[retiredpapaya]

The Netflix approach to this [1], where Netflix allows employees to choose how much of their compensation is cash vs options seems like the best approach - you can tune based on your risk tolerance.

> Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside (down) you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.

[1]: https://jobs.netflix.com/work-life-philosophy

[robocat]

The stock options are for common stock, right?

However investors that put money in get preferred shares (not common stock) right?

The tradeoff is not equal: taking less salary and receiving stock of less value seems risky to me. I can't imagine the employees discount is very good (those preferred shareholders don't want to be diluted).

Better sibling comment here with in depth opinion: https://news.ycombinator.com/item?id=43677084 : which answers my question:

  when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).

[tomp]

> when your options vest, is that you are essentially allowed to make an equity investment

isn't the idea that you buy shares at book value, which is way less than "last round valuation"? so you're getting a discount.

I mean, hopefully that's how it works, I never put enough money when exercising my option to care...

[jjeaff]

Is there some bonus given if you choose stock options? Otherwise, what would be the incentive of taking options over cash in any amount?

[n2d4]

An understated benefit is that, if you have 4 year vesting, you can choose after year 1 or year 2 whether you want to stay.

Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.

So, considering this, the expected value of $100 in stock options is actually more than $100.

[hiatus]

> Meaning, if the company's stock went up 2x after year 1, your salary has effectively doubled for years 2-4. If the stock went down -50% however, you just leave and get market salary somewhere else.

If you get 25k shares worth <$1.00 and, you won't double your salary even if the share price doubles. Not to mention that only 1/4 would be able to be exercised, and you have no liquidity to realize the gain.

[n2d4]

The assumption in my comment is that your entire salary is in stock — otherwise, obviously you need to adjust accordingly. But only 1/4th of the stock being exercisable makes sense if you think of vesting like a monthly salary — each month, another 1/48th becomes exercisable. Even if you technically own the rest as well, it's more appropriate to think that you don't.

[dandandan]

If you think NFLX is going to increase x%, then your total comp goes up accordingly. If you took straight cash, you'd only recognize those same gains if you had purchased NFLX with it.

[fastball]

It's actually more than that, because the option costs less than the price of a full share. i.e. if your comp is $400k and you choose 100% stock options as your comp, that value allocation will almost certainly control more shares than if you took 400k in cash and used that to buy all NFLX shares.

If that wasn't the case then yes, there would be no reason to take options as comp because obviously (as you say) you can just buy NFLX on the stock market directly with some or all of your cash.

[fastball]

I realize this is still confusing, so here is a concrete example with made-up numbers.

---

Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.

Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.

If you'd taken the cash you'd have $300,000.

If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.

[virgilp]

> If you'd taken the cash and immediately invested all of it in NFLX, you'd have $400,000.

But you can take the cash and immediately invest it all in NFLX options. That should be the baseline for comparison, when answering "why would one pick options vs cash"?

I'd imagine you _must_ have some benefits to pick options. Perhaps tax treatment is better; perhaps you pay less fees than buying them yourself. But still, there must be some incentive to pick NFLX options from the company, instead of picking whatever options you want from your broker.

(also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).

[fastball]

You're going to get a better strike price from the company than from the market.

> (also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).

Yes indeed, that is why options are a risky investment and no company pays people entirely in options.

[laurencerowe]

At least when I was there the options cost 40% of the strike price (whatever the current market price was at time of issue). The other difference is that you shift the income tax to time of exercise.

[fastball]

Yeah my numbers were made up, 40% of strike price does sound more reasonable (and obviously provides less leverage, but still some). It being pre-tax also helps with leverage vs taking cash.

Another benefit of the company's options is that they have a 10 year term, vs most market options which expire in < 1 year. You can get LEAPS but those are still max 2-3 years.

[lbotos]

I know a few years ago spotify had a similar selector:

- cash bonus

- RSUs

- More OTE Options

You got to pick two and your ratio. IIRC, 80/20, 60/40, 50/50.

[jiveturkey]

this is a bad comment for this subject. NFLX options are on a publicly traded stock. the terms are also different than a startup stock option. you've really just introduced confusion into this subject, judging from all the child comments.

in my experience, most startups do offer you a sliding scale of cash vs equity, just not 90% as NFLX does. they may not advertise it or be upfront about it, but i've never personally experienced a startup that wouldn't trade one for the other.