Comment by argonaut | Hacker News Reader

Comment by argonaut | Hacker News Reader

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Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options.

Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero.

Adding on to this comment:

It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, < 5 employees, you're not a founder) your options are probably worthless, sure, although you have a minuscule chance of being worth $10M+. At the other extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more.

To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.

It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.

This makes no sense. Any vesting details will be detailed right in your contract. Dilution depends on the company's fundraising in the future, you are essentially asking them to bring out a crystal ball and tell you exactly what their IPO/fundraising plans are. It's up to you to estimate how much you think you will get diluted, based on the type of company and how much they've raised so far.

I think one of the points Adam repeatedly mentions in the article is that a contract in itself isn't really transparent. I get exactly what you are saying, it makes logical sense from the perspective of someone who knows what's going on, but in all of these discussions my thoughts are on the young naive person signing up for a deal they don't fully understand.

I think stock options should be valued at zero. In an a-will employment state you, and with a typical contract, you can get fired at any random day and if you don't have enough money to exercise your vested options within 90 days, they're gone. I don't consider that reliable.

In regards to the parent comment of yours, I think if it was stated as "proactively answer" vs "answer" it'd be less arguable.

None of that justifies valuing them at zero. Even if those reasons were valid, those reasons would maybe justify taking the official private valuation and cutting it by 75%.

I've been in the room where the CEO said, in not so many words, "fuck the former employees who exercised their options. They aren't here."

No one gives a shit. Sometimes it works out well.

You also won't be told when they take on a funding round with priority, even though all their prior rounds were funding with no priority. Personally experienced that one.

If the industry wants employees to value their options above zero, give the employees legal protection that would enable them to do so. Otherwise it's VC firms getting butthurt that people aren't accepting their scrip as real money.

You won't be told about funding rounds if your contract doesn't mention it. Like I said, any details you desire should go in the contract.

Yes, the standard contract is completely opaque to the employee, and they don't have the specialized knowledge required to understand it. And the company sure isn't going to help you. So value the funny-money at 0.

If the industry wants to change this perception, then there should be a widespread standardization on a contract that is fair to the employees and it should be easy for employees to understand any diffs from that standard.

If a contract is opaque to you, you get a lawyer to look it over. End of story. If you sign a contract that is opaque to you, without talking to a lawyer or at least someone knowledgeable (e.g. personal friends that are senior engineers that have talked to lawyers), you only have yourself to blame, not Silicon Valley.

It goes without saying that I've rarely found the contracts I've signed to be opaque.

I find this sort of burden-shifting abhorrent.

It's the company who will spend thousand or tens of thousands of dollars having the contract made. It's the company who gets to amortize the costs of a complicated contract over many hiring interactions. It's the company who has the advantage of a strong information and experience asymmetry.

In short, the company has a lot more power. If somebody with power screws somebody without, I save most of my blame for the people who set things up.

Sure. But none of your perfectly valid comment changes the fact that if you are clueless about a contract, you should either talk to a lawyer (or otherwise someone knowledgeable) or decline to sign it.

It goes without saying that employment contracts all use the same language, I have never personally run into a clause I found opaque or confusing.

You are making the argument that whatever the company does is legal. That's fine and I don't disagree with it.

It's not just a matter of not understanding the entire legal contract. Someone could understand every single thing, but not realize, like you said above, "you won't be told about funding rounds if your contract doesn't mention it." They wouldn't even think about that because they aren't experts in that field.

I've negotiated plenty of employment and IP agreements. I've found 100% willingness to, at the least, discuss them. But employee options grants must often be the same for everybody. And for a normal employee (as opposed to some C-level executive hire), once you start negotiating "in case I leave early I want more rights" you are signaling bad things.

Really, all I'm telling people is "if you don't understand something fully, assume it's worthless." Your reaction is that, for some reason, employees should jump into the deep end of the pool and try to outsmart the VCs at the game they play every single day of their lives. And for what purpose? The vast majority of the time the options are going to end up at $0 anyway.

I say no. Assume legalese is written in order to screw you over. Smile and accept the options because you might get lucky, but never ever stay late at the office imagining how they will make you rich.

Yes, 100% agreed. When I'm giving people options, I want them to treat them as valuable. So I work hard to make them valuable, and for people to understand what they're getting.

But at the end of the day, they could well be worthless, and they will never mean as much to an employee as they do to me. I had to just accept that people would value them at zero. For those interactions, I just had to think of the options as something we were doing so that in case we won big, we'd all feel good about the outcome.

Yes, people signing contracts should get good advice before signing. Also, they should study hard and floss every day.

My critique is not of generic, anodyne advice. It's of your assigning of blame to the weaker party.

Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?

Yes. I'd say easily 3-5%.

Quite honestly that would shock me, but I wouldn't know where to get data about this. I always believed that only a microscopic fraction of tech workers actually made off with more than a year or so of salary from options (but those who did likely made out extraordinarily well). I would not expect a very flat distribution.

I think it's more the opposite. Lots of employees just pulling a salary and another chunk on the side from periodic grant refreshes (you often hear folks talk here of, say, $50k of grants per year as part of comp).. versus a very small handful of millionaires.

The Googles and Apples and Facebooks of the Valley employ a lot of people vs the (granted, numerous) small moonshot startups.

Every time any tech company goes IPO or gets acquired for a large number (~>$50M), that's on average 1,000+ engineers who probably made some amount of money from options.

These numbers don't make sense to me.

You're saying an average tech company that exits has over 1000 engineers alone? Certainly a $50M company can't support 1000 engineers. Or a $100M one.

(And, just for fun, if a co exited at $1B with 1000 engineers... Let's use round numbers to sketch it out. Let's say the engineers alone get 10% of that value (which seems generous). That's $100M. Divided amongst 1000. So $100K. Not that much if you've given up income for years! Even if that amount is split across 100 engineers, $1M's not necessarily a super-duper return on investment if you're taking a bit pay hit.)

I'm saying the average number of engineers is pretty high (because it's an average, it's skewed up).

Regardless, quibbling over this doesn't really detract from my broader point which is that every time you see a company go public, that's hundreds, if not thousands, of engineers that made some money off their options. Some got rich. Most probably just ended up with an above-market salary. Others (those who just joined) get a tiny amount. The same applies for acquisitions, though obviously you'll need to scale the number up or down depending on the $$.

Yes, because you are ignoring the fact that most engineers that make money off stock options are doing so at well-established startups that haven't gone IPO yet. Companies like Airbnb, etc. 4 years ago, everyone knew Airbnb, Pinterest, etc., would be successful.

Kind of like how everyone knew Evernote would be successful four years ago? Or Gilt? Or Dropbox? Or Fab? Or Foursquare?

The only companies whose options are worth 0 (zero) in your example are Gilt and Fab.

Evernote and Foursquare are still around - your options are worth less than their private valuations if you joined 4 years ago, but they are not worth 0, even after dilution. Foursquare is still a $650M company. And only in some twisted world is Dropbox not a success. They're a friggin multi-billion dollar company even if they aren't a 50 billion dollar company (the horror).

I also didn't say you're going to have a 100% stock option hit rate for companies that are pre-IPO. You are still taking on risk. But your hit rate is going to be a lot higher.

It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.

> It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.

Nah, just the first ones that came to mind. Theranos is another good one I should've mentioned.

Theranos was never in the category of going-to-IPO-soon.

Arguably, neither were any of the others; none of them ever published an S-1.

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