"When is a pay cut okay?", or "How to value startup options?"?

There's lots of opinions out there about stock options ranging from "most likely worthless" to "huge potential for monetary gains". How would you value the stock options part of startup's compensation and in what cases (including non-monetary) would you say an opportunity justifies a pay cut?

patio11's avatar
2 years ago

I think the relatively easy part of valuing a stock option is understanding how the math works out given the company achieves $X valuation at exit (covered in many places on the Internet; the Holloway guide is pretty good) and the relatively difficult part is understanding whether a given company is likely to win or not. It hugely, hugely, hugely matters that you pick right on a company which wins big; contingent on this, most other infelicities in math or negotiation magically go away.

Plausibly if you can see that a company is going to succeed in 6+ years you should be an investor rather than an engineer, but leaving that aside: isn't it sometimes kind of obvious to geeks with taste which companies are going to win among the geeks with taste crowd? Stripe is a healthy business in 2020. Would you have picked Stripe for Stripe-shaped things in 2014? Yes? Then that is a data point. It isn't a sufficient data point, probably, but it is a material data point.

As to the tradeoff between companies justifying a pay cut: you're making a bet on some sort of growth as a result of choosing small-and-nimble over big-and-stable, right? Growth in equity, growth in your skillset, growth in opportunity selection, etc. You should be very explicit with yourself about that bet, and then go about derisking it. Don't just passively consume the company's hiring process; try to understand a) what are their levers for growing and b) to the limit you can perceive externally, are they already growing quickly? Ask for their model and ask questions; develop your own model. Ask probing questions of existing engineers with regards to growth in opportunities, etc. Do some soulsearching on whether your work style and temperament comports with high-growth opportunities in (without loss of generality) AppAmaGooBookSoft, which do still have many high-growth opportunities available, or whether you're best positioned working near a frontier.

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