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Comment by xyzzyz | Hacker News Reader

That’s not a rational way to evaluate compensation. Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?

A "reasonable person", or a more commonly used "rational agent", is an idealized notion that doesn't actually exist in a real world. Actual humans are not expected-utility-maximizers. See e.g.[1].

Also importantly, the scenario (evaluating the value of option-based compensation) is not like "guaranteed $1000 or a 10% chance of a $1 million" scenario you're describing. Rather, it's like "pay $50-100k/year in opportunity cost for entry to the lottery in which you can win some unknown prize that's almost surely below $5M, at even more unknown probability". Even an expected-utility-maximizer, a "reasonable person", cannot really make a reasonable calculation of the expected utility.

[1] - https://sci-hub.tw/https://www.sciencedirect.com/science/art...

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Just because people don't tend to do it doesn't mean you as an individual are incapable of doing it. His advise is the rational approach, and people on Hacker News tend to be smart enough to understand how to estimate probability distributions and how to compute expected value off of these estimates. With tools like this at their disposal, they are more than capable of applying their risk preferences and making rational choices.

It isn't really a matter of being "smart". Even investors, who have detailed financial models, decades of data for comparables, get preferences and often board representation to protect their interests, aren't confidently going to be able to provide a probable value of the investment. It is certainly unreasonable to expect employees, who get no board representation and thus can be screwed over in any scenario short of an IPO, to do better than people who have this as their entire job.

That's precisely right. Calculating EV of a lottery ticket is easy, because you know the odds exactly. The idea that a "smart person" can do the same for an early-stage startup that's offering options to employees simply beggars belief.

Estimating the value at zero is no different. I don't know if options from my old job will ever be liquid and worth anything of note, but I wouldn't sell them for a penny.

His advise is only smart if the salary you'd be giving up is unnecessary and you consider it a luxury to lock into an investment you may lose.

In fact, that's exactly what it is, whenever you're taking stock options into account for compensation be sure to consider how big of an investment (in loss of salary) it is and whether the potential payout and the risk seem logical. If you think that making that big of an investment is too risky for your well being (even if, in the average, it'd pay out better over a lot of plays) then don't take it.

We exist for a limited amount of time and large games of chance like this (even if they have an expected return) are not irrational to decline.

I cannot think of a single employed person that I know for whom turning down a $1000 1000:1 payoff for 10:1 odds is rational. Maybe a recovering gambling addict who would be triggered by this action, but that's about it.

Turning down an offer can be perfectly rational. I do not know why I am being accused of advocating for always taking options. All I'm claiming is that they aren't always worth zero, and assuming such is an irrational decision. And it's an entirely avoidable irrational decision that can be addressed by considering your own risk preferences, foregone salary, tax consequences, expected company outcomes, professional development, &c.

There is so much to factor in, too. I'm pretty happy with options if my base salary gives me a decent quality of life, I certainly wouldn't work for less on a gamble, considering the failure rate of startups. Never mind the fact that you are making a secondary investment in the same place you work, so you are doing worse than putting your eggs in one basket.

It's a nice bonus that _might_ pay something out. It's not a replacement for a proper salary.

That said, I can appreciate the desire to get skin in the game. Would love to see research on how necessary that is, though.

I think you may still be missing the point. What is the harm in completely ignoring the stock options and negotiating strictly on base pay. I think stock options for the most part should be considered like free snacks in the workplace. "Nice-to-have", they taste better because they're free, and if all the sudden they get yanked you didn't stake any livelihood or change of circumstance for it. If they end up becoming something great - maybe you get a new espresso maker, extra bathrooms at work, or an office instead of an open desk. Rarely will stock options change your life that you shouldn't plan on them but a nice perk if they do as they are very infrequently life-changing by any measure.

> His advise is only smart if the salary you'd be giving up is unnecessary and you consider it a luxury to lock into an investment you may lose.

Actually, even then, i'd just take the cash comp instead and invest it into FAANG options. You can do that on almost any brokerage.

> people on Hacker News tend to be smart enough to understand how to estimate probability distributions and how to compute expected value off of these estimate

That's a strange assumption to make. If anything, I'd argue that people who think they are somehow smarter than others because they're an engineer/programmer/whatever are more likely to put too much faith in their intelligence and make financial mistakes.

> His advise is the rational approach

Being smart is orthogonal to being rational.

What is the probability distribution that startup X will succeed? I'm genuinely asking, I'd love to know how would you approach estimating something like that?

Building this I used information from CB Insights, which looks at companies that receive VC funding by cohort. Their most recent report covers companies that raised seed rounds in 2008-2010: https://www.cbinsights.com/research/venture-capital-funnel-2...

>> more than capable of applying their risk preferences and making rational choices

Only if you know 1. The Cap Table 2. Your founders' and boards' predilections for exits 3. Potential future rounds 4. Where the market will go

When you don't know these, you can still create a probability distribution, but price will likely be zero because the inputs have to have massive brackets for potential values.

Another input I would add to your list is knowing what the day to day culture of the company is. If it's a total shit show and many many startups are, you might not even be able to last there a year which is the normal cliff before your options start vesting.

>"Only if you know 1 The Cap Table

Are candidates or regular employees ever privy to the cap table? I have asked about it many times when a recruiter has tried to sell me on the joys of options in lieu of pay. Even after accepting a job I have routinely been rebuffed on getting a response to inquiries about the cap table.

Early stage key hires are; after things get rolling though probably not so much.

Don't forget liquidation preferences.

This isn't even an abstract question about utility. What esoterica outlined was finance 101 (change "compensation" for ROI), which millions of people use in their day to day lives to make investment decisions. And stock options are an investment just like any other.

In my limited experience, stock options have significant differences from other typical investments in the following ways: 1) You can be prevented from effectively selling stock options prior to a liquidity event 2) Partly due to 1) , stock options are much harder to price than other investments that _could_ be bought and sold freely. 3) Due to the additional requirements as a byproduct of vesting, it is often impossible to pursue options at multiple similar organizations simultaneously. 4) Due to the caveats of even being a shareholder in a company, sometimes there are complications and risks. This is why there is a significant multi-page document to sign when exercising options typically.

What is a "typical" investment? There are literally thousands of different assets one can invest in, all of which contain varying degrees of risk profiles. What you outlined was the risk profile of options, which you would use to determine ROI.

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