[ChuckMcM]

To add to this, so what if it is "$200K" ? Basically that is enough to completely cover one kids education at a state school, put down 20% on a million dollar house, or seed fund your next "big thing" for easily 6 to 18 months. On top of that you've been working for a salary that probably paid all your existing living expenses so you were not accumulating debt. That is a pretty cool thing.

Further, if you continue to work there and it continues to appreciate (as it would if Box proves out their model) then you're looking at $200K * x where 'x' is the appreciation multiplier.

Even if your company does a reverse 5:1 split as a friend of mines did just before it IPOs that ISO option is now a 'something' rather than a 'nothing' which was what it was when it was illiquid.

Bottom line, its a Good Thing for everyone.

[ryanobjc]

Good point! Although, you didn't really talk about what the engineer gave UP to work at the company.

Depending on the time, $200,000 over 4 years is not a really good reward. In the mean time you have forgone: - better healthcare (if you have a family this ups the cost a lot) - lower stress job - better bonuses at 'big companies' - better options at public companies

Remember, that a great sr engineer, the kinds that startups allegedly hire, tend to be getting $30-80,000 a year in options at companies like Google, Apple, etc.

So now your $50k/year is looking like... well it's looking like a loss frankly.

[ChuckMcM]

It is a fair point that you have to consider the null hypothesis. My experience, and granted its really only about a dozen startups where I actually know the full details of the deal, are either a "huge" win over an established (already public) company or a "huge" loss (the go out with no additional value). And I happen to know that in this specific case folks that were senior engineers at Google and are now senior engineers at Box, and at least one of them is happy they didn't choose to stay at Google. But like anything, Box could IPO and fall through the floor like Zynga (I doubt it, but it could) or GroupOn. Or it could do a Facebook and fall for a while and then recover quite nicely. So the play isn't over yet as they say. In my own experience if Google hadn't repriced everyone's ISO shares I would have made very little money on them after they had vested and I exercised them.

The key though is that its really really hard to compute the expected value of a share, even with Black-Scholes, such that you know what the right answer is :-)

I will say that I have not yet met anyone driving their life based on expected value of their choices who is really happy. I find that strange sometimes because when it is a conscious choice you would think they would be happy to be doing what they want, but so far haven't found anyone.

[FireBeyond]

"put down 20% on a million dollar house" - maybe, or maybe not. Your bank might still look at it as a gift, and you still run into issues.

For example, Mike Davidson (founder of Newsvine) describes in a blog about building a $1.1M home after he sold to MSNBC (http://www.ahousebythepark.com/journal/archive/category/fina...):

"My credit is great and I have a strong cash position, but even so, getting a jumbo loan is seemingly 10x more difficult than it has historically been."

"Then, a whole two months into the process, they wanted me to go to my HR department and provide written compensation guarantees using language my HR department was not comfortable with (and neither was I, to be frank)."

"All this for someone who has perfect credit, a comfortable salary, plenty of equity in his property, and the ability to pay off the entire house tomorrow if necessary."

[ChuckMcM]

I made the down payment on my first house selling my ISO shares, and then when we sold that house and moved to a slightly larger house my wife and I both sold shares we had in ISOs to make a larger downpayment. Neither time did the bank consider it a 'gift' (nor did the IRS, they took their pound of flesh too)

During the dot.com boom there was an interesting series in the newspaper about people who took their IPO proceeds and immediately sold them and bought a house. The question was "Gee, look at all the future growth they are giving up by converting hot stocks into stodgy real estate."

[wwweston]

> To add to this, so what if it is "$200K"

Depends on if it's $200K while working at market rates, or $200K vested over 5 years while working at 50k under the highest market rate you could have had because, hey, you had equity.

[michaelochurch]

To add to this, so what if it is "$200K" ? Basically that is enough to completely cover one kids education at a state school, put down 20% on a million dollar house, or seed fund your next "big thing" for easily 6 to 18 months. On top of that you've been working for a salary that probably paid all your existing living expenses so you were not accumulating debt. That is a pretty cool thing.

You are not allowed to comment further on this until you read this article: http://en.wikipedia.org/wiki/Opportunity_cost

So, here's how to read startup and employee equity. Compare it to Wall Street. Yes, Wall Street.

Forget whatever negative image you have of banks or hedge funds. Whatever negative thing you might say about those also applies to most VC-funded startups. (After all, most VCs are ex-finance guys, MBAs who didn't do well enough in school to get into stat arb.) 95% of startups have worse hours than IT or quant or S&T roles in banks. (Analyst programs are a different mess.) 95% of startups have no moral edge in terms of mission or management ethics. 95% of startups fire more quickly and with less severance (sometimes zero, plus a ruined reputation because shit happens when arrogant kids fall into power) than any bank. 95% of startups aren't giving more interesting work to non-founder engineers than large companies (being CTO or first engineer might be cool, but a typical engineering role is inferior) do. 95% of startups don't have the prestige for their more liberal titles/promotions to actually carry durable weight.

So, there's literally no good reason to choose the startup ecosystem, unless you have a rare informational advantage, over Wall Street. Are there excellent startups out there? Yes, there are. I would argue that very few people have the skills necessary to tell the good few apart from the worthless many.

In the successes, the typical employee equity payout, vested over 4 years, is the kind of bonus banks give when they're looking to fire someone nicely (i.e. the "we'll disappoint him out" bonus).

Also, acquisitions are generally terrible for regular employees in terms of position, rank, etc. So you should literally think of liquidation as a severance, because the odds are high that the acquirer already has someone doing your job and he has the political edge. And $200k after taxes is really rare for an employee startup payout. That might be 98th percentile. I've seen lots of zeros in acquisitions considered "successful" by Techcrunch.

It really is a fucking scam, but it's not just a problem with startups. Software people are terrible at looking out for their own interests. Engineers either need to become savvy and self-interested like hedge fund quants and get what they're worth, or bring back the out-of-fashion but powerful concept of collective bargaining.

[ChuckMcM]

It is clear from the tone that you've got some emotional investment here, and I respect that, and with all due respect the facts stand in argument to your thesis.

Consider for that there are more millionaires and billionaires in the California than there are in New York ([1] [2]). The housing market that is the Bay Area exists not in a small number of neighborhoods, but from South San Jose to Novato in Marin. One has to appreciate the wealth building effect of the industry if it can raise the median price of a single family home over a thousand square miles by $500,000.

Yes, some acquisitions suck, and yes, even some IPOs suck, but no other industry puts as company value into the hands of the rank and file employees as startups do.

[1] http://www.census.gov/prod/2003pubs/p70-88.pdf

[2] http://www.netstate.com/states/tables/state_millionaires_air...

[mahyarm]

Do not look at the price of housing as an indicator of being wealthy! It's often an indicator of regulatory failure & NIMBYism more than anything. Otherwise my home area of Vancouver would be land of the wealthy, while it's actually became the 2nd most unaffordable city in the world. Unaffordable being housing price : annual income ratios. The bay area has started to attract mainland chinese cash too. Friends have been outbid by mainland chinese buyers with cash trying to buy a house in palo alto.

You don't even have the luxury of going over a bridge and housing prices dropping significantly. In Vancouver, the average house is $1.2mm - $800k+ and going 1 hour away from the city core just drops you $100k-$200k.

[michaelochurch]

Thank you for writing that. I'm at a conference and don't have time to correct all the wrongness on the Internet. High house prices are a combination of regulatory corruption ( NIMBY) and extreme price inelasticity.

Disasters that destroy housing actually increase the notional value of housing after the (very short) period of panic wears out, because the price spike more than cancels out the loss of supply. But wealth was destroyed, not created.

[ChuckMcM]

I wasn't going by the house prices specifically as an indicator, I was really trying to point out that Census data says that there are more millionaires per capita. In California. I used to be able to find it by county but the 9 bay area counties are well represented. All those millionaires are not "just the founders and a few MBAs"

[thaumasiotes]

Using an unrepeatable windfall as the down payment on a loan seems wildly inadvisable. The point of the down payment is that you're able make good on the loan.

[rahimnathwani]

No. The point of the down payment is to reduce the loan-to-value ratio which, in turn, reduces the risk taken by the bank (as the property value would have to fall by more than the amount of the down payment before the loan collateral is worth less than the loan).

This risk reduction is why the bank will give you a loan at y% rather than 1.5y%. This reduces your monthly payments to an amount you can afford each month from your salary.

[ChuckMcM]

This is exactly correct, loan to value differences change both your APR and whether or not you need private mortgage insurance (PMI). If your loan to value allows the bank to give you their best rate and waive PMI (which they do because they believe if you default they can sell your property at a profit) then you will save a tremendous amount of cash over the lifetime of the loan.

[FireBeyond]

As I mentioned down thread, it's not that easy. Mike Davidson, who sold Newsvine to MSNBC and had enough liquid cash to (more than) cover his mortgage that day in its entirety still went through hoop after hoop even refinancing his loan.

Risk is only a part of the equation here.

[ChuckMcM]

I would be really really cautious about taking anything from Mike Davidson's blog, for one if you notice the dates it was during the worst Mortgage Meltdown in history (july 2008, and may 2009) and he was attempting to get a construction loan which is an entirely different sort of transaction than simply buying a house that already exists.

[rahimnathwani]

I was responding to a parent comment: "The point of the down payment is that you're able make good on the loan."

I don't agree with that statement, as I believe the primary purpose of the down payment is a source of risk reduction for the lender, whose only guaranteed recourse is the collateral on the loan. In the UK, home loan products each have max LTV (loan-to-value) thresholds, and prices are inversely related to those (though not linearly of course). Lenders don't care whether the LTV being less than 100% is the result of years of saving, a gift from parents, a windfall of some kind, or just because you happened to make money when you sold your previous property. They care mainly about the LTV (which affects their downside risk) and the ratio of your regular monthly income to the monthly payments (to make sure you can comfortably afford the repayments).

Do you disagree with my statement, or are you just pointing out that the down payment is only one of the factors which affects the risk of the loan, and that the risk of the loan is only factor which affects the lender's decision?

[thaumasiotes]

If your down payment is a gift, you're supposed to disclose that fact... the lender doesn't consider it equivalent.

[rahimnathwani]

If it's a bona fide gift, the lender will consider it equivalent. If you claim that the deposit is a gift, they may request a letter from the person who gave you the gift to confirm there are no strings attached, i.e. that:

- it's non-returnable

- it's not interest-bearing

- no interest in the property will be retained by the person giving the gift

If they didn't do this, the gifting party could later claim that the gift was in fact a loan, and that it is secured on the property. This could cause complications for the lender, who is relying on a first charge on 100% of the property as security.

[jbooth]

If he had that cash, why didn't he just buy the damn house himself?

[FireBeyond]

To my mind (and I don't know exactly how much) - even $1.5MM at a 3% return would nearly make your mortgage payments without touching the capital, so maybe that's why.

[jdavis703]

It depends on if you're buying the biggest house you can afford, or are simply trading your rent for a mortgage payment of the same amount.