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A huge percentage of stock options expire worthless (one common assumption is that 90% of options bring no value to the holder).

That's offset by the fact that a meaningful fraction of the 10% that have value to the holder can sometimes generate life changing wealth.

To me, substitution of stock options for cash is a function of how much financial risk you want to take or can afford.

If you have fewer financial obligations (eg. unmarried, no mortgage, no kids, no or low debt) and want to take a risk at a company by taking options in lieu of cash, do so.

If, on the other hand, you have financial obligations (any of the Big Financial Four above), it's probably better to get a salary that keeps your nose above water, take the token sign on equity they offer and then earn more shares by being awesome.

In any case, it's wise to objectively evaluate the value of your equity every six months or so. If it seems to you that it's got a lot of value, try to get more (ways to get more include being awesome and asking). If you think it's not worth much on two consecutive bi-annual reviews, see if there's another place where you could get a better deal.

It's no one's job to manage your career but yours.

I don't suspect most people have any problem with worthless options. Quite the opposite, those are easy to deal with. What most people have a problem with is the requirement to exercise the options for real money when leaving a company before there is any proof that they are worth anything.

Seems to me that if a person is leaving a company for a different opportunity, they're making a clear comment on their perceived future value of the company.

That is, who would leave Google in 2002? Dell in 1993? Facebook in 2006?

In my opinion, the best stock exercises are cashless, one time events, paying full short term capital gains. Those trades represent almost no risk to the exerciser (exercisor?) and are pure financial upside.

I wonder how options stack up against just getting a higher salary, gathering all the extra money and taking it to the casino for one big spin?

This is an excellent suggestion. Alternatively, you could invest the extra money in stocks, which have a somewhat better average return.

I don't have as much personal experience (only one colossal flop, $4k invested + ~20% lower salary), but I've got enough experience in the industry to have come up with this hard and fast rule: If you didn't found the company and aren't getting 10%+, equity is meaningless. If they insist you take equity ("Don't you have faith that we'll be successful?"), you can offer to knock off 1% of what you would have expected in annual salary without it (even that is arguably too much). Otherwise it's absolutely not worth it.

Companies love trying to get you to take a 5-40% pay cut because "It's a startup" and "we'll give you equity". Total BS. You will be better off spending an hour every week minding your money in other ways, with your appropriate salary.

To be fair, I've talked to people in some companies that try this that quite simply do not understand how options work. It is ignorance, not malice, that causes their odd behaviors (not that the end result is any better).

My usual bargaining gambit is to ask how much salary they will give me over the vesting period to buy back the options. If nothing else this puts a price floor on how much the options are worth to the company.

"Don't you have faith that we'll be successful?"

To which the answer is: "The success of this company will depend much more on management's strategies and the vagaries of the market than on the code that I write. Besides, you're not sharing your financials and other private business information with me, so I have no basis for guessing whether the company will be successful or what the value of the equity you're offering me will be. And in any case, I need to be able to pay my rent and other expenses regardless of whether the company is successful or not. So I'm expecting to receive a competitive salary."

Likely response to that is "Not a team player."

And you're better off not being there.

It blows my mind when friends accept offers and I ask "did you get any equity?" and they say "yeah" to which I reply "how much?" and they give some figure that is meaningless without a cap table, and when pressed further I learn that they have never seen the cap table.

A good rule of thumb is any start-up options has to potentially be 2-5x better than I would get at a FSTE 100 (DOW 30 in the USA)

BTW British telecoms latest share save 5 years maxed out at £200 a month - just came out at £100k effectively tax free.

Actually you would be better off coding something yourself in your spare time and giving it away for free. As soon as you can get recognition or an audience you are building some intrinsic value that will pay itself out some day.

Equity in the form of options is usually worthless. Even in the off chance that the company is wildly successful, your options will only be meaningful if you got them early enough to have a ton of them or a ridiculously low strike price. I've worked places where the total number of options offered to new employees (vesting over 5 years) were fewer than what the early employees and founders vested (and exercised) WEEKLY.

RSUs tend to be better because, unless your company goes out of business, they're usually at least worth _something_ when they finally vest. One thing about stock, however, is that after they're all vested, you're effectively seeing a decrease in your overall compensation. An RSU package that fully vests after 4 years incentivizes you to start looking for a new job after 4 years.

When I get an offer that contains options, I usually mentally value it at $0 and THEN consider whether the salary still seems competitive.

EDIT: I generally value _options_ at zero.

I also LOVE kasey_junk's strategy below of asking companies what they'd hypothetically offer in cash instead of equity. That's pretty much guaranteed to make the company get real about how they value their equity. I remember once negotiating ~$5K more in base salary to "give up" what OMG COULD TURN INTO MILLIONS OF DOLLARS IN OPTIONS!!!! The company eventually went bust and sold for pennies on the dollar.

At any stage company? Valuing options at $0 at a seed company is a lot more reasonable than at a company actually making money or is growing rapidly.

It's a rule of thumb to keep my gambling addicted brain from getting carried away. Mentally treating options as $0 helps me focus on expected value and to ignore the tiny sliver of probability that would result in a huge jackpot.

You usually get "refresh" RSU grants if you do well, so I don't think you should value it at zero.

The "usually" part, and "if you do well" part means there is some risk but if companies like you they will make sure you have a lot of RSUs vesting years from now.

>I remember once negotiating ~$5K more in base salary to "give up" what OMG COULD TURN INTO MILLIONS OF DOLLARS IN OPTIONS!!!! The company eventually went bust and sold for pennies on the dollar.

Without knowing any details whatsoever, couldn't someone say the company went bust because it didn't align incentives, hiring people who insisted on $5K more so they had nothing riding on the company, and did not end up with any incentive to make it succeed?

If someone hypothetically did say that, what would our response be?

The incentive for an employee is his/her salary and to do their job well.

They have very low effect on the success of the company other than doing their job well.

>They have very low effect on the success of the company other than doing their job well.

By 'they' did you mean engineers at tech startups? They have a huge effect on the success of the company and options-based incentives directly cause vastly greater alignment and output.

Do engineers really have that big an impact on the success of the company? Their salaries and ownership share certainly don't reflect that, in my opinion.

absolutely!

(in general the shares reflect engineers' preferences, as they do require a certain level of salary and don't want to take as big risks as the founders. founders would be happy to give them more share and less salary! they have a huge impact on success.)

Maybe the correct incentive structure is to give the employees a meaningful percent of shares given that someone would choose $5K towards base salary over whatever pitiful shares the offered.

In this case, I'd say that wasn't what happened. As is the case in many (most?) start up failures, my take on it was that it happened largely due to circumstances outside of the company's control. The founders were awesome folks, and did everything they could to make things work. I don't think it was a problem of "alignment" at all--if the company went under we would not have jobs. That's pretty solid incentive to me. A couple of stock options (with a low probability of ever begin worth something) is not going to change that calculus.

On the other hand, it could show that the owner's don't really believe in the future success of the company. If they really think the options will be worth millions of dollars, why wouldn't the owners just pay the $5000/yr more and keep the millions for themselves? That sounds like a great deal for them...unless they really don't believe that will happen.

Saying RSUs tend to be better is potentially true (at least a higher expected value) since they are likely to be issued by public companies rather than early stage companies.

If you're doing well and the company is sensible they will continue to offer you additions equity grants so there isn't that incentive to leave as your compensation falls. This post describes the "evergreen" aspect to granting equity: http://firstround.com/article/the-right-way-to-grant-equity-...

Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!?

It's not directly relevant to me as I don't have options, but I suddenly feel like I don't understand stock again.

I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).

Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man.

They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.

That's exactly right.

"Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now."

I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.

There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.

Interesting. The email I got from their stock administrator read:

> As a result of a transaction in 2001 that created CompanyName Acquisition Corporation, now named CompanyName, Inc., all equity interests in the predecessor companies were extinguished.

I guess I'll talk to a lawyer. They were sold for $3.5B, so that might be an interesting up-side.

Wow, I hope you write about what you find out. The situations like that I've heard of, and admittedly that's mostly from following the press, is that the old shares are traded for shares in the new entity. If minority owners aren't protected, it's a crack in the foundation of silicon valley.

But is this 'legal' even if the employee didn't sign anything to change the previously agreed upon arrangement (options)??

As with every legal question the answer is "sometimes." But typically, yes it is legal. See the comment below that basically allows the "extinguishing" of options under certain restructuring.

The most recent way I found out was the offer letter that spoke of my grant said "on board approval." A year later, they had never gotten board approval. I was long gone, but another year later and my old colleagues had finally gotten their grant. Preventing board approval for a long time is a nice way to extend the 1-year cliff. Even better, my email to the controller and then to the CFO was completely ignored. That is what really set off my spidey-sense. IMHO, if the officers aren't willing to acknowledge my questions in email, they have legal reasons for not having anything recorded.

Oh, and they were recently acquired by BAE for a lot of money. The officers made a killing, but my friends made around 4-figures. I have no idea what they did to get board approval but it feels like they rejiggered things to dilute everyone else.

One common example is the case of employees who have left and a company that is acquired. The acquiring company often has an incentive to take part of the bucket of cash and stock allocated to the purchase and shift it to retention bonuses, screwing former employees who exercised their options.

The path to liquidity is not always straight up and to the right. Some funding rounds can drastically revalue prior shares through reverse splits. This can make your 1% stake magically turn into a 0.05% stake in a single funding round. Even if they don't reverse split, funding rounds issue new shares which is dilutive if you do not also get an additional grant. Once you leave a company, your precious few shares get diluted and reverse split with all the funding rounds between your departure and the liquidity (IPO or acquisition) event.

So how do you protect yourself against this? Is there something you can put in the initial contract to prevent reverse splitting in the future?

There are so many ways to screw you, that your best protection is a management team you trust.

I'd argue that the best protection is the advice of a lawyer, and not to mix trust with financial matters. History is strewn with tales of people who trusted other people with their money.

> I'd argue that the best protection is the advice of a lawyer

That advice turns into: "You could fight this and possibly win, but it would take a year and it would cost more than you'd get back." I get what you are saying. You definitely can't really "trust" anyone, but there are so many ways to legally screw you that I'm not sure you can trust protection using a lawyer.

Does that just happen with stock options or normal stocks as well? It would seem that if there are 100 shares and I have 1, then it should be worth 1% of the company no matter how successful it becomes. I can understand how options might be subject to tinkering, but if stocks are as well then the whole thing sounds like a racket.

I just mean that the idea of dilution suggests to me that the original company has been dissolved and reconstituted somehow. That sounds like something seriously in need of regulation...

>> "then the whole thing sounds like a racket."

Yup, that's it exactly.

This doesn't sound like what happened in the case here, but dilution can happen due to reasonable funding rounds. If you own 1 share out of 100 and then the company decides to go to some investors and raise $10 million, they might give those investors 50 shares, meaning the company now has 150 shares, the new investors own a third of the company, and you own 2/3 of a percent of the company instead of 1 percent. Where this gets messy is if shenanigans are used to dilute particular shareholders (e.g., after some event you now own 0.001% and someone else's portion is unchanged) or other such things.

Edit: I should add that even publicly traded companies do this, issuing more shares and diluting current shareholders to raise capital.

What were the specifics of the stock shenanigans?