[nostrademons]

Interesting that this quote was initially about stock options at tech companies. It turned out that stock options did become nearly universal in tech compensation, and companies that granted them outcompeted companies that did not. So the management that was ostensibly “doing a massive blag at the expense of shareholders” wasn’t really, time vindicated their practices and things like option backdating and not treating them as an expense weren’t even really necessary, but it took a few years. It wasn’t obvious in 2002 that this is how it would play out.

And relevant to the title quote: maybe it should be amended to “good ideas do not need a lot of lies to gain public acceptance eventually”. The dynamic here is that a significant part of public opinion is simply “well, this is how things work now, and it seems to be working”, and any new and innovative idea by definition is not going to be how things work now. The lies are needed to spur action and disturb the equilibrium of today. But if you’re still telling lies a few years in, you’ve failed and it’s a bad idea to begin with.

[pjc50]

The specific lie discussed was the idea that granting options was not somehow an "expense" and could be excluded from the accounts.

(Google tells me this is a relevant summary of US GAAP https://carta.com/uk/en/learn/startups/equity-management/asc... )

[AnthonyMouse]

> The specific lie discussed was the idea that granting options was not somehow an "expense" and could be excluded from the accounts.

Stock options for the company's own stock are kind of weird because the company can issue its own stock, which puts them in a much different position than someone selling uncovered calls.

An uncovered call is a potentially unbounded liability. If you issued someone options to buy 10,000 shares for $10 each and then the price went up to $1000, you could be on the hook to have to buy $10M in shares and then sell them for $100,000, i.e. you'd take a $9.9M future loss, and the risk of that is a significant liability.

Whereas if you have 10,000 shares and agree to sell them for $10 each and then the the price goes up to $1000 before they pay you, you don't actually owe anyone that extra money, you just failed to make the $9.9M gain you otherwise would have. It's the same as if you'd sold (or issued new) shares for $10 immediately. But we don't generally book "opportunity cost of selling shares for the current market price" as an expense, do we?

[manwe150]

The IRS rules on AMT for that transaction might have you thinking it was generally booked. Though any sensible accounting seems like it wouldn’t book it.

[AnthonyMouse]

We like to pretend we have rule of law, but every part of the government is inherently a political animal.

Old money deferring capital gains forever? No prob. Some nerds who built something but mostly don't have a sophisticated understanding of finance or an organized political machine? Haha screw those guys.

[nostrademons]

That's not what the quote in the article is:

> Our lecturer, in summing up the debate, made the not unreasonable point that if stock options really were a fantastic tool which unleashed the creative power in every employee, everyone would want to expense as many of them as possible, the better to boast about how innovative, empowered and fantastic they were.

That's saying that it's stock options themselves which are the bad idea. The lie is in how they are expensed or not expensed. The point the accountant is making is that if stock options were a good idea, they could be expensed, thus not needing the lie.

But nowadays, stock options are expensed, right there in public, and they are still considered a good idea.

[camgunz]

Nah I think the advice generally is "ignore options."

[zdc1]

People who sell lottery tickets, on average, do better than those who buy them. The same applies to stock options. Which is why "bonus" options are fine, but "buying" them by taking ESOP over potential salary, can be a bad choice.

[xphos]

I think it depends on the ESOP, the companies i've worked at ESOP happened at 10-15% discount of the real price at the buy time and those stocks are instantly sellable. They can be taxed differently yeah but depending on how much you are buying and sell its capital gains tax which can be lower than income tax.

Edit: I am conflating RSUs and stock options never worked somewhere without RSUs so there might be a gap in my experience

[slavik81]

Options are a bit riskier than RSUs. If you have RSUs issued at $100 and the stock goes down to $50, then your RSUs are worth half. If you have the option to buy stock at $100 and the stock goes down to $50, then that option is worthless.

[chermi]

What behavioral incentive do lotto tickets give the buyer? Options/stock work for both parties because of alignment.

[zdc1]

I'm kind of getting at the fact that people tend to optimistically overestimate the likelihood of positive outcomes. This is true for lottery tickets, and stock options (every startup is definitely going to the moon).

From the company's perspective, options/equity are great for creating alignment. From an employee perspective, employees need to understand that they are making a bet and have limited control over the outcome of said bet.

[commandlinefan]

> stock options did become nearly universal in tech compensation

Although I've noticed that options have been replaced more and more these days with RSU's (plain old grants) because options have a tendency to go "underwater", suggesting that they weren't all that great to begin with.

[zozbot234]

Right, options go underwater precisely when the company is not doing well and you are at greatest risk of losing the job. That's not a great risk profile.

[JumpCrisscross]

> options have been replaced more and more these days with RSU's (plain old grants)

RSUs are also much-less liquid and tightly controllable by companies than actual stock. That has made them attractive to management and insiders.

[bluGill]

I learned long ago (when my company decided they couldn't give me options because we were too big so they did these "I can't believe it isn't an option", which expired worthless): until cash is in my bank account it is just a promise waiting to be broken. If I want to invest I want it my choice.

In any case, it is a bad idea to invest in the company you work for - unless you are high enough up in the company that you see the real books, or you have so much invested they have to show you as a large shareholder. (nobody is the later - large shareholders have a full time job managing their money not working for someone else). There have been a number of cases where a company has unexpectedly filed bankruptcy and someone lost their job and their savings on the same day.

[nostrademons]

> In any case, it is a bad idea to invest in the company you work for

I'd question this conventional wisdom, simply because you have a lot more information about the company as an employee than a random investor does, even if you are not in possession of things like financials that the SEC considers "material non-public information". Things like culture, intelligence of your coworkers, whether or not you're actually delivering on your commitments, how many feature requests and bug reports you get from your customers, mood of management, perks offered, etc. are all intangibles, but they are usually better predictors of long-term company performance than the financials that the company gives investors.

If your company is not doing well enough or is not something that you would consider investing in, you should find a different company to work for. Bad things are going to happen in your future, regardless of whether you own shares or not.

[p_l]

I used to be on a project that, IMHO, had possibly considerable impact on capabilities and even some specific financials in a publicly traded corporation.

After about third earnings call (which happened a tiny bit before the trading window for our stock grants opened), I (re)learned the hard lesson that even if we delivered and I had actual, material, move the needle impact on corporate financials, that would not translate in any way to stock price. Except maybe if I pushed it really, really, down by causing an avalanche of problems that resulted in some big name deal going down.

The stock prices are vibe based, once its publicly traded your share value will be based on whatever vibes pushed numbers in excel around earnings call, and it's perfectly normal occurrence to beat expected earnings per share for 3 quarters straight and every quarter get a different vibed-off reason as to why the price should go down.

[raw_anon_1111]

No you don’t. If you did, you would be subject to lock outs. The average rank and file employee at any BigTech company knows only a minuscule more than the general public.

Amazon for instance has over 1 million employees. You know nothing about most of your coworkers or whether other teams are delivering featured

[YetAnotherNick]

> The average rank and file employee at any BigTech company knows only a minuscule more than the general public.

They know the clients, the contracts, hiring, cost cutting way before the general public does. The problem is that many BigTech is sum of many units which might not be correlated, but for say Nvidia or Apple I would assume the employees would be a good people to take the stock advice from.

[youarentrightjr]

> The average rank and file employee at any BigTech company knows only a minuscule more than the general public.

Huh? We're not talking about the custodial staff.

> Amazon for instance has over 1 million customers. You know nothing about most of your coworkers or whether other teams are delivering featured

This is a hilarious example; especially at Amazon, "rank and file" employees are privy to $100M+ AWS deals, they have to implement them after all.

[bluGill]

You have more information, but only in a small area. if there is fraud by the executives they will hide it from you. If a different division doing poorly bringing everyone down you won't know before anyone on the street. even in your own division you won't know all the important numbers, a great feature coming doesn't mean customes really want it, you might be sucked into thinking a useless vanity project is something customers care about.

[thegrim33]

>> RSUs are also much-less liquid

Every time I got an RSU I could just sign into my RSU account and press a single button which sold them all, put a portion of the proceeds aside for taxes, and deposited the rest as cash directly into my bank account within 1-2 business days.

How are options more liquid than that?

[jayd16]

What makes them more or less controllable? I know they can have specific triggers applied to them so as to delay vesting. Are options somehow immune to that or is it something else entirely?

[JumpCrisscross]

Note that I’m speaking more about private companies than public ones. But an RSU is basically only liquid if the company says it is. Shares, out of exercised options, have a lot more flexibility.

[jayd16]

Right, but that seems to be comparing unvested RSUs to vested and exercised options. Are options more strict about what games can be played with vesting triggers?

[lotsofpulp]

It’s been standard advice on this forum for at least 10 years to value options at $0, and only consider cash comp + RSUs.

[0x3f]

Options have some minor value in signalling that you're a true believer. You should in fact care only about base salary, but not telling the people doing the hiring that can be quite useful. Doing a fake come-down on base in exchange for options shows you are invested and surely worth hiring.

[eleveriven]

Lots of things succeed after early hype not because the lies were necessary, but because the underlying idea was good enough to survive them

[ekjhgkejhgk]

> Interesting that this quote was initially about stock options at tech companies. It turned out that stock options did become nearly universal in tech compensation, and companies that granted them outcompeted companies that did not. So the management that was ostensibly “doing a massive blag at the expense of shareholders” wasn’t really, time vindicated their practices and things like option backdating and not treating them as an expense weren’t even really necessary, but it took a few years. It wasn’t obvious in 2002 that this is how it would play out.

I happen to have read probably everything that Warren Buffet wrote on this subject, and in my opinion your take is confused at best.

First, you say that “stock options did become nearly universal“. No, they were already nearly universal at the time that this conversation was happening. I remember that Warren Buffet was quoting, going by memory, something like all but 3 out of 500 S&P DONT companies do it, or nasdaq or whatever index he was talking about. The fact that almost all companies do it doesnt mean its the right thing to do and if almost no company did it, Buffet wouldnt be complaining about it.

Second, you say “companies that granted them outcompeted companies that did not“. I literally have no idea how you came to this conclusion since, like I said, at the time this conversation was going on almost all company did it. Not because the companies that didnt do it died out, but because companies that didnt do it switching into doing it.

Third, and most important, I believe you misunderstand what the conversation is about. Expensing stock options is not a competitive advantage. Granting stock options might be, the rationale that paying management and staff more attracts the best people is an argument worth having. But the conversation isnt about whether its a good idea to grant stock options, the conversation is about which entry you should put your stock options when preparing financial statements. The author says clearly that this is about accounting, but you missed that. Theres no competitive advantage in doing one way or the other. The reason why Buffet complains about them is that A) it makes harder to discern from financial statements how much staff is costing the shareholders, not that its a competitive advangage or disadvantage, and B) if theres a cost that you need to pay in order to run the business, thats called an expense, and by your own argument you need stock options to run the business, therefore those are expenses and thats how they should be labeled in the income statement. The argument of companies doing it is that “earnings“ is bigger if there are things which are expenses but you dont call them that. Its literally saying that pnl = P - L but you know what, its bigger if I just report the P and hide the L.

[opo]

>...The reason why Buffet complains about them is that A) it makes harder to discern from financial statements how much staff is costing the shareholders, not that its a competitive advangage or disadvantage, and B) if theres a cost that you need to pay in order to run the business, thats called an expense,

Yes, that is true - that is what Warren Buffet says are his reasons. It might also be true that the actual reasons might have more to do with the fact that he didn't like the idea of having to potentially dilute his 100+ billion dollar wealth in shares of Berkshire or that he didn't like having to increase employee compensation to compete for workers since he refused to give out options.

[indymike]

There was a body of evidence far before 2002 that dealing employees in was a good move.

[asa400]

> and companies that granted them outcompeted companies that did not

What are you basing this claim on?

[nostrademons]

That of the top 10 companies in the S&P 500 [1], all but Broadcom and Berkshire Hathaway give generous stock options, and also that of the top 10 in 2000 [2], only one (Microsoft), maybe 2 (Cisco) did. If you look at change in index composition, or even total earnings by company, you'll see a very steady and dramatic replacement of companies that did not spread the wealth through stock options & RSUs with companies that did.

[1] https://www.slickcharts.com/sp500

[2] https://www.visualcapitalist.com/ranked-the-largest-sp-500-c...

[raw_anon_1111]

Conflating stock options and RSUs?

[peacebeard]

So in your view, even a useful innovative idea cannot gain traction without being overhyped?

[SpicyLemonZest]

Almost any useful innovation is going to have a right tail of people who overhype it. They shouldn't, and I wish they wouldn't. But if your strategy for evaluating new ideas is to find the biggest sources of hype and fact check them, you're going to systematically undervalue innovation.

[6510]

The problem is that many care more about presentation than substance. The irony gets overwhelming where boring is usually the best solution and the least exciting.