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