How do startup options work ?

Amazon
fhhgfh

Go to company page Amazon

fhhgfh
Dec 23, 2020 4 Comments

I am a bit confused by how startup options work. When you join a startup that issues options, then they count the option grant as part of your tc, but then when you leave, you also have to exercise them (generally within 3 months) by paying the strike price. So, it feels like one has to double pay. Needless to say that if the company fails, then not only do you lose out on the tc money, but you also lose out on the extra money that you paid to exercise those options.

On the contrary, RSUs seem to be much more simple. They are part of your tc and you get them when they vest.

Can someone explain :
1. Why do you have to double pay for the options ?
2. Why would anyone prefer a startup which offers options as opposed to RSU ?

tc - 300K

#engineering #software #swe #startup #startupdigest #startupequity #startupoffer #faang #facebook #amazon #apple #netflix #google #microsoft #compensation #salary

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  • Google
    linksgoat

    Go to company page Google

    linksgoat
    You’re thinking about either options or RSUs incorrectly. Not sure, but will explain both.

    In your scenario when a company fails or if the stock goes down, you lose money on your RSUs just the same. That million dollar, 4 year RSU grant can be 500k next year. You essentially lost 500k on your comp, but the initial capital outlay was just 0 for you, so it feels like you still have money, which you do.

    In the scenario where you have options, you would just choose not to exercise them and therefore, still not have any capital outlay. You didn’t really lose anything at that point, but you are correct that that scenario is worse than having some value in RSU that went down 50%. If you chose to exercise and convert the options to stock, it essentially becomes RSU at that point and you win or lose in the same way. It goes down by half and you lose half of your gains and capital outlay. Theoretically though you wouldn’t exercise u til you really had a lot of gains.

    You are also correct that options cost money to exercise, but they also provide you much more upside versus a stock share because of an option’s leverage. You should compare an option to an RSU by backing out the strike price and calculating the growth from there. Typically, you will get much much more options and therefore potential for more ownership of a startup than a company that provides RSU, which is much more mature and has less growth. In other words, companies that offer options typically offer you much more percentage of the company than a company that provides RSU because they are less mature and you are taking on more risk and they should make that up to you by giving you more share of the company. When evaluating a company that offers options vs RSU, you really should just be trying to compare potential growth in both situations instead of being hung up on having to pay for options and that being bad.
    Dec 24, 2020 0
  • Resources that explain it way better than I could:

    https://blog.wealthfront.com/equity-ipo-guide/

    https://github.com/jlevy/og-equity-compensation
    Dec 23, 2020 0
  • New
    jdk18

    New

    jdk18
    Options are worthless unless company finds an exit, in which case your upside is likely going to be very significant. Option is not a stock, it’s a right to acquire stock at a given price. You decide if you want that stock at that price. Also different startups have different policies. Some allow you up to 10 years after you leave to exercise your options.
    Dec 23, 2020 0
  • New
    TobyLerone

    New

    TobyLerone
    Options are essentially one big lottery ticket.
    Dec 23, 2020 0