[buttershakes]

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution.

As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu of cash.

The single trigger RSU is a very hard sell though, as we can see from this example it hurts both Investor and Founder equity stakes, unless people start balking at options (which they should) it won't fly.

[dohertyjf]

I value stock options at zero. There is potentially a huge upside if you are an early employee at a company that gets enormous. Even then, you have to be top 20 or 30 to get f-you money, and even then it might not even be that.

I had stock options (not RSUs) at BigCo where I worked for 2 years. At one point, had I been fully vested, I was sitting on about $240k worth of stock. After a 3x1 split and the company going back down to almost the strike price I was granted stock (and most of it was worthless because was given it as part of a raise at a high strike), after I parted ways with the company and sold my options (had to as part of the severance agreement), I walked away with $2000. Basically a $1k/yr bonus. I would have gladly taken extra salary instead of stock. Lesson learned.

[infinite8s]

Do option counts not change as a result of a split?

[sokoloff]

Routine corporate actions will adjust the option count and strike price equitably. (A 2:1 split will typically double the number of option shares and halve the exercise price.)

[jusben1369]

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

[buttershakes]

I have started multiple startups, and joined others at various times. I've also professionally traded options. I have a huge appetite for risk, but the risk/reward isn't there for most early employees who are getting paid less cash in exchange for options. You just can't take them at face value. I would say many early stage employees aren't taking appreciably less risk than the founders themselves, but at a fraction of the upside.

[chris11]

How successful have you been in negotiating your options? Have you negotiated significantly more options/money or different terms?

[buttershakes]

I've been fairly successful at it. Most companies are willing to put up with some negotiation. I've gotten a lawyer to go over the options agreements on more than one occasion, usually money well spent if you don't understand all of the contract intricacies. I think how much people are willing to put up with is directly proportional to how valuable you would be to the company, your skill set, experience etc. If you are easily fungible or at least the perception is that you are than your ability to negotiate some of the finer points will suffer.

I think most early stage employees, especially ones who are ultimately going to be injecting the IP of the company on which it's future value will be based should be very aggressive about options and salary packages. Having seen both the bad and the good, I definitely gravitate towards being cautious when getting startup offers. I also think we need to educate people more about this. I recently asked a potential employer about the strike price, and he said I was the first person to ask that question. I think that says a lot about how weak the understanding of early employees is.

[vidarh]

I have, several times, and I generally treat them as pretty much lottery tickets. That is: I expect at least market rate, often above in order to compensate for risk, and the options are an extra bonus if you're lucky. This is achievable. It's mostly younger people that "buy" the story of how you're going to get rich off the options so you should accept a lower salary. I did that too, a couple of times, before I "accidentally" learned that this is not an issue. Either you're important enough that they'll stretch, or you're in a junior enough position that the options allocation will be tiny anyway, in which case you're better off in a more stable company.

But the options I've made the most money on was ironically from the only post-IPO company I've worked for (and where I joined years after the IPO), rather than the startups where I've had shares that have at some point or other had a paper-value magnitudes higher.

And the reason I did well there was that they clearly didn't value their options very highly - they threw a large options allocation after me to get me to accept a lower salary than I asked for for the first 6 months for political reasons (it would have put my salary above the salary of one of the higher ranked people who had to sign off on the hire, and they clearly didn't think that'd go down very well... so instead HR quietly promised me a "review" after 6 months and bumped up then).

[delphinius81]

I worked at a startup for 2 years (left without exercising my options). I objected to options right from the start and during negotiations with the CEO said they should max out my salary in lieu of options. Options are funny money to trick potential employees into thinking their lower salary will pay-out in the end. But the reality is most start-ups do not have exits where rank and file employees get anything for their stock. Investors get paid first, then founders, followed by employees if anything is left - and usually there isn't unless the company has an IPO or was bought out because of superior growth.

That said, I am now co-founding a company and we plan to give future employees a long time period to decide whether they wish to exercise their options or not. If employees are willing to take lower salaries for equity for the sake of the company, companies should reward that sacrifice by letting the employee keep their equity options.

[JoshTriplett]

Discounting the value of options doesn't mean objecting to them completely, or not having an appetite for risk. But an option has to have a sufficiently large potential upside to take that risk. When you work for a startup, you take the risk that it'll fail, and that you get nothing except what you've already received. To compensate for that, the options need to provide a potentially huge upside, of the "never have to work again if I don't want to" size, not just "if this succeeds, the options might be worth what I could have easily made in a year or two at a non-startup".

[bhickey]

Framing it as an appetite for risk is too simplistic. Risk adjusted returns matter.

For example, I've got a friend who's been working at a startup for about eight years. They have a looming exit. If it goes through, he'll probably walk away with $1.5m. Had he gone the salaryman route, that'd be money in the bank.

[freddyc]

This is an important calculation that too many employees ignore. They get lured in by the stories of early Facebook and Google employees walking away with tens or in some cases hundreds of millions from their options, when in reality most start-ups fail and of those that succeed a sub-$100m exit is more likely than a blockbuster exit.

As an early employee you can probably negotiate 1-2%, which after dilution, tax and all the other fun things that come with options doesn't generate the returns to justify giving up the better part of a decade while arguably taking on just as much risk (if not more) than a founder. I've worked at several start-ups - including one where the founder plundered the employee option pool to offset his own dilution - and won't work at another unless it pays an above market salary or I am in a founder role.

[beachstartup]

i would only ever join a startup as a co-founder. i would never own less % than anyone else, i.e. at least one other founder should have the same equity as i do. that's my personal heuristic, ymmv.

if i'm going to work for someone else it's going to be the most stable situation possible, i.e. an established company with market or better salary and benefits and a reasonable workload.

[morgante]

I've worked for two startups.

In both cases, one of the defining factors in choosing the particular startups that I work for was that the founders were very employee-friendly.

In both cases, I was granted actual stock (ie. not options).

In my view, options (as typically offered) are basically useless as compensation. They have a strike price which isn't much lower than the price investors last bought stock at. Companies which offer these as a substantial component of compensation are essentially exploiting the naivety of employees and expecting them to value "ownership" more heavily than investors do, despite having much less favorable terms.

Risk appetite is not the issue.

[mavelikara]

  They have a strike price which isn't much 
  lower than the price investors last bought stock at.

Why is this so? I recently became aware of a case where the Fair Market Value of the common stock was only about 7% lower than what the last round of investors paid - preferred stock which, it was rumored in the press, came with a ratchet.

My impression was that the original thesis of the employee options were that common stock is marked down to a significantly lower price than the preferred stock.

[mahyarm]

I have. The basic issues with most options is will the %90 best case scenario of this risky reward mechanism beat working at FaceGooSoft by a significant margin? My %90 best case would be something like IPOing at $1 billion.

If the startup stock doesn't, then it's extra stupid to work at that place unless they provide you with a special non-standard working arrangement.

Usually they don't, it's open offices in the bay area with a pretty similar organizational structure and work type. Not a flexible remote working situation at bay area salaries or similar.

[Joeri]

Let me flip that question. Is risk a positive quality for a startup employee? After all, the startup is already taking a risk in terms of its product/market fit, so it should not be taking risks in terms of technology or internal processes, and hiring employees who like risk means they will make professional choices that involve risk even in situations where they shouldn't.

[JonFish85]

You didn't address this at me, but I figured I'd chime in.

I do work for a startup now, with options (and have in the past as well). I object to options in the sense that it takes a lot of luck for them to ever be worth anything. It's easy for companies to talk up their potential value (once we get our billion dollar valuation, your 0.05% is $500k!), but in order for the options to be worth the paper they're printed on, a lot of things have to happen in a specific order. One bump in the road, and your shares are wiped out.

Appetite for risk is a tricky way of putting it. I don't think the risk is that the company will fail and the options won't be worth anything; I think the real risk is that something will happen to cause the options to be worth less (or perhaps worthless). That's the sort of risk I'm not interesting in sacrificing much salary for, especially if the company isn't bootstrapping.

When the sum of the options pool allocated for employees is 5% or 10%, the risk/reward ratio is all out of whack. The risk of being diluted/preferenced/strong-armed out of your shares is fairly high. All it takes is one investor with preference to completely wreck the cap table.

As an employee, you need to know that you're absolutely last in line. Standing in front of you are: banks (loans generally come off the top), investors with preference, investors, founders (who will be fine, even if it means their shares are worth $0, but they get an incentive to stay worth $5m), C-level employees who might have preferred shares, and then finally, common stock holders.

So assuming everything to there goes really well, the shares convert to common and everything is looking up. You haven't been diluted into the ground, your company isn't Zynga and demanded your shares back and your company is now public. Congratulations! There are still more obstacles: you can't sell your shares for a certain lockup period, during which the share price could very well dive. If the stock is going up, you don't care, but if it dips, it's a race to your strike price. If the stock dips under your strike price, you have no reason to exercise your options, so you're left hoping that Wall Street likes your company.

And even then, let's say you exercise your options, sell the shares and make $500k. After taxes, you're going to walk away with a good chunk less than that. After taxes, let's say you have $330k. Say you worked at the company for 5 years before they went public, that's roughly $60k/year that your stock was worth.

So the real question then is how much salary is it worth deferring on the very long shot that you make $60k/year off of your stock? $330k isn't exactly life-changing money for most people: it's not enough to retire on, it's a nice down payment on a house someplace in reasonably high demand.