I used to also believe this, and would parrot it every chance I got, but I've since changed my tune.
It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive.
If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless.
But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice.
It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.
Being granted equity as a bonus is an incentive. Being granted equity in lieu of salary is asking me to invest in the company.
Let's say I'm asking for X salary. If the company offers me Y salary and W equity such that Y + W = X, then what they have done is gotten me to spend W of my salary investing in their company. If this pays off as an investment, that's great, but it isn't due to their generosity, but rather my investment. In fact, since I'm limited to investing in only their company (instead of being free to invest it in whatever I want), it is a large burden.
If they offer me Equity, W, such that Y + W > X, then (Y + W) - X is compensation (and X - Y is my investment in the company).
To sum up, if a company says, "We will pay you X salary, as long as you invest W in equity in our company" this is not in any way as valuable as X salary. W is a burden on me, not compensation. It is money I am giving them, not the other way around!
For this reason, I always negotiate salary independent of equity.
>Being granted equity in lieu of salary is asking me to invest in the company.
That is exactly right and I think what people are missing here. I mean even legally if you look at options purchases, you are literally investing. Even with stock grants, unless the company defers the strike tax through a loan mechanism, you will pay taxes as though it were real income.
> In fact, since I'm limited to investing in only their company (instead of being free to invest it in whatever I want), it is a large burden.
There's two ways to look at this. Yes, you're locked into investing in just the company, but you're also being given the chance to invest in something that's not available to the general public. These investments are risky, but often very good.
I'm currently coming to the end of my 4-year vest in a company that was acquired 9 months after I started. I gave back some salary in exchange for more options when I started since the company looked very likely to exit. That investment, over the past 4 years, has quadrupled. Even in a bull market, there aren't many stocks that have ~40% annual returns over that time. And that's not even accounting for the fact that these kinds of investments are better from a tax standpoint (flexibility to avoid AMT, long-term cap gains, etc).
As others have said, it's not a simple decision. You're being given an investment opportunity that is normally only available to VCs. But unlike VCs, you can't diversify across a portfolio. But, also unlike VCs, you can directly influence the success of the company...I learned after our acquisition that in the few short months I was there, some of my actions played a significant part in us getting acquired. It's a really unique investment opportunity that's available to very few people. It doesn't make stock options as a class of investment good or bad bets, the exact details of every situation determine that, which makes it very hard to make blanket statements like many people are doing here.
At series C you are not likely to get a significant enough position to make it worthwhile. If they do indeed have revenue then they should be able to pay you a decent salary.
This is the way I look at it:
A 50% chance to make $100K in 5 years with an interest rate of 5% is worth:
($100K * 0.5) / (1.05 ^ 5) = $39K
And if you have credit card debt then you should be discounting at something closer to 15%.
If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.
Saying they are worthless shows that you have zero skills at probability. A way to look at options is the way a good poker player tries to play when the bad beat pot is particularly high.
It depends more on how many bad hands you can afford to play on before netting a good hand. A good poker player may still fold if they've got a crappy hand because they know they're only going to enrich the pot for somebody else in this round, and by folding they stay in longer.
If you're joining a series C that's close to IPO, they should be able to pay market-rate, or close to. You're also not really going to be getting a significant amount of stock from it, and it won't be worth all that much, relatively speaking.
I know a couple Boston-local companies with Series C's (one's on D now) that still try to play the "but options!" game as an excuse to not pay people. (A manager at one tried to guilt-trip me into working more by saying "you're one of our highest-paid engineers" at a number that was about market for a senior when I'd joined; they had multiple principal-level engineers on staff. When I left a few months later, my cash compensation jumped 25% when moving to a staff-level role.)
Options are not how you pay people. Options are how, along with good raises, you keep them from leaving as the good parts of working for a small, nimble company leach out.
To first order options are worthless. I've worked for venture-funded startups, angel-funded startups and started my own company on debt and nerve, and the only one that worked out was my own thing. The rest... well, I have a lot of pretty wallpaper in the form of option certificates and the like.
Anyone who makes decisions based on the prospective value of options is a sucker. They are a nice bonus when they work out.
You're right that options in a reasonably well-established company can have some value, but such companies can also afford to pay a decent salary, and should.
It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive.
If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless.
But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice.
It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.