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Calculations like this article neglect the far more common case where the liquidity event, if it ever happens, is years in the future, much longer than average employment times. Companies used to go from garage to IPO rapidly. Now a decade from founding to IPO is not uncommon. Unless the employee plans on committing their life to the startup that just hired them, they will most likely move on somewhere else before that decade-later liquidity event happens. When they leave, they have to spend after-tax $ to buy non-liquid shares of a still-high-volitility pre-IPO company, because almost all options have a 90 day exercise clause. If they were early enough that their shares are 409a valued at pre-seed valuation, that might make sense. If they are a significant employee, the kind of employee the company most wants to retain, and their shares are valued at Series B or C, that tends to be a very big check they'd need to write to their former employer to turn those options into non-liquid shares that may well end up at zero valuation, all at a time when they no longer have any ability to help the company succeed. The original motivation for offering options was to encourage employees to stay, but what happens is the precise moment the company most wants those options to do their thing and retain the key employee is the moment when the employee starts doing the above calculation, realizing the company is years from IPO, it's still risky even if it looks promising, and the options are actually worth zero unless the employee either (a) stays at the company for a decade or (b) pays back a non-trivial fraction of their takehome pay to buy a risky illiquid asset. The employee realizes neither of those scenarios are likely to happen, so boom the moment when the company wants the options to drive retention ends up being the moment when the employee realizes the options are not just worthless, they could actually have a negative EV if exercised. Suddenly those options aren't very effective at retaining the employee. There was a time when options had value like the OP suggests, because the timescales were shorter. Today, not so much. Yes, outliers happen, but in general they don't. |