
Is the Valley Falling out of Love with Options? - transburgh
http://techcrunch.com/2010/10/14/is-the-valley-falling-out-of-love-with-options/
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danielnicollet
Back in the days I worked at Netscape and Infoseek, two startups where early
employees were raking millions in vested options sales. I just started working
then and I got in a little too late into the game. My options never made me a
dime there or at any of the 4 or 5 other companies that gave me options.

So to the great disappointment of recruiters I started negotiating
compensation at my next jobs by always asking to trade some of the options in
the package for more cold hard salary cash. I wouldn't say no to options but
unless you join a startup very early, they usually are a very risky bet to
make up for, say, a pay cut from your previous position. It's served me well.
I am not Cresus and I don't drive an expensive sports car but I do have enough
in the bank for a few rainy days and I feel safe to be able to take the risks
I now take as an entrepreneur myself.

So never forget, short of being lucky, only business owners, stockholders (not
option holders) are really poised to make the big bucks if a company makes it
to the top. As an employee your options were always planned by the company CFO
and its lawyers to be sufficient in numbers to just bring you the equivalent
of a nice fat bonus if the company fares well. Not more. If you are an
employee, freelancer, or contractor, try to get paid for what you do. Don't
say no to options but make sure you don't rely on them to heavily.

------
grellas
The focus of this piece is on VC-funded startups (and larger companies) in the
Valley. In the earliest stage startups with which I work, it is overwhelmingly
the norm for founders and others to work for equity and often for equity
alone. Such early-stage equity can be valuable if the company succeeds and is
to be sharply distinguished from the "one-tenth of one percent" option grants
that come later, after funding.

So, yes, at the early stages, the Valley remains enamored with "options" and
perhaps more so than ever in the 25+ years I have been doing startups. Beyond
the early stage, the lack of an IPO market has taken the luster away from the
equity grants that used to excite so many in Silicon Valley and the article
makes a good point that a noticeable change has occurred at that level.

~~~
guelo
I can see how VCs and lawyers can make money from equity consistently by
spreading their bets around but the reality for startup workers is very few
people in the whole valley strike it big in a good year. An event like the
creation of youtube or faceebok happens exceedingly rarely. It's a lottery, a
ticket isn't worth very much.

~~~
wlievens
Genuine question: does that depend on what "striking it big" means? If you
consider making, say, an amount that's a <10 multiple of what you would have
made with an ordinary job in your league, does that consistute "striking it
big"? It would for me, but do you include that measure?

~~~
aaronblohowiak
No, the risk-adjusted value of <10x return is worse.

~~~
arethuza
That's the question though - what is the process for calculating the net
present value of startup options given the risks involved.

I would be nice to have a online tool that did all of these calculations for
you - e.g. given estimates of market size, distribution of the sizes of exits
etc.

------
gamble
So startup employees are wising up to the fact that options won't make them
rich, and they're demanding market salaries? I see that as a good thing.

~~~
staunch
It'd be better if startups responded by giving out more equity to employees.

~~~
gamble
There's a pretty hard limit to how many people can own 10%+ of a company. With
the average exit around $12 million these days, a smaller share than that
isn't going to amount to much after dilution, preferences, and taxes.

~~~
staunch
A very quick check on CrunchBase of the (155) acquisitions (with known prices)
since Jan 09 shows: average price $215M median price $80M. I think the average
option pool is larger than 10% as well.

In most cases there's plenty of money to go around when a company is
successful. At least enough that the first dozen employees should make far
more than they could have at a regular job.

~~~
arethuza
Say the option pool is worth $21.5 million for a $215 million exit (it'll
presumably be worth less than this but assume that cancels out that the pool
may be larger than 10%).

Assume that half the pool is given to the first ten employees - so that's
about $1 million each.

I know people in the software field who have "regular jobs" and earn ~$200K
and have been for many years.

So I would perhaps disagree with the assertion that being an employee in a
successful startup means that you will make "far more" than is possible in a
"regular job".

Now this isn't to say that the startup would be a much more interesting
experience - but in purely financial terms the rewards of a high earning
"regular job" are comparable (and that is ignoring the risk profile of
startups).

~~~
metageek
_I know people in the software field who have "regular jobs" and earn ~$200K
and have been for many years._

Wow. Where, and in what branch of the industry?

~~~
arethuza
Hint: it involves suits and traveling a lot.

~~~
metageek
Oh. Right.

Twitch.

------
flomo
And meanwhile every company outside of the Valley/Startup realm got sick of
their employees leaving and developed their own bogus options package, even if
they had zero intention of ever selling ownership. When your local urinal cake
manufacturer is offering you options on a thousand shares, is there any wonder
why the average candidate isn't interested?

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rms
>But lately, it seems like the Valley is falling out of love with options.
That is weird, because people keep saying we’re in an early stage funding
bubble.

It's not weird, extra money for employees is an expected consequence of
continued competitive overfunding for early stage companies.

------
ohyes
"But what about the employees? Instead many are finding themselves churning
through a series of companies built to flip, never making much money
themselves and just jumping between treadmills."

This sounds remarkably like what happened to my dad in the late 80s/early 90s.
VCs, founders make money, employees get fired and the company gets moved to
(wherever-corporate-office). This is not a new trend; to make money in an
acquisition, you must be one of the people with a large stake in the company.
If you are Joe Programmer, that is probably not you... so ask for a salary.

It may be true that the lottery/pigeon dance effect is kind of wearing off, as
there hasn't been a huge IPO (like Google's) in a while. This would make
normal employees less likely to bank on a huge IPO.

------
acgourley
Are there any practical and tested ways to tie company success to employee
compensation?

Could tie a bonus to a metric or give out a percent of revenues... but there
is a much bigger tax burden there.

~~~
lsc
I'm told "profit sharing" is the answer, but I haven't really done enough
research, yet, to speak intelligently on the matter.

------
terra_t
Quote: "It’s a bubble based on too much early stage money throwing itself at
too few good ideas."

How bad is it going to have to get before investors discover the other 48
states in the U.S.?

~~~
hga
Errr, don't you mean 49 states?

And in reply, I'd ask "How long will it be before any of the other 49 states
make non-competes unenforceable and forbid companies from laying claim to what
you do with your own ideas on your own time and with your own resources?"

~~~
terra_t
There's a scene in N.Y.C. too. As an upstater I'm almost tempted to say that
we ought to just scrap all our laws in New York and start all over again.

~~~
hga
And there's a scene in the Boston area as well, one that I watched and
participated in from 1979 to 1991, which coincides with its decline and fall.
I'm not watching it closely, but I've been told by reliable sources (plus read
the usual stuff on HN) that there's been a significant revival, but as far as
I can tell neither location can hold a candle to Silicon Valley.

I've been trying to figure out why for some time ( _strong_ anti-
recommendation: _Regional Advantage_ , which gets way too many things dead
wrong about the Boston scene (all too often in an "I was there" way...) and
feels like a book that cites evidence to prove its thesis without paying any
attention to counter-arguments, interpretations or facts).

I can't help but notice that what I've cited is the only unique thing about SV
(well, there's earthquakes, but I don't think any non-researcher move there
for them), how it had to help the true silicon genesis part of its history
(Shockley -> Fairchild -> many companies) and how I've seen the chilling
effect that non-competes have on potential startups in the Boston and D.C.
areas.

