.

------
calcsam
No, this is not just a problem you're having.

I was an early engineer at Zenefits and found myself holding stock options
seminars to explain this stuff to the rest of the engineers.

I built optionvalue.io as a calculator to help people answer some basic
questions about what their stock is worth, and I'm building it out more to
answer questions (eg, tax implications and exercise windows).

I've talked to grellas and some other folks with a long, long history dealing
with this stuff. There seems to be some consensus that:

(1) People now are more educated about stock options than they've ever been.

(2) That's a pretty low bar.

~~~
JonFish85
"I was an early engineer at Zenefits and found myself holding stock options
seminars to explain this stuff to the rest of the engineers."

This is a tricky position to be in, considering that in this sort of
situation, you're generally explaining to people a small subset of the ways
that they can get screwed. As much as it might seem nice to see people
spending lots of time trying to figure out what their stock options are worth,
it's not worth the time or effort. By the time you have it figured out, it's
changed. And the future is so unknown. If everything goes great and the
company hits all of its targets, stock options will be worth something. If
there's a bump in the road, you're toast.

~~~
calcsam
The simplest heuristic to use is to assume the company exits at its latest
valuation and do the calculations of what your options would be worth in that
case.

Then, understand when your company could (at soonest) go public, given that
growth rates will slow down at a rate around what comparable companies
exhibit.

Obviously it's still a crapshoot, but this will give you a value for E(x) and
timeframe.

~~~
JonFish85
> assume the company exits at its latest valuation and do the calculations of
> what your options would be worth in that case.

Sure, but even in this case, you have no idea what the provisions of that
round are, most likely. The investors may have asked for better returns
(money-back + participation), there may be lines of credit that have to be
paid back first, there may be loans that are paid off the top. My point is
that most non-executive employees can't get enough information to make an
accurate assumption. It's possible, maybe even likely, that if you exit at
your latest valuation, your stock is worth $0 of actual money when on-paper,
it was worth something significant.

~~~
calcsam
If cash-out is around latest valuation, weird terms will only change the $
amount by <10% or so.

If cash-out is less than the latest valuation, then it starts mattering. At
~40-50% of latest valuation, common shares can end up effectively worthless,
for example Good Technologies.

------
probably_wrong
When it comes to stock options, HN has taught me two things:

1\. They are worthless, as >90% startups fail and you won't be getting
anything in that case.

2\. If they are not worthless, you might not be able to afford paying for them
anyway [1].

Add to that how difficult it is to get a simple, clear answer to the question
"how do I invest my money?". So yes, I wouldn't be surprised if most people
didn't know how stock options work.

[1]
[https://news.ycombinator.com/item?id=10811570](https://news.ycombinator.com/item?id=10811570)

~~~
logfromblammo
Even though anecdotally, I have made some money on option grants, I now see
them as a symptom of cargo-cult management practices.

A few weeks ago, a co-worker asked me for advice about a new (to us) employee
stock purchase plan, and I basically said, "don't shit where you eat."

Messing around with your employer's stock isn't a wonderful idea. Most people
should just be blindly investing x% of their income in a robot-managed index
fund. Fewer people should also be investing in only those businesses they
understand well enough to independently analyze. And if I were in any position
to really analyze the financials of my employer, well, now I'm subject to
insider trading gotchas.

But as a peon-level employee of a company, I am always in the very first group
of people to be lied to whenever anything goes wrong. Everything is fine.
Continue working as usual. Don't worry about office shutdowns and massive
layoffs. I'd always tend to overvalue my employer's stock (or frantically
shotgun resumes to other potential employers).

For the purposes of incentivizing better productivity, the company _could_ be
adding cash bonuses to my paycheck. It's very simple, and great for my morale
(barring memberships in the Jelly-of-the-Month Club, Sparky). My current
company has done it a few times. When you hide the "extra free money" behind a
stock-shuffling scheme, it makes me think you're up to something sneaky.

Also, I don't consider it wise to be heavily invested in the company that is
my primary source of ordinary income.

Think of it this way: would/could you buy the option/stock on the open market
if the company wasn't offering it up in the conference room? I wouldn't. Only
if I were already 100% financially secure otherwise would I ever invest in my
employer directly. And guess what? 100% financially secure means that I can
quit, right now, and not have an employer, freeing me to invest in whatever
damned-fool thing I want.

If you're taking financial advice from random people on the Internet, the only
place you should be investing is robot-managed index funds, and not doing
anything on the side until after you have already maxed out your 401(k)
contributions.

So I basically value options as "this company would rather generate massive
amounts of additional paperwork and hassle than just give me an equivalent
value in cash bonuses."

~~~
smallnamespace
To play devil's advocate though, you _are_ being provided more information
than the external market would be by virtue of being an employee of a company,
and also someone working in the industry, etc.

Having more information at your disposal to evaluate a company means that
option grant is worth more to you than to a random person on the street, which
is why the company will pay you in options. It's better for the company, since
they would rather sell equity to you than to a random person, and it's better
for you, because you are an informed investor and know more than just from
reading balance sheets.

That said, IMO you should basically only work at a startup that you think will
be successful. Given that, you should buy as much equity as you can afford to.
From a financial perspective, working at a startup then not taking equity is
just throwing away a big chunk of informational efficiency. If you just want a
cash paycheck, go work at a big company instead.

~~~
logfromblammo
The only rational reason to work as an _employee_ of a startup is for better
job titles, working conditions, and professional development (from tougher
challenges). Getting paid in lottery tickets is _not_ sound investment
strategy.

You may be a better informed investor if you pick the locks on the filing
cabinets in the C-level offices after the bosses go home, and bug all the
conference rooms, but it is unlikely that will make you better at estimating
the future market value of the company, or at evaluating potential buyout
scenarios. In any case, I never thought that spying on my bosses was a good
idea. I just heard the lies, saw through the BS, and started sending out
resumes. Or I got blindsided and started sending out resumes.

You should only work at a startup that will support the lifestyle you desire.
If you were really critical to the company, you would have a contract and
genuine equity, rather than being "at will" with a promise of options vesting
later. Your primary concern should be "can the company continue to pay me for
my work this month?", and your secondary concern "can they pay me next
month?", and so on. _As an employee_ , you are a replaceable worker-for-hire.

If you want to win big at the startup game, be a co-founder with undilutable
equity. If you want to invest prudently as an employee, you can play the
entire market rather than just one small, potentially volatile company, and a
bigger cash paycheck makes that easier to do.

Employee option grants just seem like a con to make peon-level employees feel
like they have more agency and more emotional connection with their employer
than they actually do. The anecdotal success stories of option grants that
actually pay off are necessary to keep the game going, just as state lotteries
have to blow some money on oversized checks, balloons, and confetti whenever
someone wins the jackpot.

The company's money does not come from a vacuum. No matter what amount of
profit you get from an option grant, the company could have given it to you in
a different, less complicated way. If you exercise 1000 options, and have to
sell 500 of the shares to cover the exercise price, the company could have
just granted you 500 shares directly, and still had 500 left to give out
later. The hand-wavey sort-of-options are 100% there to benefit _the company,
and its owners, and their tax preparer_ , not you.

~~~
smallnamespace
> Getting paid in lottery tickets is _not_ sound investment strategy.

Anecdotally, I know someone personally who was an early employee at multiple
startups at all IPO'd. Some of those IPOs happened years after he had already
left.

He's now a millionaire many times over because he had the acumen to pick
winners, and that's specifically what he was looking for when he made his
choice on where to work. This is obviously not general investment advice,
because you have to have an eye for picking winners. But he certainly
recognized that 1) he had an opportunity to get equity for cheap and 2) he
knew more than the general market and took full advantage of that fact. He
even diversified by working somewhere until his options vested, then moving
on, while not waiting for exit.

My point still holds: if you don't tolerate risk and want to get paid in cash,
_don 't work at a startup_.

Your moralizing and demonizing of startup compensation seems misplaced here --
the #1 biggest reason they pay in equity and options is because they are short
on cash and long on equity. Founders spend a lot of time trying to raise cash
from investors, so turning employees into de facto investors is a cheap and
convenient solution.

~~~
logfromblammo
> _...turning employees into de facto investors is a cheap and convenient
> solution._

And also unethical, in my opinion. If startups treated their investors like
investors, and their employees like employees, they would be able to hire
people without needing to look at _risk tolerance_ as a hiring qualification.
Perhaps coincidentally, young, single people have a much higher risk tolerance
than older people with families. If avoiding the appearance of age
discrimination is at all important

They would even fare better if they refrained from treating employee-investors
as a lower class of investor, that can be diluted to oblivion while the higher
classes of investor still get paid.

Your anecdotal acquaintance sounds like an investor first, who just happened
to be able to get hired as an employee. If you job hop while collecting
discount equity opportunities, and leave before the success of the company is
ultimately determined, how much of that value comes from the work you do,
rather than your evaluation of the company and your co-workers? I presume that
if the initial evaluation was off, he'd scarper for greener pastures in the
middle of the night without waiting for anything to vest?

You can't do that in most of the US. Away from the west coast and the Boston-
to-DC corridor, there may only be one or two startups in town that need tech
employees, if any. If you're in a college town, there may be few dozen, built
around somebody's thesis work. If you don't like the local job scene, you have
to move your entire household somewhere else. The startups follow the
expectations of the investors, and the investors are looking at the coastal
unicorns. I just get sick of all the cargo-culting of SV startup culture,
y'know? It only works there because it's _there_ , and I'm not even sure that
"works" is the right word to use.

------
jartelt
Some employers don't help either. My wife just received an offer from a pretty
well funded company (Series B >$20M) and all they would tell her about the
options package was number of shares and vesting schedule. When she asked to
how many shares are in the company (to calculate her potential ownership %)
she wasn't given an answer. When she asked for a rough estimate of the current
value of those shares if vested, they basically just said "trust us, this is a
good package." That experience reinforced my belief that you should assume the
equity is worth $0 and not factor in the stock grant when evaluating an offer
(unless you are at the company super early).

------
moonka
There are 2 things which people are very financially illiterate about these
days. Stock Options, and how income taxes work. You've covered the former,
with the later I've seen confusion with how progressive tax brackets work, how
deductions work, etc. All you can do is to make sure you understand it, and be
careful of the advice you get from others.

~~~
tom_b
I was taken aback when I realized just how few people understand the United
States progressive tax system and how income tax brackets work. That
misunderstanding is so pervasive (in my experience) that I can't even imagine
people having a general understanding of how deductions work at all.

------
neom
There seems to be a general rule of thumb among investors and founders I've
talked to that the vast majority of options won't vest or will go unpurchased,
and as a result it seems many have tried to keep things as opaque as they can.
As a CEO and Founder I find this incredibly troubling and I believe it's
contributing to why so few folks value sweat equity anymore. I've written a
few thoughts on this before for anyone interested:
[https://medium.com/busyness-time/part-i-how-were-building-
st...](https://medium.com/busyness-time/part-i-how-were-building-
stae-6c4beab9f771#.vk21sy795)

------
chimeracoder
To add to all of this, most people really don't understand the tax
implications of options (whether they're ISOs, NSOs, or not options at all but
instead are RSUs).

It's hard to explain those without looking at a person's individual situation
(the company, the initial value, the current valuation, and the person's tax
bracket), which is why there's not a lot of talk about them. But the taxation
can very easily be the tipping point between "definitely worth it to exercise"
and "definitely _not_ worth it to exercise", so it's really important to
understand them.

~~~
AnimalMuppet
True. But it's also important to not view taxes as _the thing_ in deciding
what to do.

I had options that I could exercise (at a big, publicly-traded company, so I
didn't have the startup, no-liquidity issues to worry about). My options were
worth quite a bit of money. I had already exercised enough to put me at the
edge of the next incremental tax bracket. On about December 15, I was looking
at it, and thought it was a _really_ tempting price, but... taxes. I decided
to wait for January.

Three days later, our company made an offer on another company. The stock
market didn't like it. Our stock went down. I lost more than the taxes would
have been.

Moral: When money is growing on trees, _pick it_.

Disclaimer: That isn't always good advice. If the price had continued to go
up, it would have been really bad advice. But too much focus on taxes is also
bad advice.

~~~
chimeracoder
> Moral: When money is growing on trees, pick it.

The problem is that taxes can quite literally cause you to lose money.

For example, exercising options (at a gain) is a taxable event _whether or
not_ the options are actually liquid. In fact, if you're an early employee and
your startup has been very successful, you could literally be looking at a tax
liability of tens or even hundreds of thousands of dollars, even if your
strike price is only a couple thousand dollars. (That would be the case if you
were a very early employee and the company was very successful - ie, the exact
situation we think of as the "upside").

If you leave the company (voluntarily or not), you have 90 days to decide
whether or not to exercise those options and pay the taxes immediately, even
though you won't get to actually sell the underlying shares until a liquidity
event happens. There's no guarantee that the liquidity event will give you the
same (or higher) price, and even if those options tank, you don't get your
taxes back.

So, if those options subsequently tank to "only" double what they were worth
when you joined the company as employee #1, you might think "hey, that's great
- I made a 200% return on my equity". Except, you didn't - because the taxable
amount was 100 times that - so you're deeply in the red.

(These numbers are all made up, but the orders of magnitude I'm talking about
are quite realistic under the parameters I described.)

------
danpalmer
We give basic details in our offer letters, are open about all the details,
have an employee focused scheme (i.e. 10-year exercise window), and when we do
the grant paperwork for new employees (we do it in batches because of all the
government stuff involved, we're in the UK), we give those employees a talk on
how it all works, set expectations, etc.

I think we're fairly good at this, and most people I've spoken to in the
company know enough about it to not hit any of the issues above - i.e. their
vesting schedule, strike price, exercise window, etc.

------
Jugurtha
Pardon my ignorance, but I did a search on this thread for the word "lawyer"
and there was no match.

My stupid question: Doesn't San Francisco have good lawyers who are
specialized in this stuff? I mean, a lawyer who's getting paid by you, not by
the company.

I'm not advocating complete ignorance of the matter, but there are people who
know the ins and outs of this and are aware of most of the missteps through
which they can guide you.

My point is that having a lawyer also serves as a deterrent and sends a signal
you're not to be hustled. It also tells you about the people you're dealing
with: the company not liking it should set off your spidey sense.

I mean, the first thing someone who's hustling would do is to be offended
you're taking precautions because it hurt his feelings that you don't "trust
him". It's not that you don't trust him.

These things are just like prenups. People's feeling about them stems from the
assumption that at the time they're activated, they'd be feeling the same for
each other as they are now, which is not true. By the time a prenup is
activated, people usually hate each other, and a prenup serves to protect you
from the future version of them, and them from the future version of you. The
versions that hate each other. There's a reason billionaires have the cheapest
divorces, and artists/athletes have the most expensive ones.

------
praneshp
Add me to your example list, I knew nothing till recently (now I know a non-
zero amount, still close to zero). I was talking to Docker earlier this year,
and really appreciated the recruiter spending about 30 minutes (and told me
several times to do additional research) just explaining how options work.

On another note, this recruiter at Docker was hands down the best recruiter
I've worked with. 45 minute initial phone conversation to explain the product
and roadmap before even scheduling the first phone screen.

------
metaphorm
let me augment this with a real world example of why knowing about stock
options is important for those cases where you need to understand why _not_ to
exercise.

recently I left a company after 3 years, with a decent chunk of options in my
comp. the company is not publicly traded, is still deep in the red, is still
trying to raise more rounds of venture capital (thus increasing dilution), and
has no exit in sight for the foreseeable future.

My cost to exercise my options at their strike price would have been just over
$8000 bucks, and then there would be additional taxes on top of that for
whatever the face value of the purchased shares would be. These are illiquid
assets, mind you, so the face value would be taxed, but there were no buyers,
so it's just an outright loss.

I left those options unexercised. I certainly didn't feel like donating $8000
bucks to my former boss' checking account and then paying extra taxes on it
all for the privilege of sitting on illiquid assets for an indeterminate
number of years (with a high probability of the stock never being worth
anything at all).

Understanding the structure and fees and taxes of the options is very
important specifically so you don't go and throw good money after bad in
situations like this.

------
JamesVI
[https://github.com/jlevy/og-equity-compensation](https://github.com/jlevy/og-
equity-compensation)

~~~
dshuang
I know it may seem like a long read, but I highly recommend taking the time to
look the document over if you have/will have stock options from your company.
The part about early exercising covers a calculated risk that can potentially
save you thousands if not hundreds of thousands in taxes if your company does
well.

------
ChuckMcM
In answer to your question, the answer is "Yes, many if not a majority, of
tech employees are clueless about stock options." I've thought about the
reasons for that, and mostly they are around actual use.

Every startup, and nearly every company, that I've worked at had "the talk"
about stock options, they went over ISO, NSO, and RSO. They talk about taxes
and gains and tax law. They talk about vesting and cliffs and blackouts and
strike prices. They dump a ton of data on your head.

And the problem is they are dumping it onto people who have absolutely no way
to connect what they are saying to their own personal existence, and so they
forget all of it. It is human nature, a brain defense, what have you that when
you are given information that you only barely understand and has no immediate
relevance to your situation, you promptly flush it out of your brain.

That all changes once the options are actually worth money and can be
exercised and sold.

Once options have value they become _relevant_ and generally a co-worker or
someone more clued in will do something like buy a new car "using their
options" or even just a new bike or TV. And that will trigger the questions,
"Hey I think I have options maybe I should figure out if they are worth
money." Sometimes this happens when you are being laid off or fired and you
are given 90 days to exercise your options or lose them.

At that time, the information you develop about options will stick in your
head because you needed it to accomplish some task, which ideally rewarded you
with some extra cash that you didn't know you had access to. Later in the year
this action will trigger you learning a lot more about the tax code than you
wanted to know :-).

------
pawelwentpawel
Can anybody share some info on how taking stock options in a US company
differs from a UK one? A lot of the reading applies to US market. I'm
wondering if any of the advice is not transferrable.

Also, I believe that this is a good read - [https://blog.alexmaccaw.com/an-
engineers-guide-to-stock-opti...](https://blog.alexmaccaw.com/an-engineers-
guide-to-stock-options)

~~~
djs55
In the past I worked for a UK company from the UK which was owned by a US
parent, where employees in the UK were granted options in the US company under
the HMRC Enterprise Management Incentives (EMI) scheme:
[https://www.gov.uk/tax-employee-share-schemes/enterprise-
man...](https://www.gov.uk/tax-employee-share-schemes/enterprise-management-
incentives-emis) . I think without the scheme if I had exercised an option
(whether to hold onto the share or to sell immediately) then I would have owed
income tax on the difference between the strike price and the current value
i.e. the discount my employer effectively gave me. I think I would have owed
the tax even if I was forbidden to sell the stock (e.g. if the company had
stayed private). With EMI there was no income tax on exercise and I only owed
capital gains tax when I eventually sold the stock.

------
kafkaesq
_I think there might be an even bigger problem — many employees don 't
understand the basics of stock options, hence they don't value equity as much
as employers / investors do._

That, and for the fact that their holdings percentage-wise are, in the vast
majority of cases, typically negligible. Or even if they might potentially, in
theory, be worth something, almost no one has time to investigate the
company's business fundamentals to a sufficient degree to determine what
chance they actually have of panning out, and hence, whether it's even
remotely worth the risk.

Anyway, it's definitely not just you, it's a lot of people. The HN search
engine (hn.algolia.com) is really quite good; in addition to the links others
will be posting here, try some targeted keyword searches, and to read as many
articles as you can on the subject. While they may not be all tailored to your
specific situation, gradually the general subject will become less opaque.

------
hkmurakami
I worked at a pre IPO company a few years ago and it was an exception to find
people who understood how things worked. Hell, even I missed some details back
then, and it was only after I put in hours of research that I developed a
decent grasp of the tradeoffs and deadlines. I still don't really know how to
do AMT though.

There are a couple of startups that make it a point to early through what
their equity means with new hires. But this puts power into the hands of
employers since some will be well meaning and some will mislead.

It's unfortunate that we don't have a "yo-yo" knowledge with a easy to
remember URL we can point to. Plenty of great articles out there, including by
prominent VCs. But it requires a lot of digging.

~~~
JonFish85
>It's unfortunate that we don't have a "yo-yo" knowledge with a easy to
remember URL we can point to. Plenty of great articles out there, including by
prominent VCs. But it requires a lot of digging.

This seems impossible; stock options just aren't simple. There is no way for
most employees to get enough information in a reasonable amount of time to
make an accurate estimate of their stock options' worth.

Employees probably aren't privy to bank loan terms (e.g. converted to
preferred shares in certain conditions, over time). They aren't privy to the
preferred share terms (past, current or future). In the case that an employee
has to purchase their shares prior to a liquidity event, they have no way to
know what the future holds in terms of dilution.

It's an exercise in futility. Even if you make logical guesses, guesses are
worth very little. If the economy tanks, and suddenly there's a cash crunch,
your best guess may not apply. Even if things go WELL (but not smashingly
well), you can get screwed by weird preference issues, dilutions or other
shenanigans that weren't public knowledge that kick in.

An option to buy stock puts you last in line for money. If everyone else gets
paid (vendors, banks, VCs and founders), you'll get a share of what's left
(after a lock-up period). There's no good way to know what that's worth.

------
Mz
I will suggest it is probably not just you and your friends. I am more
financially savvy than most people I meet and I really don't know much at all
about stock options. I imagine I would try to find out if it were being
offered as part of my compensation package, but I think stock options are a
fairly sophisticated financial concept and most people will not really
understand them.

I say this as someone who worked in insurance, which is a financial services
industry subject to federal financial regulations, such as Gramm-Leach-Bliley.
So, it is not just my opinion that I know more about finance than average, I
also have relevant training. And I only have a vague, hand-wavy idea of what
you are talking about.

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hesdeadjim
_it wouldn 't be that expensive to buy them_

I hope you are taking into consideration the capital gains tax when it comes
to the difference between strike price and the current fair market value of
the stock. If a company is growing fast or takes on money, this can change
_alot_ in even a year.

The IRS doesn't care that you may not be able to actually recognize that gain
because you cannot actually sell the stock, it's considered a gain nonetheless
and you will owe tax on it.

I have been in a situation where the FMV of my stock changed by 10x in the
span of a year and by the time I could have actually bought any stock the tax
bill would have bankrupted me.

~~~
stockoptionsta
You're talking about AMT, right?

You're right, there are situations when people can't exercise their options
simply because of the high tax bill.

In this particular case, with the company I'm talking about I am fairly
certain (simply because I'm doing the same calculations for myself) that if he
exercised his options it would not trigger AMT.

~~~
hesdeadjim
Only ISO options trigger AMT. NQSO triggers regular income tax on exercise for
spread between strike price and FMV.

As far as I'm aware almost option grants are NQSO because ISOs have a bunch of
other limitations that make them annoying or untenable depending on the grant
size.

------
pfarnsworth
This has always been the case. I've been in Silicon Valley for ~20 years, and
even back during the dotcom days, most employees didn't know much about
stocks, let alone stock options. Given the fact that it's such an important
part of Silicon Valley life, you would think that people would educate
themselves more, but it hasn't happened in 20+ years. It's just human nature,
and some people don't care, or think it's too complicated and ignore it.

~~~
marssaxman
One could also see this as a large-scale demonstration that employees, in
general, disagree with your assertion that stock is an important value of
Silicon Valley life. It's important to founders/CXX types and venture
capitalists, sure, but so far as I can see it is rarely useful for everyday
workers to pay attention to their stock packages, because they are usually
worthless, and opportunities to make a decision that has a meaningful impact
on their value are very rare.

------
module0000
This bears posting, it explains _actual stock options_ , not what
employees/employers bandy about as "stock options".

[http://www.investopedia.com/exam-guide/cfa-
level-1/derivativ...](http://www.investopedia.com/exam-guide/cfa-
level-1/derivatives/options-calls-puts.asp)

~~~
cglouch
I understand the basics of actual stock options, but get confused by employee
stock options. What would you say is the difference?

~~~
tamcap
You have 3 significant "problems" with employee stock options:

1) need to exercise them upon leaving: when you leave a company, a company
might force you to exercise the stock option within 90 days of leaving (and
this takes cold hard cash too!). This gives you stock in the company, BUT:

2) taxes: you have to pay taxes on "fair market value" of this income

3) illiquidity: you can't sell it (now, and potentially ever)

There are multiple blog posts dedicated to this problem, if you want to read
more and at least try to understand all the caveats and the gotchas. I am
still learning those, so take this advice with a grain of salt.

------
mabbo
Can someone point me to a good guide to stock options?

I've been with a large company since graduation, with Restricted Stock Units
granted to me, vesting over time as a nice bonus now and then. But in January,
I start with a start-up, and I'm going to learn the reality of how stock
options work first-hand. I'd like to know how to make sure I do the best I can
with them.

------
id122015
I think there is a difference between investing in stocks and receiving
equity.

Since investing in stocks is so troublesome, no way to beat the market, why
even bother to learn about it? And when it happen, rarely to have the chance
to get equity, I think its normal.

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xutopia
On paper I'm worth enough to pay off my mortgage. In reality I'm most likely
never going to see a liquidity event for the startup from which I bought
options.

The only time stock was worth something tangible for me was when I was a
bootstrapped founder.

------
bsvalley
No more Stock options in large companies, they offer RSU's... meaning you have
to work for a startup In order to get Stock options. If you join a startup
without knowing about stocks then you should start a landscaping business
instead...

