Comment by joekrill | Hacker News Reader

Comment by joekrill | Hacker News Reader

> Again, let me emphasize, this is not inherently unfair.

I guess our definitions of what is "unfair" are quite different. I think a better term here would be "illegal". It's most certainly not illegal - but I definitely would not consider it fair.

Companies throw options at employees - or potential employees - like candy. They imply, explicitly or not, that when the company gets big and successful, these options are going to be worth tons of money.

Most of us here know they're probably worthless. But executives/entrepreneurs/whoever most definitely suggest otherwise. So it's more like false advertising.

Now is that "fair"? I don't personally think so. I think it's pretty dishonest. I think when sale time comes around, they most certainly realize that these employees think they're finally going to cash in, and they are more than happy to let them think, even though they know otherwise.

Obviously there are exceptions. There are occasions where they actually do end up being worth something. Or where the seniors folks are very clear about how worthless these things actually are. But, in my opinion at least, those are most definitely the exception to the rule. I'm also pretty cynical for the most part, too. So there's that.

When I received my most recent startup offer, I was handed a spreadsheet that outlined the size of my option, and what they would be worth under multiple hypothetical scenarios, including highly-optimistic >400M and >3B valuations.

While it was nice for them to do the math for me, I do think that the scenarios presented were misleading and only represent the case where everything goes exceptionally well.

Now they did caveat that these were based off of assumptions, and that I should consult my own professional advisers etc etc. But, they didn't name any of the factors that could significantly impact returns (liquidation preference, participation, caps, etc.).

I received something similar with my last offer, but it also included the caveat that the shares are currently completely worthless unless we have some sort of exit, which probably wouldn't be happening in the short term.

It was pretty refreshing.

I think if a venture is unsuccessful employees shouldn't expect to make money from their options. A venture that raises $60MM and sells for $100MM 4 years later is a failure. Making nothing in a case like that seems fair to me. What is perhaps unfair, is if the employee worked for substantially below market wages all of that time, and particularly if they were given a much rosier picture than was accurate. But we shouldn't assume those things are always true.

even that is not unfair. the employee knows, or should know, the risk. they likely aren’t being compelled to work at a risky startup.

They never explain the risk, the unlikelihood of selling.

> if the employee worked for substantially below market wages all of that time

For an engineer that could get a job at FAANG or similar, I think this is pretty much universally true for all startups.

I think the problem is that it's often difficult to pinpoint the crux of the unfairness, but still feel it all the same. In my opinion, the unfairness is engendered by the realization that time and money are merely different units of the same thing. Which means the investors are getting guarantees on their invested time, but the folks who did all the work are completely unable to recoup any of the time they invested. When we cast the investments in the same units, it clarifies the nature of the inequity.

Investors convert dollars into time (like a conversion from matter to energy), and workers convert time into dollars (energy to matter). Even in physics a seemingly small amount of matter has enormous power with respect to the energy it can unleash. But it can take a lot of energy to form the tiniest lump of matter. Investors are turning their matter, their dollars, into time. A lot of money, in that respect, is essentially lots of time -- more time than you have life, if you have enough of it. So you can do more, by buying someone else's time.

For simplicity, if we ignore non-labor costs (labor is the largest expense in most software startups, e.g.), it would mean that the invested dollars purchased an EQUAL amount of invested time. That is, the investors dollars were converted, with perfect efficiency to time (unless they overpaid the workers, or the workers were underpaid), which means there was conservation of dollars/time. This implies a balance of the two sides of the equation, which means at best (again, for simplicity, only accounting labor costs) the investors could only be guaranteed a share of 50% of the purchase of the company. Or at least that is how it should work, in my opinion.

If the worker is paid for their time, they aren't owed anything for it. If they are taking below market - as I said that may be unfair - then at most their investment is the delta to market compensation.

Also, investors puts in all the money upfront; there is a concept called time value of money that applies here, and what it means is that money paid upfront is worth more than a distribution of the same amount over time. The higher the cost of borrowing (cost of capital), the more valuable that upfront investment is.

If the investor is paid for their dollars, then they aren't owed anything for them either by the same logic. And they most definitely are paid. Investors are compensated for their dollars because they exchange those dollars for time, just as the worker exchanges their time for dollars.

Whether an investor puts money up front or not is irrelevant, as it is only converted to time incrementally as the time is traded for it. Any excess dollars in the bank can, and frequently are, returned to the investor in an exit. Hence they only trade in dollars to match what is invested in time (when only accounting for labor).

You cut off the quote too early:

> Again, let me emphasize, this is not inherently unfair. [...] The problem is most companies hide it.

The author is saying it's not inherently unfair if the company is honest and upfront about it.

It is unfair if a bridge loan is involved. If the preferred stakeholders have the chance they will remove the commons from the equation. In the end both sides take a risk with their shares and it is usually more meaningful to people with little money.

In the example, the common shareholders didn't make a profit because the company didn't make a profit. Ignoring the bridge loan for a moment, after all their expenses, the company just managed to make back what was put in.

The hypothetical bridge loan in this case did earn a profit, but it was a high risk loan. The company was going to be insolvent in 60 days and they hadn't yet found a buyer. The lenders got a multiplier because they risked losing their $10 million loan.

This bridge loan certainly could have been unfair, depending on whether the riskiness was worth the multiplier (for instance, if the company took a loan with 100x multiplier, it would clearly be abusive). If that were the case, the minority shareholders could sue and would win.

I’ve seen a lot a options packages awarded - and most of the time the actual options agreement goes completely unread - it’s baffling - but I think most of time senior managers are too embarrassed to let people know they don’t understand

Back in the dotcom era, they called it "hanging paper."

Reply on news.ycombinator.com