This is a short, but comprehensive, guide to stock options, with specific example outcomes for employees and a sprinkle of Bayesian modeling of your chance to cash out with at least $1M.
Unlike other guides, this is not a stream of financial terminology. Instead, it is specific and answers the real questions with concrete examples. “What happens if I have vested and unvested stock options and the company is acquired?” and the like.
Most of all I tried to provide tools for tackling the main question: “Is it worth it?”
Topics covered: basics, how startup exits work, possible outcomes for stock options holders, taxes, dilution, how long you will wait, and how lucky do you have to be to make money. And, of course, how to lose all of your money. There are so many ways.
This guide exists because I followed the advice of a guy I met at the Lisbon rationality meetup. The advice was to take all your interests seriously and write out ideas to completion. The topic was mildly interesting to me and I went a little bit too deep in the rabbit hole.
Hope you find this useful!
Thank you, this is a very nice explanation! I have read enough stories on internet to develop a belief that “if you work for a startup that offers you a part of the profit in case of a huge success, somehow even in the unlikely case of the huge success, your part of profit will turn out to be approximately zero (possibly negative, because somehow you get a nonzero tax on that zero profit) because of some technicality that is difficult to understand but it seems to happen to many, maybe most employees”. Which I still think is mostly true, but it does not help me understand the shape of the minefield, so I have no chance to navigate it successfully even if I tried to be careful. Your article explains it nicely.
Thank you!
Previously I thought stock options were improbable to pay off. After doing all the research for this guide I updated towards stock options being even more risky. My intention in writing this guide wasn’t to prove stock options are worthless, but I see a lot of readers making this conclusion, and I understand why. As you said, it’s a minefield of technicalities.
My softer personal takeaways:
Never expect to get rich via stock options, no matter if you think the company will go to the moon or not.
Early in your career, up to and maybe including Senior dev roles, stock options are just not worth it. You get little equity, so no big win even if all goes well, and zero ability to affect the outcome. You will get way more income by taking as much cash as possible and investing it properly. Absolutely work for start-ups, but for other reasons: experience, good people, connections, flexibility, etc.
Treat stock options of anything before series A as lottery tickets. After series A it’s a proper business and the probabilities are much nicer.
To make the best of stock options you need to be senior in your career, at least a lead, preferably VP. Then you get more equity, so bigger upside, and you can do something meaningful to affect the outcome.
You are in the best position if you can exercise stock options and pay tax on that without making a big dent in your budget. Because if you have the money you can exercise your stock options before an exit and see if it pays off, just treating that as a high-risk bet without compromising your financial goals. If you don’t have spare money to exercise the stock options then it’s insane to play this game. Apparently, you have much better chances of becoming rich from stock options if you are already rich.