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TLDR Stock Options (tldroptions.io)
492 points by vinnyglennon on March 4, 2019 | hide | past | favorite | 201 comments

Easiest strategy is to just assume the options are worthless and base your comp assessment on that. Doing otherwise sets people up to get burned badly. Furthermore the risk reward for all but the founders is typically significantly lopsided.

If you can accept the risk great, but again assume you’ll never see a penny from options or far far less than you might think (as the calculator highlights nicely).

If things go well you’ll get a nice bonus. Not life changing for the vast majority of people, but a nice financial surprise.

The mistake most people make is accepting far too little cash comp on the grounds that their options may be worth something some day. When they turn out not to be they get burned twice. First on not getting that money period, and second on not having higher cash comp all along which means they also missed out on compound savings or investment with that money.

Net net see options for what they are in most companies—-a way to “pay” people when the company can’t really afford to pay people.

That’s not a rational way to evaluate compensation. Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million? Obviously the latter, even if it has a large chance of being worthless. The not-stupid way of assessing a compensation package would be to conservatively estimate the expected value of the options and apply a substantial risk penalty in your objective function, not to round all volatile compensation down to zero.

That’s not a rational way to evaluate compensation. Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?

A "reasonable person", or a more commonly used "rational agent", is an idealized notion that doesn't actually exist in a real world. Actual humans are not expected-utility-maximizers. See e.g.[1].

Also importantly, the scenario (evaluating the value of option-based compensation) is not like "guaranteed $1000 or a 10% chance of a $1 million" scenario you're describing. Rather, it's like "pay $50-100k/year in opportunity cost for entry to the lottery in which you can win some unknown prize that's almost surely below $5M, at even more unknown probability". Even an expected-utility-maximizer, a "reasonable person", cannot really make a reasonable calculation of the expected utility.

[1] - https://sci-hub.tw/https://www.sciencedirect.com/science/art...

Just because people don't tend to do it doesn't mean you as an individual are incapable of doing it. His advise is the rational approach, and people on Hacker News tend to be smart enough to understand how to estimate probability distributions and how to compute expected value off of these estimates. With tools like this at their disposal, they are more than capable of applying their risk preferences and making rational choices.

His advise is only smart if the salary you'd be giving up is unnecessary and you consider it a luxury to lock into an investment you may lose.

In fact, that's exactly what it is, whenever you're taking stock options into account for compensation be sure to consider how big of an investment (in loss of salary) it is and whether the potential payout and the risk seem logical. If you think that making that big of an investment is too risky for your well being (even if, in the average, it'd pay out better over a lot of plays) then don't take it.

We exist for a limited amount of time and large games of chance like this (even if they have an expected return) are not irrational to decline.

I cannot think of a single employed person that I know for whom turning down a $1000 1000:1 payoff for 10:1 odds is rational. Maybe a recovering gambling addict who would be triggered by this action, but that's about it.

Turning down an offer can be perfectly rational. I do not know why I am being accused of advocating for always taking options. All I'm claiming is that they aren't always worth zero, and assuming such is an irrational decision. And it's an entirely avoidable irrational decision that can be addressed by considering your own risk preferences, foregone salary, tax consequences, expected company outcomes, professional development, &c.

There is so much to factor in, too. I'm pretty happy with options if my base salary gives me a decent quality of life, I certainly wouldn't work for less on a gamble, considering the failure rate of startups. Never mind the fact that you are making a secondary investment in the same place you work, so you are doing worse than putting your eggs in one basket.

It's a nice bonus that _might_ pay something out. It's not a replacement for a proper salary.

That said, I can appreciate the desire to get skin in the game. Would love to see research on how necessary that is, though.

I think you may still be missing the point. What is the harm in completely ignoring the stock options and negotiating strictly on base pay. I think stock options for the most part should be considered like free snacks in the workplace. "Nice-to-have", they taste better because they're free, and if all the sudden they get yanked you didn't stake any livelihood or change of circumstance for it. If they end up becoming something great - maybe you get a new espresso maker, extra bathrooms at work, or an office instead of an open desk. Rarely will stock options change your life that you shouldn't plan on them but a nice perk if they do as they are very infrequently life-changing by any measure.

> His advise is only smart if the salary you'd be giving up is unnecessary and you consider it a luxury to lock into an investment you may lose.

Actually, even then, i'd just take the cash comp instead and invest it into FAANG options. You can do that on almost any brokerage.

It isn't really a matter of being "smart". Even investors, who have detailed financial models, decades of data for comparables, get preferences and often board representation to protect their interests, aren't confidently going to be able to provide a probable value of the investment. It is certainly unreasonable to expect employees, who get no board representation and thus can be screwed over in any scenario short of an IPO, to do better than people who have this as their entire job.

That's precisely right. Calculating EV of a lottery ticket is easy, because you know the odds exactly. The idea that a "smart person" can do the same for an early-stage startup that's offering options to employees simply beggars belief.

Estimating the value at zero is no different. I don't know if options from my old job will ever be liquid and worth anything of note, but I wouldn't sell them for a penny.

> people on Hacker News tend to be smart enough to understand how to estimate probability distributions and how to compute expected value off of these estimate

That's a strange assumption to make. If anything, I'd argue that people who think they are somehow smarter than others because they're an engineer/programmer/whatever are more likely to put too much faith in their intelligence and make financial mistakes.

> His advise is the rational approach

Being smart is orthogonal to being rational.

>> more than capable of applying their risk preferences and making rational choices

Only if you know 1. The Cap Table 2. Your founders' and boards' predilections for exits 3. Potential future rounds 4. Where the market will go

When you don't know these, you can still create a probability distribution, but price will likely be zero because the inputs have to have massive brackets for potential values.

Another input I would add to your list is knowing what the day to day culture of the company is. If it's a total shit show and many many startups are, you might not even be able to last there a year which is the normal cliff before your options start vesting.

>"Only if you know 1 The Cap Table

Are candidates or regular employees ever privy to the cap table? I have asked about it many times when a recruiter has tried to sell me on the joys of options in lieu of pay. Even after accepting a job I have routinely been rebuffed on getting a response to inquiries about the cap table.

Early stage key hires are; after things get rolling though probably not so much.

Don't forget liquidation preferences.

What is the probability distribution that startup X will succeed? I'm genuinely asking, I'd love to know how would you approach estimating something like that?

Building this I used information from CB Insights, which looks at companies that receive VC funding by cohort. Their most recent report covers companies that raised seed rounds in 2008-2010: https://www.cbinsights.com/research/venture-capital-funnel-2...

This isn't even an abstract question about utility. What esoterica outlined was finance 101 (change "compensation" for ROI), which millions of people use in their day to day lives to make investment decisions. And stock options are an investment just like any other.

In my limited experience, stock options have significant differences from other typical investments in the following ways: 1) You can be prevented from effectively selling stock options prior to a liquidity event 2) Partly due to 1) , stock options are much harder to price than other investments that _could_ be bought and sold freely. 3) Due to the additional requirements as a byproduct of vesting, it is often impossible to pursue options at multiple similar organizations simultaneously. 4) Due to the caveats of even being a shareholder in a company, sometimes there are complications and risks. This is why there is a significant multi-page document to sign when exercising options typically.

What is a "typical" investment? There are literally thousands of different assets one can invest in, all of which contain varying degrees of risk profiles. What you outlined was the risk profile of options, which you would use to determine ROI.

Your example dramatically overstates the upside, understates the risk, and ignores a lot of the difficult problems in evaluating options - there are large uncertainties in valuation and very limited information, there is a negligible possibility of fraud or misrepresentation, the person evaluating might have good reason to choose less risk (e.g. starting from 0 savings greatly increases the value of stable predictable income), there is additional risk in having salary and investment tied to the same company, etc.

Let's change it to make it slightly more realistic - on offer are options which have a 1% (at best) chance of being worth 1 million in 10 years or a guaranteed higher salary over 10 years worth 300k more. It's not quite so clear cut in that case, and depends greatly on the circumstances and judgement of the person making that call with very limited information.

I think it's more reasonable to assume they are worth 0, as the majority of options end up at 0, and the probability of making more through options than salary is nowhere near that in your example.

I don't think your example depends on the person's circunstances, there is a very clear cut rational decision there. Even not taking the utility of money into account, nor the fact that you need to discount that million as it only arrives in 10 years, you are still only making 10k on average on that gamble. Taking the 300k is the rational decision.

The numbers I've seen are more like: give up anywhere from $30k to $130k per year for a chance at an equity payout. The only way that works out is if $num_years_worked * $discount_salary < $potential_payout * $chance_of_payout. So if you are getting shorted $50k/yr and you spend 8 years helping build the company, you need a payout that is better than $400k with 100% chance of success. Something like 90% of companies utterly fail. I'm sure some VC math can be applied here. But the VC gets to roll the dice a lot. You get to role the dice once every few years as you change jobs after getting some vesting going on. There is a reason why it is called the start up lotto. You can pad the chances by going with founders with a track record, or going for a company that is nearing an exit, but it is all still the start up lotto.

I think the difference is that equity has the potential (even if it’s a small chance) to create a major qualitative change in your life. If you stand to make a million over 8 years anyway, another 400k is nice but won’t change your life that much. Maybe you buy a slightly bigger house or you retire a few years earlier. But a homerun outcome in a startup can mean complete financial freedom and never needing to work again. It’s the long tail, sure, but given that there are other benefits to a startup (learning more, more influence, etc.), a lot of people prefer that long shot to the certainty of being marginally wealthier.

I also don’t think it’s really comparable to the lottery. It’s like playing the lottery if you could easily afford to have a 1-5% chance of winning... in which case it wouldn’t be such a bad idea to play for many people.

Different strokes for different folks and all that, but I do think it’s wrong to imply that it’s always wrong to take a calculated risk like this when given the opportunity.

> I also don’t think it’s really comparable to the lottery. It’s like playing the lottery if you could easily afford to have a 1-5% chance of winning... in which case it wouldn’t be such a bad idea to play for many people.

Really? Roulette has odds of 37:1 for a single number which is about a 2.7% chance. Would you take $300k that you could otherwise earn in salary and place it all on a single number? The payout would be 10.5 million which far more than anyone I know expects to get from their stock options even with a pretty good outcome. You'd still be insane to walk into a casino in Vegas and make that bet.

I would, assuming that if I lost:

- I could pay off the 300k over the next 8 years.

- The loss would be tax-deductible.

- I could somehow know for sure I'd have a job where I'd still net at least 120k per year during that period (after the loss).

- It would somehow grant me multiple years-worth of extremely valuable skills and experience, new friends and connections, and the chance to be intellectually challenged and satisfied.

I think that would definitely be the most popular roulette wheel in Vegas!

> Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?

For a lot of good software engineers, it's more like:

Option A: $1.5mm (5 years total comp at FANG)

Option B: $0.5mm (5 years startup salary) + 0-10% chance of $0-20mm.

Given all the unknowns in B, I'd definitely take A.

I'm on the Option B track right now :) And there are a lot of unknowns. But I would say that I'm "learning" more at B then I would at A.

I can't speak for Facebook, Google, but I did work at Amazon for about 5 years (and take this with a grain of salt because this was 2003 through 2008 on the ops side (supply chain specifically)). And you learn the Amazon way of building software. You use Amazon tools, frameworks, and style. And while some of that knowledge is definitely applicable to other jobs I've held, most of it is not. It is a little bit more now because of AWS (similarity between internal tools and AWS offerings).

So yeah...with Option B you might not hit the lottery. But the skills I learned from multiple attempts at Option B are more applicable in my opinion. And that's worth something.

>So yeah...with Option B you might not hit the lottery. But the skills I learned from multiple attempts at Option B are more applicable in my opinion. And that's worth something.

Obviously speaking from my own experience, but this hits the nail on the head. The things I learned at startups were parlayed into jobs at the bigger companies later in life.

Also, on the original topic. I've been a part of three startups. One with trivial equity, one with options worth about 0.1% of the company, and finally one with options worth 1% of the company.

The second company is still going and is a lifestyle business, so those options were basically worthless since the owner may not sell for many, many years. The first and third companies were acquired, but at values that made the options worthless, so I got a long term capital loss for the first company and nothing for the third.

For the third, I was an executive, so I got a stock/cash package from the acquiring company for (very) low seven figures, but the stock itself was worth nothing.

So, I'm 3 for 3 on "successful" startups, but 0 for 3 on actually cashing in on any equity.

I would be really curious to get an answer on these, for the company you had the executive role:

- Was it basically an acqui-hire?

- How much was it sold for?

- How much was raised totally?

- How much was the cumulative compensation package above the stock price given to key employees such as yourself?


Yeah. Either one is a good salary. At some point enough is enough. Take the job that you will enjoy. Even as I say that, I know that for some people job == money, so if making the most money is "fun" then that's totally OK.

"I took the one [road] less travelled by, and that has made all the difference" ;-) It doesn't matter which way you go, years from now you'll end up thinking the decision was an important one.

I disagree. Either one is a good salary if and only if you are willing and able to work for the rest of your life. I would spend 15 years at a FAANG and retire early with a comfortable amount of money.

> Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?

When they have monthly expenses, or understand the power of compounding interest? A reasonable person would take the guaranteed.


Even if you make your example less hyperbolic (for an employee):

$100k vs $90k + a 5% chance of making $50k in 5 years.

Where, the higher and guaranteed salary also has 3% annual COLA (or further freedom to job switch) raises, has a 4% 401k match; The wise person would take the guaranteed income.

If we were talking about horse racing, I’d agree with you, as you can evaluate the odds of an outcome.

The reality is that in business as an employee you’re ability to project the odds is limited at best. You simply don’t have the information to make that calculation.

Obviously there’s a spectrum of risk, which is why most people don’t work for minimum wage plus options. But it’s pretty clear that in a world that hasn’t seen a tech recession in a long time, employees without the perspective of living through 2000 may not appreciate what can happen, and will happen again.

If a rational person was given this choice 100 times it would be rational to always chose 10% chance of $1 million, but is having 10k cash in your pocket 10 times as valuable as having 1k in your pocket when compared to having 0 in your pocket?

Money has diminishing returns and when you're potentially going to be below water when it comes to mortgage, food, utility, even the occasional vacation for sanity - then a smaller guaranteed sum can be more valuable than a larger expected sum.

A reasonable person would take the lottery ticket and immediately offer to sell it back to the issuer--or to a large insurer or casino--for a guaranteed $50k (negotiable) before the drawing occurs.

However, some options grants are not transferable in that fashion.

The reasonable person can then calculate the range of payouts for each option as [$1k..$1k], ev $1k, for the cash option, and [$0..$1M], ev $100k, for the gambling option. Not all gamblers only use expected value as their only metric. Some people also use the minimum return. Those people would take the guaranteed $1k, in cash, and walk.

Even if the gambling option had a minimum payout of $1000, thus making it the strictly superior option on paper, just by those metrics, it might also only pay off 3 days from now, when the $1000 on the spot, could be used right now, possibly in some other psychologist's thought experiment on gambling behaviors.

That depends on the marginal value of a dollar. If you don't have any money, a rational person would take the first $1,000 since "some food" is better than "a 10% chance of some food".

Because it is more like $200K/year and 0.1% chance of $500K or $75K/year and a 0.1% chance of $5M. It would be silly to take the latter over an expected 5 year tenure.

I think you are misreading the point. It's not that the true expected value of early stage options is actually zero, it's that it might as well be for your purposes, choosing between that and other reasonable (i.e. market value) opportunities.

If you look at early stage startups, I think it's pretty clear that the EV[startup options] < EV[invested market value salary delta]. This holds true over nearly all startups, and nearly all people who have the option of early stage options. There are outliers, sure - but to a 1st approximation you aren't in them.

So you have to fall back on "how much more fun/cool is this startup job than other things I can do". And realistically, getting rich off a startup isn't a rational plan for nearly all people. Asking yourself, "what are the odds I recoup most of the lost salary?" is a more like it. And for typical seed round start up, that break even is going to be a few percent, dilute as needed to look at different rounds.

Of course this doesn't help you choose between two different under market salaries with options, either...

Or more realistic: Would a reasonable person accept $1000 a month or a 10% chance of a million dollars?

... without you knowing whether it's a 10% chance or a 0.2% chance and that number becoming 0 if you leave the company so you stay inside and spend even more time working for them even though you might get more at another place, or get a second shot at least. Big tech has multiple advantages, including higher total comp and flexibility.

I’m reasonable. I would never take a lottery ticket vs $1k in cash unless I could buy 20 tickets.

A conservative estimate of the expected value of the options in a startup that is not successful yet, is $0.

So assuming the options are worthless is not all that unreasonable. Options are bonus, not part of the real compensation. Unless the company is already successful or your share in the company is large enough that it really is worth the risk.

But if in the most optimistic scenario your options end up being worth $1 million, but it's going to be years before they're worth that much, the chance they're going to end up worth that much is small, and in the mean time you're severely underpaid, then it's probably not such a good idea.

For that to be "obvious", the 10% estimate should be objective and not just pulled out of thin air by somebody. And if it is statistics-based, it should hold into the future even though conditions change all the time (no idea how you would guarantee that). Even then, it's not that obvious - you can't pay rent with a 10% chance. Surely, if you take such chances regularly, it would pay you rent on average, but if you do it just once, you'd have to think about how much not being evicted from your apartment when 90% chance plays out instead costs to you.

Idk, does taking the second option mean I have a 90% chance of not making rent?

> Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?

Can this reasonable person afford to pay this month's bills?

The problem with that logic is that you never know up front what the percentage chance is, and whatever it might be, a retrospective analysis shows it's always much, much lower than 10%.

Expectation of option B is $100,000 - so any rational human would take that.

I would also add that stock options are not stock grants. You are given the option to purchase those shares. Meaning you have to pay the company for them at strike price within 90 days of leaving and you have to pay tax on them.

Many young startup employees I talk to are under the impression that they own .x% of the company because their options have vested. That is not true.

After exercising your options the company could shut down or it can be acquired with a valuation less than what your options and strike price were based on. In both of these cases you would be losing money.

Grants would need to be taxed at fair market value even though it's not liquid, so there's a very good reason for doing it this way

The cost shouldn't be 0% or 100%, but the percentage chance of getting the reward, multiplied by the value of the reward. IOW, E(X) = P(X) * X, so a 50% of 100K is effectively a 50K payout. The problem is P(X) is unknown, and you only really have heuristics to guesstimate. Whether you move forward with the idea 0%/100% is just if you are a glass half empty/full kind of person, but the real answer is somewhere in between.

From looking at tldroptions.io, it's just taking an empirical approach to guess the P(X) value.

> Easiest strategy is to just assume the options are worthless and base your comp assessment on that.

But that easy thing leads to:

a. Having no basis to negotiate your options. (X% of $0 is always $0 regardless of X)

b. Your comp will always look like crap compared to a publicly traded company.

But your comp is almost always crap compared to a publicly traded company. (i.e. FAANG) Just look at the numbers on this website to get the expected value of startup stock. Short of getting an obscene amount of stock in a startup, it's not worth it. And almost no startup is going to give you 5-10x+ the amount of stock that other employees are getting for the same position.

Many people aren't comparing to FAANG companies: they are comparing to other places they actually want to work.

FAANG companies aren't paying that much because they get so much more value out of employees: they are paying that much more because that's how much extra they have to pay to convince people to take the jobs they are offering.

Obviously if they paid less they would get fewer engineers, but there are plenty who would take peanuts to work on problems at that scale. The actual reason they're paying that much because they have no limit on the number of 1% engineers they can put to work, and they want as many as they can get.

B is kinda true a priori. It's easier to negotiate A should be negotiated in relationship to ownership and responsibility. You should get into the head the hiring manager in question and figure out what's the max/min range to motivate a candidate to do the job properly. That could be anything for single digit percentages for senior ICs at an early stage company to 50% for a pre funding cofounder to a couple bips for an IC at a series D medium sized company to a sizable fraction of a percent for an executive at a series B. Trying to value illiquid options as if they were fungible in cash is a fool's bargain. Reject it. They have value, but they're different.

In your example, what would you consider an early stage startup? At what size org would 20 basis points be reasonable for a senior IC?

Sorry, I should have been more specific -- I meant seed stage. I think you'll see 20 basis points for a senior IC around post Series A/B depending on the company and how they've set up their option pool, as well as the senior IC. At that point, 20 bips is material enough to be non-negligible if the company grows well enough to the next raise, but probably not enough to be thought of as cash in the lifetime of that employees tenure (on average, anyhow). At that point, cash comp should be on par with median salary, which is tier 4 and below for most ICs*

*I'm putting FANG into T1, the next tier down of liquid companies into T2, large pre-IPO companies into T3, and everyone else into T4 -- the interesting part obviously is that company salary tiers can and do obviously change if/as companies grow successfully.

Thank you!

Yes, on Point B the comp IS “crap” and hence why most startups try to convince you to take the options. They can’t pay you what the competition would give you in liquid comp so they try to get you to take the bet. Such startups are typically paying well below market on liquid comp. it’s not like they’re asking you to make a “bet” with a 10% haircut on liquid comp (which would make more sense).

I’m not against options, but if what you will make over the next X years based on liquid comp is not something you are totally OK walking away with as your total comp over that period then one is probably making a bad choice.

Then negotiate a higher salary which is the statistically correct course of action. Many of my colleagues are 10+ years stuck waiting for an IPO that may never come.

I think the subtext is that you're always taking a risk with start-up options, so minimize the risk by assuming the worst. Your basis for comparison/negotiation should be other offers, or your existing job and other offers. In a vacuum you'll never be able to make a realistic evaluation.

a) That's not true. More is more. You just do it from a basis point perspective.

b) If you're at a pre-ipo company with options, your comp is crap compared to a publicly traded company. If you're counting your lottery tickets as real money, you're a fool. You can't even sell them on Sharespost for the valuation the company tells you.

That is really great advice unless the company you're working at turns out to be really valuable, in which case it's really bad advice.

Only if you got in really early and even then it statistically won’t happen.

It’s like saying lottery tickets are a bad investment idea. It’s true for far more people than it isn’t.

It's <50%, but chances of winning the lottery are 1 in 292 million.

I'd bet if you picked a promising company (say Series B+ on the breakout list) your likelihood of a positive outcomes is >=10%.

Not high, but very different than lottery tickets.

You'd be betting on the probability of outcomes of choosing startups with successful outcomes, you must see the absurdity!

Regardless, at least a lottery's odds are fixed. For a startup not only do you have a direct impact on the outcome, but there's near-infinite number of internal and external factors that can make a company fail, or, very rarely, succeed.

I think that's one of the big selling points on options: It's a lottery ticket but you are directly capable of affecting your odds. Theoretically if a group of 100 people all feel that way, they should be able to do some amazing things!

Even at seed stage, if you're picking from the same group as Crunchbase is the 2008-2010 cohort had a 30% chance of an exit and a 1% chance of becoming a unicorn. 1 in 100 is much better odds than 1 in 292 million.

Also, you can buy as many lottery tickets as you can afford - you only have so many shots at picking a promising company in your working days.

Those seem equivalent, just with a different limiting resource.

So no one should ever work at a startup?

It's not that you shouldn't work at a startup, it's that you shouldn't let the startup convince you that their stock is going to inevitably be worth millions so you should accept a tiny salary up front.

Don't be Jack from Jack and the Beanstalk -- don't trade your cow for magic beans if you need to eat. Only make the trade if you won't be worse off if those beans don't turn out to be magic.

From a financial perspective, no. If you get more meaning from it and/or want more responsibilities and autonomy (on average), sure,

welcome to the HN paradox.

This tool isn't really helpful. What you really want to know, as an employee, is what the expected value of your options are -- not what they will be worth if company IPO's for $xxb. This expected value is strongly correlated to your company's valuation which isn't an input into the posted model.

As a general rule of thumb, I'd recommend taking the valuation of the company's last financing round and halve it. Then, multiple this valuation by your projected vested ownership percentage (and subtract any impact from exercise price).

The biggest reasons you want to discount the company's last private valuation are liquid preference and risk intolerance.

This rule of thumb is most effective if the last private valuation was recent and completed on standard terms.

Edit: I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary.

> Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary.

The problem is, there is no reliable way to value the options in most cases. Valuations are not very realistic, especially for young companies or companies that are overhyped. Your ownership percentage might also get diluted as a result of future financing rounds.

Besides all of that, the chance that your options will end up being worth zero is the most likely outcome at most startups.

I agree there's no reliable way to value a startup, but that doesn't mean you should throw your hands up and say they're worth nothing. In lieu of any reliable method, the best estimate you have available to you is the company's last private valuation. Though there is wild variation in outcome, on average, VC's do a decent job pricing investments.

Even if the valuation was accurate, how could you account for the possibility of dilution?

VCs price investments in the context of a portfolio, thus VCs have statistics on their side.

As an employee, you don't have statistics on your side, so you have one shot at being right.

Further, many VCs are managing OPM other people's money (OPM). You are investing your own money.

If the best estimate of the value of the stock is it's last valuation, that means current options, which are priced at last valuation have a paper value of $0. There's certainly a time-value, but that's hard to compute, given the most popular model uses a volatility component which you'll have no data for.

If you have options from before the current valuation, or if you were offered RSUs, or underpriced options, you could use the valuation as a guess of the value, sure.

To my knowledge, almost all startup options have a strike price that is close to the last 409A valuation, which is typically an order of magnitude less than the valuation given to the company at its last private financing. Receiving options with a strike price close to the last private valuation would be highly unusual, but if it did occur, I'd advise people to value those at $0.

When you say "typically", how many data points do you have?

In my experience, an order of magnitude just happens when the company is at a very early stage (e.g. post seed). By the time the company is at Series C/D, the 409A valuation is typically between 1/2 and 1/3 of the last preferred round, or higher.

> This tool isn't really helpful.

huh? You go on to describe exactly how it's helpful.

"IPO" is just shorthand for the price at which your options become liquid. There are many spreadsheets you can find to calculate this, round-by-round so that you can run scenarios. Just search for 'cap table excel' or 'cap table example'.

The beauty of this tool is the interactive slider. Of course it's very simplified for the sake of ease of use, but it is fun and helpful. And they do a great job being crystal clear about the oversimplification, and point you to resources to learn a lot more! It's really great.

Could it be better? sure. But then it'd start encroaching on the author's commercial tool (captable.io)

Given that 2/3rds of venture-backed startups fail entirely, your approach is going to massively over-estimate the likely value of options.

I don't think that's the case. 2/3rds fail, 2/9ths return a small multiple, 1/9th return a substantial multiple to a typical decent VC. Valuing the shares at half the most recently priced round puts them into a quite reasonable range, IMO.

The company's valuation at the last financing round already prices in the high likelihood of failure. That is, on average, the VC industry does a good job at assigning valuations to companies (see published reports on average IRR of the VC industry). As you point out, there's huge variance in outcome which may affect your appetite for shares, but when it comes to assigning an expected value to your shares, the last financing round is an appropriate place to start.

I don't know what your experience is, but what I have observed is that valuation is usually the product of multiplying how much money investors want to put in by how much stock the company is willing to give up.

I concur with your line of thought, as long as the base salary covers your basic needs (food, shelter, sufficient extra to put away for retirement, basic vacations). Once those bases are covered, the employee is already looking at "more money than they need" and should take a measured approach to how they want to invest/risk that money.

But ultimately, it should be done objectively based on the reality of the company and the options presented.

>I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket

A lot of people play the lottery, the prize is millions and the price is a buck or two. If your income is ~100k and you're valuing your options at a buck or two then it sounds like you're pretty much joining the view that options are worthless.

Options have a strike price that is close to their last round of private valuation, so you are effectively valuing them at 0, which as you say is irrational.

This is cool... I was first employee at startup who sold about 5 years later. My original stock options sheet said my shares would be worth a cool 1.2mil. Turns out the shares were only worth about 60k. Pretty solid , but not fuck you money. more like pay off some of wife's student debt and kickstart retirement saving money haha.

I will have to say though getting a check worth 5 figures and cashing that bitch felt great!

A 5 figure check is standard sign-on bonus at most medium-large companies - you don't have to wait 5 years to get that.

Really? The most I've ever had was $10k with a one year clawback clause, and the 45% bonus tax left me feeling like I had trapped myself in a job I didn't like for a measly $5k.

In my experience (which includes my circle of friends in the bay) FAANG companies routinely give sign-on bonuses in the $50k-$100k range for standard software engineers with a few years of experience.

The largest sign-on bonus I've personally seen was one that I myself received in an offer from an hedge fund in NYC: $150k (I didn't take the job anyway since I hate the cold weather, very stupid of me).

This seems like it would make the insane cost of living most of these companies are in much more manageable, no? I've never considered leaving my low cost of living area because I figured my standard of living would go down on the average software engineer salary.

Do these companies exist outside of major cities? I don't think there is a single company in Utah that does sign on bonuses. At least none that i've ever heard of.

Probably not. I don’t have any direct knowledge about the job markets outside top tech cities, but what you say isn’t surprising.

glad to see you have a positive attitude about it! just curious - did the company just not end up being worth much, too much dilution, or was your original options sheet was misleading?

my second startup i've worked at just got acquired and my options are about enough to buy a new iphone :)

I'm not entirely sure on the details. Some similar companies were getting bought for hundreds of millions, ours was only an 8 figure deal, not 9 figures haha.

we went through multiple rounds of funding so shares got diluted...However we fucking made it , which is nuts.

This is a great example of the maths though.

Intuitively, I would imagine being #2 in a company that ends up being worth 8 digits would at least be a solid start towards real wealth, far above the $60k range.

curious what your equity was?

Cool though it always surprised me how poorly treated USA employees are when it comes to stock when compared to the UK

I have a friend who made about 3x that in a FTSE 100 company over the same timeframe a 5 year share save (paid a lot less tax as well)

I did enjoy at one point in the first dot com boom being a dollar millionaire along with the rest of the poptel coop.

Good for you! Scrappy young me fresh out of college was willing to do anything. I wasnt a CS student, self taught coder. I grinded HARD for a couple years. But hey you are a 23 year old smelly dude with long hair. Nobody likes you anyways. Might as well work a lot on things you love!

Now at 28, I would still say experience was worth it. However again im' not the CS degree 4.0 straight to FAANG guy who can make 100/yr (or whatever it is) straight from college. I had to hustle a bit to gain the codebro skillz & then find a job. I didnt have FAANG kissing my ass to pay me out the wazoo to 'change the world' with 'machine learning and AI'. News flash, yall are just selling shit , you aint changing the world. You just make really large paychecks and get pampered :p

That’s 12000 per year so in the big picture it’s really not much.

We actually got a bigger bonus as part of the acquisition, just not technically stock options. My total comp after the take-over is roughly 120k (pretax).

For my situation , it was pretty amazing. I'm not on the standard path of CS degree + working at FAANG. I'm a DIY-er , self taught. Given where I am now, 23 year old self would be fucking amazed. We built and sold a digital company from nothing to some mega corporate suit bros worth billions of dollars!

If it's additionally to their regular compensation?

Not if they took a 13k/year pay cut to get it. Options are usually "instead of" not "in addition to" salary.

I started off as a wee-lad fresh out of college (degree in science not computer programming) so was on a 50k/yr salary and i got options too.

Jesus, a 98% cutout.

Glad you have a good head on your shoulders. Still, that must have been tough.

Seems easier to just assume the stock option has no value, especially given failure rates.

I feel most people will overestimate their chances of success which will give them an unrealistic number.

This. I tend to look at stock options at an early-stage startup as a lottery ticket.

Worse than a lotto ticket. A lotto ticket doesn't make you accept below-market wages and has fixed amount winnings that won't be diluted.

Lottery tickets cost you money up front and have a defined possible upside. Neither of those is true of equity.

The uncertainty of startup equity makes it impossible to do the same probable value calculations you can do on lottery tickets.

Options are worse because they cost you money year after year: the difference in salary you could have made instead of taking a job that offered those options in lieu of a market salary.

If im offered a job that comes with options but pays $1000/yr less than I’m making now, I have to ask myself: why not just keep my current job and spend that $1000/yr on an investment with similar risk/reward profile? If I’m willing to do that then I should just keep my job and buy that investment. If I’m not willing to do that, than I shouldn’t take the job, because that’s in essence what it would mean. In either case I shouldn’t take the job.

Feature request:

When you select a new funding round of a company: "Seed", "Series A", etc. Can you keep the same IPO amount? As it is right now the IPO amount slider will keep the same position, not amount, so if your not paying attention to the IPO amount it makes it seem like 0.01% in a Seed round is worth less then in a Series A round.

Thanks for the feedback! That's a good idea; I'll add it to our list!

Ah, that's what happened! I couldn't figure out why a certain percentage at series A would yield a higher payout than the same percentage at series B and C…

I had 1% of a company at seed time which eventually went public. The value peaked at USD$400k before I could sell, and quickly dropped down to USD$100k for 6+ years of work.

Hmm. One thing that is really not covered here, even in the giant asterisk, is the diminishing probability a big acquisition will be clean.

Where by clean I mean: the acquiring company acquires the shares of your company for the stated acquisition value.

These days, it seems like acquisitions often end up using retention packages for key employees, and letting the rest go. The actual per-share purchase price is low compared with the total acquisition value, so even if you're fully vested, not that diluted, etc. -- of a $1B acquisition, very little will go to the actual common stockholders.

Do you mind elaborating a bit more on this concept?

In such a scenario, why would investors ever want to put money in a company if the bulk of the value came via retention packages (which they can't tap into), as opposed to the per-share purchase price (which they can tap into)? I am talking about investors who put money in "clean deals", so 1X liquidation preferences, non-participating, which from what I've seen in the Bay Area is fairly standard.

If the terms are clean (assumption above), common holders not making any money on a $1B acquisition would just mean that investors will at best recoup all their original capital, without any meaningful return, so why bother?

I understand that the investors have a lot of money to play with and can afford to lose a good chunk of it, but in the scenario you are picturing they would get screwed even when the company itself becomes a massive success (as defined by the $1B acquisition), which is exactly the needle in the haystack they look for.

Am I missing something? Are there some obvious ways through which investors with 1X preferences can make a lot of money while wiping out common holders?

I don't know why investors would want to put money into such a company, if they knew a priori what would happen.

But I'm not saying "common holders make no money" in literal terms. A $1B acquisition might look like $100-500M stock consideration, certainly not nothing.

It happens because, these days, founders often retain control of shares and board even all the way up to billion-dollar acquisitions, and their incentive to share all (or even most) of that acquisition money with their investors is, frankly, not that high -- the investors would rather a deal go through than the company fail, and they don't have enough control to dictate terms.

The acquiring company cares most about the product (often) and about retaining key talent, not how much the investors get.

So, in a founder-controlled startup, no one who has power over an acquisition has a strong incentive to reward shareholders. Perhaps this is an inevitable result of founder control, and will cause the pendulum to swing back the other way?

Anyway, it's worth noting that this doesn't apply to IPOs.

> It happens because, these days, founders often retain control of shares and board even all the way up to billion-dollar acquisitions

That's the part I was missing. I know of a few companies currently valued at > $500M, and for all of them the founders still own about ~15-20% (together), and the investors across all rounds (usually they are at a Series D stage) have enough equity (50%+) and voting seats to basically not just let the founders do whatever they want, and these companies are very healthy business wise. It's just the standard cost of taking every new round with a 15-20% dilution, it really doesn't take that much to lose the majority.

I assume that in order to raise money at terms much more favorable than these, the company must be doing incredibly well, to the point where the investors are going to think "well, this company is going to get so big that I'll make big bucks anyway". Not all companies that sell in the high 9 figures can command such privileged treatment from investors, in my opinion. And in some cases, the investors-founders relationship is not necessarily adversarial, several seasoned entrepreneurs raise money from investors with whom they've been cultivating deep business relationships over the years, so they definitely have a "common goal" even if technically one could screw the other. Of course this might not happen with a more naive 20-something startup founder, who might get eaten alive by investors.

But I take your data point as very interesting, and something I hadn't considered.

I don't want to sound like a grouch, but it might be worth noting that the list of ways for founders & investors to devalue common shareholders is quite long. Dilution, recapitalization, you name it. At every investment point, the company (i.e., the controlling interests) have the opportunity to effectively reincorporate and reallocate ownership.

Really my point is that ultimately there's a level of good faith action required on the part of both founders and investors in order for even the best case scenarios to yield money for common stockholders. It's one reason why reputation is so important in business.

No employment contract you sign with an employer is ever "ironclad", so you do your best to make sure they're reasonable people who understand the value of reputation and that business is "iterative" -- in the game theory sense!

This is also why at least one actually-independent board member is a good sign: at least someone involved has a fiduciary duty to the common stock holders.

But don't founders typically have common stocks as well? How exactly can they dilute other common holders rather than themselves, without implementing some very bad shenanigans (e.g. a-la Mark Zuckerberg with FB)?

Does anyone else frequently encounter companies that are coy about what percentage of stock your options represent? I've probably asked 10+ companies and only one or two shared. They're all too happy to share number and strike price, but not the outstanding shares.

They'll never share the actual cap table in any case. With preference etc, the strike is a bit of a fantasy anyway.

The biggest downside to options is the tax treatment. The treatment by the IRS is absolutely asinine: you're taxed on the 'gain' between strike & current fair market value, or rather, you'll pay tax through the AMT. You can't sell the shares, so why are you taxed at exercise?

If you were given stock you'd be taxed on the whole value immediately, because you are getting something of value whether or not it's liquid. Getting compensation tax-free at time of receipt, as options do, is already a pretty great tax deal.

Tax free at receipt is great. It should be tax free at exercise, too, and only taxed when the shares are sold. It's asinine to get taxed on something you cannot realize any actual gain from.

Would I be willing to invest any of the surplus cash I would get from a FANG-style salary in something as risky a startup? Definitely not. Just considering stock options as a cash investment (as opportunity cost) drives me so hard towards not taking them it's silly.

Of course I would have an information advantage as an employee, and also perhaps a possibility to slightly effect the outcome. But at the same time I'm locked up at the startup, and putting my salary and equity in the same basket.

(Maybe this has been covered in other comments, but couldn't find it)

Relatedly, the valley still does not have a good story for first employees. Given the economics of stock options, there is currently no good economical reason to go working for a startup when the option of working for an already IPOd & liquid Corp exists.

Which is why as a startup you have to offer something that FANG can't offer, like full remote working or similar.

That or taking the people who fail to get FANG offers / naive jrs.

I wonder how much the proliferation of start up failures has to do with this very fact versus a poor product/model/founder/execution/etc.

Not saying that the employees are to blame but I'm sure there's plenty of good ideas out there that just don't have the right people trying to implement it.

Or that's such a small amount that it really doesn't contribute.

Really just wondering what that number is.

If I were to start a VC-backed startup I would just employ the paradigm most big publicly traded tech companies use: pay competitive market rates for good engineers as FTEs, and contract with body shops for all the other work. Given that FANG are some of the best performing companies in the world I'd say it's a safe assumption that they've done the math and found that it's more economical to pay a high rate for a limited number of high qualified engineers rather than pay medium rates for less qualified engineers. And then you can have contractors making less than what "medium" engineers make do the less important/skillful stuff.

Not to totally dismiss your point, but don't forget that one of the reasons, a very big reason, why FAANG companies pay that high is because they literally print money like crazy, so they can afford to behave that way. They have tons of cash to burn and they're not going to run out of it anytime soon.

If you are a startup that just raised 10M$, you just can't go around and pay a few good engineers $500k a year in cash compensation (which is what they would make at FAANG, since the RSU portion of the compensation is basically cash-equivalent, perhaps discounted at 80% if you want to be conservative), even if "a few" is a very small group.

You'll have to settle with offering them $180k base + stock options that on paper might bring their compensation to $500k, 5-10 years down the road, and any reasonable good engineer should value them at 10% of their pitched value, if not less.

It just really never makes sense to join a startup for financial reasons, and I say this as a person who was lucky enough to have a ~1M$ windfall from stock options of a former startup employer: amortized over the amount of time I spent at that company (4 years), I'd have been much better off financially had I been at FAANG the whole entire time (which is where I am now btw, completely done with the startup bs).

I think this is a relatively recent development. 8-10 years ago, working at a startup or working at FANG paid about the same, but the startup came with this lottery ticket, you learned more at a startup and it wasn't a big co with big co politics and process. Back then it definitely made a lot more sense to maybe give up %10-%20 less income in exchange.

Startups & VCs started getting a lot of money in the global search for yield as interest rates dropped to 0 and QE started printing money and giving it to banks who would invest it. The google/apple/etc wage collusion lawsuit increased the amount of competition for engineers. FANG was losing engineers who would rather do their own thing for a little bit less. The H1B lottery system limited the supply. Housing started getting even more expensive in the SFBA. And as you said, FANG prints money so they can afford to keep on going up in the bidding wars.

Compensation started going up in this competitive system as a result until we are at the point we are today, where startups are definitely not competitive comp wise to being at FANG.

Given my experience, I don't consider FAANG engineers any more qualified than other engineers on average. Actually, people coming out of agencies and consultancies that sell their development expertise are usually the most qualified candidates I interview, whereas FAANG companies are banking on hiring more engineers than anyone else and then building systems so even shitty engineers can productively contribute.

I worked at startups for the free beer, the tech and people. 3 startups later I have made 0 money on stock and had loads of fun.

That's the truth about startups. Now I don't work at a startup, I make butt loads more money, and have much less fun.

Previously posted. Big discussion here: https://news.ycombinator.com/item?id=14463260

Great concept, and really helpful for most non-legal savvy early employees.

I noticed that an employee getting 1% options in a seed stage company doesn’t seem to get anything unless the exit is > $35M. Not sure that applies to most seed stage companies. Employees of a company I know well would start seeing proceeds after an exit >$5M.

>doesn’t seem to get anything unless the exit is > $35M.

It's because their model assumes "$41 million" was invested into the hypothetical seed company over 4 rounds. Therefore, the company has to exit for more than $41m for the employees' common stock to be worth something.

You have to click on the "How We Guesstimate" button to see their underlying financial assumptions.

In my opinion, this type of "what if?" calculator would be easier to understand if they explicitly showed the intermediate calculation steps in the user interface. A more obvious "show your work" would educate people and preemptively answer questions such as yours about why a $5 million exit nets $0 for employees.

Yes, and that is with a very generous assumption of no class-preferences for investors.


Seconded. A user-friendly display of intermediate steps would be great for educational purposes.

Building this tool we purposefully steered away from education. We found that the users we talked to, people considering startup jobs who didn't know how to value options, were frequently overwhelmed and discouraged by tools with more educational content.

This tool might spark someone's curiosity, but we purposefully built it for a group that didn't want to have to learn about venture finance and still wanted to work at a startup.

So then I guess my feedback is that exits between $10M and $100M (which are the bulk of >$0 exits for venture backed software companies) should assume the company has only raised ~30% of the exit amount. e.g. A $50M exit for a company that has raised $10M can still make some money for everyone.

But I agree with the premise that the UI for this tool has to be super simple.

Thanks for building this!

Only if it exits at that seed stage: if it raises more money, the number goes up. If the company makes it to Series C+, the number is probably going to be higher than $35M. Which is what taking the average does: for about half of exits that number will be higher and for about half the number will be lower.

Rather than complicating the model here to try to illustrate the difference between exiting at this stage versus raising another round, we went with an approach that demonstrates how preferences work. Even if the number is lower for a Seed company that exits at Series A or higher if it exits at Series C, there is still a number under which you'll get nothing even if the company has a profitable exit.

A highly ratcheted round can easily change that.

I had around 0.6% of a seed stage company. After series A, acquisition, a down round with the acquiring company, etc. I wound up with like $12K. Most people do much worse.

What if my company doesn't tell its employees how many shares have been issued, so that it's impossible for us to know what percentage of the company we own?

I just did some more research, and actually, for many US states, you can request a copy of any corporation's annual report, which includes the # of authorized shares.

The information you actually need is the # of issued shares, which is some fraction of # of authorized shares. You will have to make an assumption as to what that fraction is. From personal experience running several startups, I would recommend using 70%.

So, you need to:

1) Find out what state your employer's corporation is registered in

2) Request annual report from state's entity search website (e.g. https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch...)

3) Calculate issued shares based on some assumed fraction of authorized shares.

If your employer refuses to disclose # of issued shares, you have absolutely no way of valuing your shares. I can't think of one good reason why they'd be unwilling to give you this information, and as a result, I'd actually advise that you value your shares to be worthless.

I had that once and I told the hiring manager that without that number I have to treat them as zero value. He said that was reasonable, and we negotiated on salary instead.

I agree, without knowing, we can only assume they will be worthless. I am in the US, Do you think discussion of this among employees is protected under the National Labor Relations Act, say in our company's private Discord channel?

I'm not sure. If you really want an answer, I'd post the question to Avvo and see what responses you get. I've found that you typically get written responses from real lawyers within 24 hours, and for generic questions like this, they don't ask for a paid consultation. IANAL and not related to Avvo in any way.

In the UK the total number of shares, and maybe the cap table (I don’t remember) is available from Companies House for a nominal fee, as part of the company’s annual accounts. No idea what the situation is elsewhere, sorry.

Then that's absurd, and you should push back. You wouldn't accept your salary in a currency with no known exchange rate, why would you accept options without knowing the size of the pie?

As mentioned by someone else, estimating how much of the company you have depends on seeing the complete cap table (redacted for names is fine) along with a copy of all of the major financing documents to validate liquidation preferences, participation mechanisms, sweeteners for i-bankers and various other instruments. Good luck getting that information as a dev.

Given that, I tend to join the group that value options in an early stage private company as "worthless". If the cash comp doesn't work for me, it's unlikely the options will move the needle as I'll probably need to be there 5-9 years to actually see a positive event and I'll need to do that 5-10 times to have a solid chance of a couple of meaningful wins. Of course, some of the failures you can drop out after a year or two, but it's still many decades to have a reasonable possibility of a return from options.

It's hard enough for VCs who do this for a living and can make 10-50 simultaneous bets to come out well ahead - and the good ones have access to insane deal flow and all the docs during due diligence. Good luck being confident that you will beat that serially with limited deal flow and limited due diligence access.

To be clear, a certain proportion of people here DID beat that and are doing great with stock options, but the odds are not in your favor . . .

Thanks, this was a good amount to chew on. I feel like a first grader peeking into the 2nd grader's math class.

That doesn't really tell you everything anyway. You need to know the what sort of "deal" the existing investors have: liquidation preferences, dividends/interest, etc.

Then you're stuck: there isn't any way to value shares in something without knowing the denominator. Your company should be willing to provide the "fully-diluted basis" for your shares if you ask.

If it's registered in Delaware, I remember an article once describing how you can apply to get the number of outstanding shares.

Unfortunately this is highly misleading without the ability to customize (e.g. capital raised, liquidation preferences, future rounds, etc.).

If you are looking for more detailed scenario modeling, we've also built a free cap table management tool that takes into account the specifics of a particular company: https://captable.io/

Even shorter TLDR: single-digit percentages of equity are unlikely to be worth much more than 1-2 years of salary.

Really if you are in the bay area and consider only the financial aspect, working for FAANG for the low 200s is almost certainly better than a startup for the mid 100s plus equity.

Note, I choose to work for a non-FAANG company for non-financial reasons. I therefore don't work in the bay area for financial reasons (I was able to find a non-FAANG job for mid 100s somewhere that is ~40k a year cheaper for a mortgage).

For what it's worth, a 35% dilution per round is pretty high. If you have good traction 15% is very doable.

That said, I like that it's conservative so you'll undervalue your options - it's very likely that they'll be worth nothing.

This model feels very mechanical in the rigid $50 million cutoff between "low exit" and "will make you money."

Truth is, niche companies with small burn rates can yield nice payoffs to investors even if the exit is $20 million. And cash-hungry dream-chasers can yield almost nothing to insiders even with a $80m to $100m valuation.

I'd like this model more if it had a second slider that let you move between "thrifty bootstrap" and "costly moonshot." Over the years, I've seen friends get surprised on both sides of the supposed $50m divider.

Giant asterisk FTW

"You've been offered 100% of a Seed company. If the company is sold or IPOs for $40M ... in 7-ish years you could be looking at something like: $0"


It's basically the difference between common stocks vs preferred stocks.

The scenario assumes the startup raised ~40M from investors, which is realistic.

So in that case yes, you can own 99.9% of the equity the company, but if it sells for less than the total amount raised, the investors will exercise their liquidation preference rights (typically 1X for clean deals), meaning that they will wipe you out completely and keep the 40M for themselves.

If the startup sells for 50M, the investors can then decide to either exercise their liquidation preference rights and get their 40M (leaving you with 10M, assuming non-participating rights), or they can decide to convert their equity to common and thus get 0.1% of 50M, and you take the 99.9%. They'll take whatever is the most convenient for them, which typically means they'll exercise their liquidation preference rights unless the company sells for more than what they valued it at during their round of investment.

To be clear, this is saying that seed-phase companies have a 74% chance of eventually failing, and a company that makes it to series C is nearly as likely to eventually fail, at 71%? My impression was that joining a later-stage company is generally seen as much lower-risk, which is also why companies tend to give out fewer options as the company grows. Is that the wrong way of thinking about it?

In the data set I used for reference, Series C+ companies still mostly failed to exit. Even at the furthest extreme the data tracked, of the 35 Silicon Valley companies that raised a fifth round 18 failed to exit or raise more money.

On the other hand, there are some advantages that may make later companies less risky: the timeline to exit may be shorter (though that is less true in the case of an early M&A, which ~23% of the cohort found). The nature of the risks may change in ways that make it easier to evaluate. And cash salaries usually rise in the later stages, reducing the marginal cost to employees.

There was no stage at which venture-backed companies stopped being a risk, but that's also true of public companies that grant options: it is always possible that the share price goes down and the options are worth nothing. I think the takeaway is that in this 2006-2008 cohort, earlier startups were less at risk of running out of money that most people would assume.

Assume stock options are worthless. Once in a career, perhaps, you might experience a pleasant surprise in a modest little way. Do it for the salary, do it for the experience, do it because you are trying to be the change you want to see in the world, but don't do it because you imagine the stock will be worth anything.

Unless the company is on the market for almost a decade now, shows steady growth and IPO might happen during the vesting period.

However I agree that most cases stock option is worthless in early ages, especially if it needs VC money to keep the ship from sinking.

Sure, but in that case you won't be receiving potentially-life-changing quantities of stock options, because it's already too close to being a sure thing. You're only going to strike it rich if you are one of the first handful of employees to receive options at a very early startup which later has a very successful exit, and you simply can't know in advance whether the startup you are thinking about joining will or won't be one of those.

Generally, I agree that you should treat shares as worthless and negotiate your base salary, the only exception that I can see is blockchain space where you can often get tokens that are already tradable. This basically means that you can sell anytime (ofc. you still have vesting period etc).

It’s important to remember this calculator is looking across several years of the growth of a company but only valuing one option grant. There may be additional grants given along that journey (say, every 2-4 years) along with salary increases that bring you closer to market.

More than percentages, it is the terms that matter. You can get a decent percentage of a early stage company, but end up making no money even if the company sells for 10-100x of the valuation at the time of stock options. Be sure you understand the terms.

Can you expand on this? What are some of the terms that should be careful examined?

Most of them are related to how and when your stocks are vested. Most companies never IPO and get to a point where you can sell your stocks on secondary markets. So vesting period and terms of it are important. For example - if you dont have accelerated vesting, you end up getting nothing when the company is acquired even at a good valuation. Depends on terms of acquisition as well and what happens to employee stock pool when acquisition happens.

What is the reason companies aren't handing out stock, but only stock options?

Taxes. Income tax is owed on the value of whatever is granted. If an option is granted with a strike price equal to the fair market value for the stock, then there's no income tax owed. This is also the reason it's important the company chose FMV in a way that wont get disputed later. Because back taxes and penalties are a bear.

Some do grant RSUs (restricted stock units), which are usually taxable as income when you receive them.

This isn’t correct. Double trigger RSUs (which are handed out by pre-ipo companies) are taxable on liquidation event.

Handing out stock is taxable to the employee at the moment it's handed out, even though (for non-public companies) they can't sell it. It'd be ruinous to give an employee $1M of startup stock, since they'd owe around 400k tax on it.

So the standard is to hand out options with a strike price equal to the current fair market value. The employee eventually gets the upside, but not the downside.

Some do. See the differences between RSU's and stock options.

It's so they can make the employees pay the taxes later, rather than paying taxes up front as most companies do for RSUs.

As an employee, you want RSUs, not options.

I general, no, you don't.

Your startup RSUs won't trigger until there's a liquidity event, at which point _you_ are responsible for taxes. The RSU value will be taxable as ordinary income.

With options, the "bargain element" is only taxable as AMT income. For options for early stage companies, this improved tax treatment _generally_ makes them better.

The "how we guesstimate" box didn't mention preferred shares, but it looks like the $0 for low exits covers that.

Of course, there's probably also "participating preferred shares." I don't think it's possible to really understand that without putting on a blue pinstripe suit and bringing your $700/hr lawyer to the meeting. tl;dr it's like the Blues Brothers' rubber biscuit. "You Go Hungry Baaaow Baaaow Baaaow."

Don't forget: when you work for stock options / restricted stock / equity , you are an investor in the company. You buy your investment with your scarcest resource, your time. (The VCs buy their investments with a resource that is NOT scarce for them, money.)

Smart investors ask questions. Honest founders answer them clearly. This web site might be a really good starting place for your questions.

If the founders balk at your questions, don't invest. Seriously.

This looks like pre-tax

While you cannot sell them (if this happens) then they are worthless (value is market-intrinsic, not an inherent property).

Gold is worthless in a famine.

Something is wrong here, why is the probability of exit is lower for C than for B stage and B stage lower than for A stage company?

Companies can still exit at stage A. I don’t know what the actual probabilities would be, but more funding rounds do not necessarily mean it’s a higher probability of exit.

More than the other feature requests seen here, this needs to be adjusted by a discount rate that reflects the risk over time.

This is a better tool.


I’m curious if anyone here has used an exchange fund (or swap fund) to diversify a portion of their private shares?

This is pretty accurate when compared to my own experience, which really surprises me.

Why is Snapchat (Snap Inc.) among the top companies when you move the slider? Since the beginning, Snap Inc. has had a clear downward trend.

Because it is based on the value when the stock options became liquid (when they IPO'ed), not on the performance since.

they should base it on the value 6 months after IPO, ie after the typical lockout period.

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