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Comment by bradleyjg | Hacker News Reader

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

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This. And things are not really comparable to big finance jobs as the bonus is more or less expected to some degree or people leave to places where they will get the bonus.

Startups are a lottery to a large degree, and for employees without significant equity, the odds don't seem great.

The finance industry has its own risks. It's a tournament type structure where as long as you stay in the tournament you are doing very well, but if you fall out you can end up doing pretty poorly. Whereas the tech industry, at least for the last several years, has offered a soft landing to many of those that choose to enter the startup lottery and lost.

Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor.

> Probably the least risky choice among high paying jobs that exist in reasonably large numbers is to become a doctor.

Though it's likely that your first several years of awesome salary will be spent paying off loans.

Can you elaborate on the "tournament type structure?" Are you referring to those at a high enough level where the expectation is that they source deals? If so, then yes, because at that point it is sales, and if you don't deliver new business, you bomb out, same as any other sales job.

If you are low enough level though, that isn't necessarily a concern since you aren't expected to source deals.

In the investment banking industry you can't be a lifetime associate, it is up or out. If you make it to managing director you are doing very very well for yourself, but you still don't have any job security. That big pay packet is a ripe target when fortunes turn and the bank needs to cut costs. And if you get let go as an MD it is unlikely you will find another bank to take you in (the usual thing where it is harder to find a job without a job is even more so in the financial world.)

There's also a technical meaning to tournament theory that helps explain why firms in some industries are so structured. You can read more about that here: http://www.econ.ucsb.edu/~pjkuhn/Ec250A/Slides/Tournaments&T...

Interesting research and thanks for the link.

So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing. But for junior analysts and such, there really isn't that stigma since their performance is not measured on a sales basis (and thus their mobility is not necessarily hindered by a down year).

Do you have any info or insights into how deal sourcing typically works at that level? Seems like a crazy thing to measure against when your annual deal volume would be relatively low given the size of the deals.

> So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing.

I've never worked in finance, but I have a lot of friends who do.

From the day they entered (ie. as junior analysts), up or out has been the mantra. You simply cannot be in a position for more than a few years. If you're not promoted to the next level, you're fired (though most of them had the sense to switch industries when it became clear they weren't going to be promoted).

Deal sourcing comes in at higher levels, but the "tournament" structure is embedded throughout.

Where do a lot of them tend to end up if they jump ship, and where to they tend to end up if they don't have the foresight to jump ship and are fired?

Every other industry. (Including and especially tech.)

A good portion of the business people you meet outside of finance are people who wanted to work in finance but couldn't hack it.

Or as michaelochurch likes to say, SV's CEOs are NYC's rejects. Not that I agree with him.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

No, having your options be worth a lot is a very rare event. That's why they hand them out instead of giving you more money.

The main reason that options are handed out is to compensate for below-market salaries, and the main reason salaries are below market is that the company wants to increase its runway. Some specific valuations or offers warrant cynicism, but remember that any startup with negative cash flow (even successful ones with near-market salaries) should be giving out equity to keep their salaries costs down.

Yes, but most of these companies fail and the options thus worthless. I mean it's great when it works out, but like lottery tickets they usually aren't worth the paper they are printed on.

Right: startups give out options, and those options are likely to be worthless. Your previous comment, however, was also suggesting causation: startups give out options because they are likely to be worthless. That's certainly not the entire reason. Like I said, a startup doesn't want to pay market salary because it would effectively ~halve their cash runway versus shifting compensation towards equity.

you are correct to point out the "flaw" in what s/he said.

I don't know the actual answer (and it would be difficult to convince me that anybody has all the data either) but many people "experienced" with startups believe that so many more options come out worthless that cash is strictly better, better expected return at lower risk.

however, in the same way that the freakonomics guys explain people playing state lotteries even thought they are "not worth it": state lotteries (and startups) offer some of the few chances that most people have to actually get rich, so even though they don't pay off on average, they are "the only way" and "worth it" to some people. Not claiming that these people have clear ideas about either expected values or risks involved, but they have clear ideas that "it's the only way". For workers at many skill levels, they may have a sense that in their industry they won't be too much worse off in the long run so why not take a shot.

That's really a moot point, important only from a "risk neutral" standpoint. You've just discovered why risk-averse people don't work for startups.

Generally companies hand out options because their expected value is Less than cash. Put another way, they could also just hand out stock instead of stock options.

You're assuming a utility function of someone that's either risk adverse or risk neutral. What happens when you plug in a risk seeker?

They'd probably be better off with cash and gambling in some other fashion.

The upside is a non-zero chance of becoming filthy rich. Some people are willing to put up with a lower expected value in exchange for that chance. It's a fancy version of the lottery, which many people also play.

You shouldn't be able to influence a lottery outcome. Presumably, you can influence share prices if you work for a company that you have an ownership claim on.

Do you actually believe that as a non-founding employee you'll be able to make the difference between the company delivering "a life changing amount of money" to employees instead of the far more common outcome?

I guess the same type of mind that believes meritocracy really exists could believe such a thing...

Do you believe companies can accomplish anything they envision, without employees? Or do you think employees are entirely fungible?

Does my last employer not have a large contract with Prudential, because of my work?

> Or do you think employees are entirely fungible?

This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail.

Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones?

> Does my last employer not have a large contract with Prudential, because of my work?

If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure. If the contract didn't make a substantial difference in the company's outlook, then how does that relate to my point?

It was a consulting firm trying to break in with a larger client, so they had to move to other projects. Last I saw, they were working on Android projects.

>Maybe you thought startups were an exception and that startup employees are unique snowflakes but BigCo employees are drones?

No, I just don't think anything can be done without people and that one person is not the same as another.

Have you worked at a small startup before?

> If that contract is what made the business viable, then the company must be completely fucked without you and be on their way to failure.

In any startup with <5 employees if an early employee leaves it's a huge risk to the company that may result in bankruptcy or failure of the company. Engineer #1 is as important as a founder in the startups I've worked at.

If there are 3 founders and 2 non-founder employees, then typically each employee is doing (approximately) 20% of the work. Not many small companies can just shrug off losing 20% of their workforce.

> This is what every self-respecting capitalist believes and knows in their heart. Employees are resources. If a founder doesn't know that they will fail.

I hate to be rude but WTF are you talking about? I've known several successful startup CEOs and they keep good employees close and well taken care of. For one thing, startups usually fail, so you're going to have to keep your good employees open to working with you on your next attempt, and if you keep treating them like slaves/resources they won't come with you to your next venture. Second, how are you going to recruit new talent if your reputation as a founder is that you treat your employees like interchangeable "resources"?

"make the difference" alone? Probably not.

Did I "positively influence the outcome" in the company I work for? Almost assuredly.

Of course, this is coming from a mind which does basically believe in a meritocracy, so...

He's talking about expected value in the probability sense.

EV = payout * probability

So for cash:

EV = 150k (or whatever your salary is) * 100% (it's guaranteed)

For equity it might be:

EV = 1M * 10% = 100k

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