If you are accepting stock options for part of your compensation (and you actually care about what the value of those might be), it's important. Otherwise, no.
The truth is that "significant" compensation is often worth little or nothing, and always has been. For every guy who makes $400K off his FAANG options or RSUs, there's at least 100 who made nothing off of their early stage stock options.
1. I'm talking about equity, not options. Aka, part of the company is yours. With voting rights, or in the case of e.g. Google, at least worth cash
2. In a startup, it is a lottery ticket. If the company is public, you can include it in compensation as there is a market value
If the company actually gives you a meaning number of shares, they can expect you to care about the company beyond the paycheck... because it's your company. If they are Google and the stock is a way to chain you via vesting...at least it's golden chains
If you are very early, when the company is worth nothing, then the company can give you a big chunk of stock with no tax consequences. But once the company is worth something, then getting the stock is income, and you have to pay taxes immediately on the market value. It's not as good from the company tax perspective, either.
It's also a problem in that if the stock is already valuable, giving you the stock is the wrong reward structure. Companies are giving you options so that you have an interest in the stock going up. Suppose when you show up the share value is $40 and they give you 1,000 shares. if while you're there the stock goes up to $60, you will have received something worth $60,000, even though you only contributed to creating $20,000 of that. With options, they can give you 3,000 options with a strike price of $40. If the stock goes up to $60, then you still make $60,000 ($20 gain * 3000 options). But if it doesn't go up at all, then your options would be worthless.
On the other hand, stock compensation does come with significant drawbacks.
Due to tax implications, your options might be worth significantly less - if anything at all - because you often have to pay taxes before you are able to sell them.
If your company is not yet publicly traded, there is a significant chance it'll be heavily diluted by the time you are able to actually sell it. Even worse, you might never be able to sell it.
You might not be able to leave the job when you want to, because you are essentially tied to the stock option vesting period.
It also significantly increases your personal risk: what happens when the company performs poorly? You might lose both your job and your wealth at the same time.
The way I see it, the antagonistic relationship exists because management is judged primarily by the shareholder value they create. To an employee, the company is their daily life. To a shareholder, the company exists solely as a means to create money. I would not want to work in a company where everyone is driven solely by shareholder value.
Personally, I'd strongly prefer it if the employer had a workers council, and just gave out bonuses when it was doing good. You still share in the benefits, but you have far less personal risk.
I think this article boils down to two statements,
"Mr. Mahaney said stock-based compensation could “distort the quality” of a company’s earnings and “make them look stronger than they are.” -- this has been a refrain from analysts for years, and the whole reason companies now report options as an expense. The argument goes, if it doesn't "cost" anything to give someone an option, then for a salary budget of X and a revenue of Y you mis-report the cost of revenue so the revenue "looks better" than it really is. In my experience, anyone who has worked at a job where part of their compensation was stock options has never considered options "pay" like the dollars that show up in your paycheck twice a week. They are always lottery tickets, and given the trading restrictions at public companies, usually a pain to exercise or cash out. Further distancing them in one's mind from the notion of compensation. The second statement is this one;
"Ms. Hindlian says that while it can be reasonable for companies to pay workers a lot in stock, the practice can become scary when the stock starts to fall. “Particularly with software companies, you run the risk of losing your leading salespeople, engineers and developers when the stock falls, because employees feel like they’re getting a pay cut,” -- For the folks that I know, they don't consider it pay so if the options which they haven't exercised are underwater they don't consider them a "pay cut."
It is closer to the truth to say that options with value (so called "in the money") do have a retention power on employees but only if they continue to be worth something. And sometimes even that isn't enough.
But it is true to say that employees with options don't behave like little autonomous drone actors moving in collective self interest, and that makes it a lot harder to evaluate the enterprise value of a company. That difficulty arises from the understanding that it is the people that make the company what it is, and not being able to predict if those people will stay or leave adds uncertainty.
The desire for mathematical evaluation is strong in the analyst community and they continue to argue against anything that seems to affect that.
Because they do matter and are still part of the compensation package. There's still a significant difference between a payout that equates to two year's worth of salary vs another that pays out one year's worth.
During the last 20 years I've seen many times companies giving shares/stock options as incentive for your work. This because the company couldn't/wouldn't pay in cash, as bonus or as an incentive to keep you working for the company.
The question is, would you accept it instead of cash?
Is there something inherently wrong with finding meaning (or perhaps motivation) from compensation? Particularly if you're using money for worthwhile reasons? You might be surprised at how motivating a big bag of stock options in a unicorn startup can be (ok, maybe not so much in recent times :-)).
Wouldn't this essentially just be the same as being an angel investor. This takes away all the value of getting options.
For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company?
The value of options is that they are options. You get to wait and see if they are worth buying. If you have to buy them on day one, then they are not a compensation for taking a lower salary, they are simply an investment vehicle like a stock or a bond (a much riskier one).
> If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options
This is the only way it would make sense.
Say you can take a $150,000 salary with zero options.
Or a $120,000 salary with $30,000 worth of stock options.
But if the company needs to give a $30,000 signing bonus to pay for the stock on day one, then they aren't saving any money for runway. Thus the main reason they want to compensate with stock is taken away.
And a $30,000 bonus wouldn't do it, it would need to be $30,000 after taxes. The company would end up paying over $150,000 for this person's total salary.
Aren't you just lowering your risk, while simultaneously lowering your reward?
Eg, let's say you negotiate a 20k/year increase by not getting any stock options. If you spend that 20k to invest in their next round, you'll be paying for preferred shares, rather than common shares. Therefore, you'll be able to afford about 5x less shares than if you were exercising employee grants. Am I wrong?
Sure, you'll get preferred shares, but if the company does very well, your ultimate reward will be less.
That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment.
Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.
At most private companies, stock options aren't worth the paper they're written on. Unless of course the company sells, in which case they're worth slightly more than the paper they're written on. And besides that, to exercise them you usually have to pay a pretty hefty sum. I generally don't consider equity as a part of my compensation package when I work for a private company.
Well, granting stock gives some pretty serious incentive to increase the value of said stock, as an employee. Stock options aren’t quite as compelling.
If I was granted 100k shares at $10/share, even if market values it higher, it costs me something to excercise them up front, right?
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