I'll always remember my first encounter with employee stock options at a startup company. (Not to be confused with startup founder equity, which consists of actual shares of the company, and enough of them that you're actually playing the game instead of watching from the bleachers. And also not to be confused with employee options at a big Fortune 1000 company, which have a fairly predictable value -- if you're smart enough to exercise them ASAP and sell the stock, instead of pulling an Enron and leaving all your eggs in one basket.)
ME: "I see I'm being offered 10,000 options. What does that number "10,000" mean? What units is it in? What is 1 option worth?"
STARTUP GUY: "It depends on how many shares are outstanding, and what the share price is."
ME: "Well, how many shares are outstanding?"
GUY: "Right now there are, um, something like X shares. I don't really remember. But it doesn't really matter to you at this point, because we can always issue more."
ME: "Um, okay. And if you go public, my options can be converted to shares, which will be worth whatever people pay for them... but we have no idea what that will be, because it's in the indeterminate future, and right now this company consists entirely of debts and handwaving."
GUY: "Right."
ME: "What if you sell the company before we go public? Then our company's stock never formally trades on a market, so I have options to buy something that is never going to exist. How do the options get evaluated then?"
GUY: "Well, the board has to decide how to compensate the existing option holders."
ME: "Hmm. And they can decide to pretend that my options are worth... whatever? Down to and including zero?"
GUY: "Um, yeah. Technically. They'd probably try to make you guys happy."
At which point I decided to never, ever think about employee stock options again. Just pretend they are like those Certificates of Achievement that managers give you when you've worked a lot of overtime -- don't throw them away, but stick them in a file somewhere and forget about them. And, as it happens, that worked out just fine.
This is absolutely right. Options are a lottery ticket, and nothing more.
My brother is currently working an awful, low-paying job with a startup because he has visions of a big stock payout dancing in his head. They continue to nurture and encourage those visions, despite having no prospects for an IPO, and only marginally more for a buyout.
ME: "I see I'm being offered 10,000 options. What does that number "10,000" mean? What units is it in? What is 1 option worth?"
STARTUP GUY: "It depends on how many shares are outstanding, and what the share price is."
ME: "Well, how many shares are outstanding?"
GUY: "Right now there are, um, something like X shares. I don't really remember. But it doesn't really matter to you at this point, because we can always issue more."
ME: "Um, okay. And if you go public, my options can be converted to shares, which will be worth whatever people pay for them... but we have no idea what that will be, because it's in the indeterminate future, and right now this company consists entirely of debts and handwaving."
GUY: "Right."
ME: "What if you sell the company before we go public? Then our company's stock never formally trades on a market, so I have options to buy something that is never going to exist. How do the options get evaluated then?"
GUY: "Well, the board has to decide how to compensate the existing option holders."
ME: "Hmm. And they can decide to pretend that my options are worth... whatever? Down to and including zero?"
GUY: "Um, yeah. Technically. They'd probably try to make you guys happy."
At which point I decided to never, ever think about employee stock options again. Just pretend they are like those Certificates of Achievement that managers give you when you've worked a lot of overtime -- don't throw them away, but stick them in a file somewhere and forget about them. And, as it happens, that worked out just fine.