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Easiest strategy is to just assume the options are worthless and base your comp assessment on that. Doing otherwise sets people up to get burned badly. Furtherm

Easiest strategy is to just assume the options are worthless and base your comp assessment on that. Doing otherwise sets people up to get burned badly. Furthermore the risk reward for all but the founders is typically significantly lopsided. If you can accept the risk great, but again assume you’ll never see a penny from options or far far less than you might think (as the calculator highlights nicely). If things go well you’ll get a nice bonus. Not life changing for the vast majority of people, but a nice financial surprise. The mistake most people make is accepting far too little cash comp on the grounds that their options may be worth something some day. When they turn out not to be they get burned twice. First on not getting that money period, and second on not having higher cash comp all along which means they also missed out on compound savings or investment with that money. Net net see options for what they are in most companies—-a way to “pay” people when the company can’t really afford to pay people.

usaar333 8y ago
> Easiest strategy is to just assume the options are worthless and base your comp assessment on that. But that easy thing leads to: a. Having no basis to negotiate your options. (X% of $0 is always $0 regardless of X) b. Your comp will always look like crap compared to a publicly traded company.
- xchaotic 8y ago
  Then negotiate a higher salary which is the statistically correct course of action. Many of my colleagues are 10+ years stuck waiting for an IPO that may never come.
- yowlingcat 8y ago
  B is kinda true a priori. It's easier to negotiate A should be negotiated in relationship to ownership and responsibility. You should get into the head the hiring manager in question and figure out what's the max/min range to motivate a candidate to do the job properly. That could be anything for single digit percentages for senior ICs at an early stage company to 50% for a pre funding cofounder to a couple bips for an IC at a series D medium sized company to a sizable fraction of a percent for an executive at a series B. Trying to value illiquid options as if they were fungible in cash is a fool's bargain. Reject it. They have value, but they're different.
  - toomuchtodo 8y ago
    In your example, what would you consider an early stage startup? At what size org would 20 basis points be reasonable for a senior IC?
    - yowlingcat 8y ago
      Sorry, I should have been more specific -- I meant seed stage. I think you'll see 20 basis points for a senior IC around post Series A/B depending on the company and how they've set up their option pool, as well as the senior IC. At that point, 20 bips is material enough to be non-negligible if the company grows well enough to the next raise, but probably not enough to be thought of as cash in the lifetime of that employees tenure (on average, anyhow). At that point, cash comp should be on par with median salary, which is tier 4 and below for most ICs* *I'm putting FANG into T1, the next tier down of liquid companies into T2, large pre-IPO companies into T3, and everyone else into T4 -- the interesting part obviously is that company salary tiers can and do obviously change if/as companies grow successfully.
      - toomuchtodo 8y ago
        Thank you!
- jonathankoren 8y ago
  a) That's not true. More is more. You just do it from a basis point perspective. b) If you're at a pre-ipo company with options, your comp is crap compared to a publicly traded company. If you're counting your lottery tickets as real money, you're a fool. You can't even sell them on Sharespost for the valuation the company tells you.
- code4tee 8y ago
  Yes, on Point B the comp IS “crap” and hence why most startups try to convince you to take the options. They can’t pay you what the competition would give you in liquid comp so they try to get you to take the bet. Such startups are typically paying well below market on liquid comp. it’s not like they’re asking you to make a “bet” with a 10% haircut on liquid comp (which would make more sense). I’m not against options, but if what you will make over the next X years based on liquid comp is not something you are totally OK walking away with as your total comp over that period then one is probably making a bad choice.
- bradlys 8y ago
  But your comp is almost always crap compared to a publicly traded company. (i.e. FAANG) Just look at the numbers on this website to get the expected value of startup stock. Short of getting an obscene amount of stock in a startup, it's not worth it. And almost no startup is going to give you 5-10x+ the amount of stock that other employees are getting for the same position.
  - roguecoder 8y ago
    Many people aren't comparing to FAANG companies: they are comparing to other places they actually want to work. FAANG companies aren't paying that much because they get so much more value out of employees: they are paying that much more because that's how much extra they have to pay to convince people to take the jobs they are offering.
    - dasil003 8y ago
      Obviously if they paid less they would get fewer engineers, but there are plenty who would take peanuts to work on problems at that scale. The actual reason they're paying that much because they have no limit on the number of 1% engineers they can put to work, and they want as many as they can get.
- kradroy 8y ago
  I think the subtext is that you're always taking a risk with start-up options, so minimize the risk by assuming the worst. Your basis for comparison/negotiation should be other offers, or your existing job and other offers. In a vacuum you'll never be able to make a realistic evaluation.
esoterica 8y ago
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? Obviously the latter, even if it has a large chance of being worthless. The not-stupid way of assessing a compensation package would be to conservatively estimate the expected value of the options and apply a substantial risk penalty in your objective function, not to round all volatile compensation down to zero.
- simongr3dal 8y ago
  Or more realistic: Would a reasonable person accept $1000 a month or a 10% chance of a million dollars?
  - est31 8y ago
    ... without you knowing whether it's a 10% chance or a 0.2% chance and that number becoming 0 if you leave the company so you stay inside and spend even more time working for them even though you might get more at another place, or get a second shot at least. Big tech has multiple advantages, including higher total comp and flexibility.
- xyzzyz 8y ago
  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/article/abs/pii/S0167487099000318 https://sci-hub.tw/https://www.sciencedirect.com/science/art...
deleted 8y ago
[deleted]
mrmuagi 8y ago
The cost shouldn't be 0% or 100%, but the percentage chance of getting the reward, multiplied by the value of the reward. IOW, E(X) = P(X) * X, so a 50% of 100K is effectively a 50K payout. The problem is P(X) is unknown, and you only really have heuristics to guesstimate. Whether you move forward with the idea 0%/100% is just if you are a glass half empty/full kind of person, but the real answer is somewhere in between. From looking at tldroptions.io, it's just taking an empirical approach to guess the P(X) value.
austenallred 8y ago
That is really great advice unless the company you're working at turns out to be really valuable, in which case it's really bad advice.
- kortilla 8y ago
  Only if you got in really early and even then it statistically won’t happen. It’s like saying lottery tickets are a bad investment idea. It’s true for far more people than it isn’t.
  - austenallred 8y ago
    It's <50%, but chances of winning the lottery are 1 in 292 million. I'd bet if you picked a promising company (say Series B+ on the breakout list) your likelihood of a positive outcomes is >=10%. Not high, but very different than lottery tickets.
    - meesles 8y ago
      You'd be betting on the probability of outcomes of choosing startups with successful outcomes, you must see the absurdity! Regardless, at least a lottery's odds are fixed. For a startup not only do you have a direct impact on the outcome, but there's near-infinite number of internal and external factors that can make a company fail, or, very rarely, succeed. I think that's one of the big selling points on options: It's a lottery ticket but you are directly capable of affecting your odds. Theoretically if a group of 100 people all feel that way, they should be able to do some amazing things!
    - dinedal 8y ago
      Also, you can buy as many lottery tickets as you can afford - you only have so many shots at picking a promising company in your working days.
      - dragonwriter 8y ago
        Those seem equivalent, just with a different limiting resource.
paxy 8y ago
So no one should ever work at a startup?
- kortilla 8y ago
  From a financial perspective, no. If you get more meaning from it and/or want more responsibilities and autonomy (on average), sure,
- anonymousJim12 8y ago
  welcome to the HN paradox.
  - deleted 8y ago
    [deleted]
- gtowey 8y ago
  It's not that you shouldn't work at a startup, it's that you shouldn't let the startup convince you that their stock is going to inevitably be worth millions so you should accept a tiny salary up front. Don't be Jack from Jack and the Beanstalk -- don't trade your cow for magic beans if you need to eat. Only make the trade if you won't be worse off if those beans don't turn out to be magic.
haditab 8y ago
I would also add that stock options are not stock grants. You are given the option to purchase those shares. Meaning you have to pay the company for them at strike price within 90 days of leaving and you have to pay tax on them. Many young startup employees I talk to are under the impression that they own .x% of the company because their options have vested. That is not true. After exercising your options the company could shut down or it can be acquired with a valuation less than what your options and strike price were based on. In both of these cases you would be losing money.
- dsugarman 8y ago
  Grants would need to be taxed at fair market value even though it's not liquid, so there's a very good reason for doing it this way

usaar333 8y ago

> Easiest strategy is to just assume the options are worthless and base your comp assessment on that. But that easy thing leads to: a. Having no basis to negotiate your options. (X% of $0 is always $0 regardless of X) b. Your comp will always look like crap compared to a publicly traded company.

xchaotic 8y ago
Then negotiate a higher salary which is the statistically correct course of action. Many of my colleagues are 10+ years stuck waiting for an IPO that may never come.
yowlingcat 8y ago
B is kinda true a priori. It's easier to negotiate A should be negotiated in relationship to ownership and responsibility. You should get into the head the hiring manager in question and figure out what's the max/min range to motivate a candidate to do the job properly. That could be anything for single digit percentages for senior ICs at an early stage company to 50% for a pre funding cofounder to a couple bips for an IC at a series D medium sized company to a sizable fraction of a percent for an executive at a series B. Trying to value illiquid options as if they were fungible in cash is a fool's bargain. Reject it. They have value, but they're different.
- toomuchtodo 8y ago
  In your example, what would you consider an early stage startup? At what size org would 20 basis points be reasonable for a senior IC?
  - yowlingcat 8y ago
    Sorry, I should have been more specific -- I meant seed stage. I think you'll see 20 basis points for a senior IC around post Series A/B depending on the company and how they've set up their option pool, as well as the senior IC. At that point, 20 bips is material enough to be non-negligible if the company grows well enough to the next raise, but probably not enough to be thought of as cash in the lifetime of that employees tenure (on average, anyhow). At that point, cash comp should be on par with median salary, which is tier 4 and below for most ICs* *I'm putting FANG into T1, the next tier down of liquid companies into T2, large pre-IPO companies into T3, and everyone else into T4 -- the interesting part obviously is that company salary tiers can and do obviously change if/as companies grow successfully.
    - toomuchtodo 8y ago
      Thank you!
jonathankoren 8y ago
a) That's not true. More is more. You just do it from a basis point perspective. b) If you're at a pre-ipo company with options, your comp is crap compared to a publicly traded company. If you're counting your lottery tickets as real money, you're a fool. You can't even sell them on Sharespost for the valuation the company tells you.
code4tee 8y ago
Yes, on Point B the comp IS “crap” and hence why most startups try to convince you to take the options. They can’t pay you what the competition would give you in liquid comp so they try to get you to take the bet. Such startups are typically paying well below market on liquid comp. it’s not like they’re asking you to make a “bet” with a 10% haircut on liquid comp (which would make more sense). I’m not against options, but if what you will make over the next X years based on liquid comp is not something you are totally OK walking away with as your total comp over that period then one is probably making a bad choice.
bradlys 8y ago
But your comp is almost always crap compared to a publicly traded company. (i.e. FAANG) Just look at the numbers on this website to get the expected value of startup stock. Short of getting an obscene amount of stock in a startup, it's not worth it. And almost no startup is going to give you 5-10x+ the amount of stock that other employees are getting for the same position.
- roguecoder 8y ago
  Many people aren't comparing to FAANG companies: they are comparing to other places they actually want to work. FAANG companies aren't paying that much because they get so much more value out of employees: they are paying that much more because that's how much extra they have to pay to convince people to take the jobs they are offering.
  - dasil003 8y ago
    Obviously if they paid less they would get fewer engineers, but there are plenty who would take peanuts to work on problems at that scale. The actual reason they're paying that much because they have no limit on the number of 1% engineers they can put to work, and they want as many as they can get.
kradroy 8y ago
I think the subtext is that you're always taking a risk with start-up options, so minimize the risk by assuming the worst. Your basis for comparison/negotiation should be other offers, or your existing job and other offers. In a vacuum you'll never be able to make a realistic evaluation.

esoterica 8y ago

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? Obviously the latter, even if it has a large chance of being worthless. The not-stupid way of assessing a compensation package would be to conservatively estimate the expected value of the options and apply a substantial risk penalty in your objective function, not to round all volatile compensation down to zero.

simongr3dal 8y ago
Or more realistic: Would a reasonable person accept $1000 a month or a 10% chance of a million dollars?
- est31 8y ago
  ... without you knowing whether it's a 10% chance or a 0.2% chance and that number becoming 0 if you leave the company so you stay inside and spend even more time working for them even though you might get more at another place, or get a second shot at least. Big tech has multiple advantages, including higher total comp and flexibility.
xyzzyz 8y ago
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/article/abs/pii/S0167487099000318 https://sci-hub.tw/https://www.sciencedirect.com/science/art...

deleted 8y ago

[deleted]

mrmuagi 8y ago

The cost shouldn't be 0% or 100%, but the percentage chance of getting the reward, multiplied by the value of the reward. IOW, E(X) = P(X) * X, so a 50% of 100K is effectively a 50K payout. The problem is P(X) is unknown, and you only really have heuristics to guesstimate. Whether you move forward with the idea 0%/100% is just if you are a glass half empty/full kind of person, but the real answer is somewhere in between. From looking at tldroptions.io, it's just taking an empirical approach to guess the P(X) value.

austenallred 8y ago

That is really great advice unless the company you're working at turns out to be really valuable, in which case it's really bad advice.

kortilla 8y ago
Only if you got in really early and even then it statistically won’t happen. It’s like saying lottery tickets are a bad investment idea. It’s true for far more people than it isn’t.
- austenallred 8y ago
  It's <50%, but chances of winning the lottery are 1 in 292 million. I'd bet if you picked a promising company (say Series B+ on the breakout list) your likelihood of a positive outcomes is >=10%. Not high, but very different than lottery tickets.
  - meesles 8y ago
    You'd be betting on the probability of outcomes of choosing startups with successful outcomes, you must see the absurdity! Regardless, at least a lottery's odds are fixed. For a startup not only do you have a direct impact on the outcome, but there's near-infinite number of internal and external factors that can make a company fail, or, very rarely, succeed. I think that's one of the big selling points on options: It's a lottery ticket but you are directly capable of affecting your odds. Theoretically if a group of 100 people all feel that way, they should be able to do some amazing things!
  - dinedal 8y ago
    Also, you can buy as many lottery tickets as you can afford - you only have so many shots at picking a promising company in your working days.
    - dragonwriter 8y ago
      Those seem equivalent, just with a different limiting resource.

paxy 8y ago

So no one should ever work at a startup?

kortilla 8y ago
From a financial perspective, no. If you get more meaning from it and/or want more responsibilities and autonomy (on average), sure,
anonymousJim12 8y ago
welcome to the HN paradox.
- deleted 8y ago
  [deleted]
gtowey 8y ago
It's not that you shouldn't work at a startup, it's that you shouldn't let the startup convince you that their stock is going to inevitably be worth millions so you should accept a tiny salary up front. Don't be Jack from Jack and the Beanstalk -- don't trade your cow for magic beans if you need to eat. Only make the trade if you won't be worse off if those beans don't turn out to be magic.

haditab 8y ago

I would also add that stock options are not stock grants. You are given the option to purchase those shares. Meaning you have to pay the company for them at strike price within 90 days of leaving and you have to pay tax on them. Many young startup employees I talk to are under the impression that they own .x% of the company because their options have vested. That is not true. After exercising your options the company could shut down or it can be acquired with a valuation less than what your options and strike price were based on. In both of these cases you would be losing money.

dsugarman 8y ago
Grants would need to be taxed at fair market value even though it's not liquid, so there's a very good reason for doing it this way