Stock Options: (Can Be) a Fool’s Game of Greed

I’ll keep this brief, because I’ve already said it all before, but stock options are a complete fools game. Yes, sometimes young companies do well and there’s value in purchasing those options long before they do, but the odds are so stacked against you as an employee you – almost – might as well buy a lottery ticket.

The fact of the matter is that I lost $16,000 on buying “cheap” shares early in a company’s life. The concept is these are supposed to be worth more because someone at the top convinced investors that they would be in the long run. That person at the top also negotiated all terms in their favor, so even if the employee shares are worth $0 they still can walk away with much more, sometimes even millions of dollars. While the person at the top likely risked a lot to start the business and is responsible for setting everything up to trick investors into giving them millions upon millions of dollars, they are the only people who profit.

Usually employees are given options as incentive to join a company that cannot afford to pay them market rate, or even while affording to pay them market rate it cannot offer the benefits that other larger competing company’s offer. And while there are different types of options (NSOs and ISOs) with different rules on when you can buy them, ultimately they are designed for an early purchase for “tax benefit.” Worse, if you leave the company you have to make a quick decision to buy your shares before its clear whether the company is going to do well or not. In other words, you have the option to buy thousands of dollars worth of shares, be taxed on the difference between whatever price your option was priced at and the price which is is currently worth (on paper) and then buy it without any liquidity on this tiny cap, highly risky stock.

Greed is why otherwise smart and logical people purchase these shares even though it would make much more sense to put all of that money in a mutual fund, or even on a semi-risky mid-cap stock that has growth potential and already proven itself to deliver great products with a number of customers. Instead, you’re left with this feeling that the stock is part of your pay that you’ve worked so hard for over the last few years, yet the only way to walk away with it is to actually pay for it. And even though it’s “cheap,” it isn’t cheap at all.

Most companies fail. Yet a really good startup CEO can hide this risk from his employees and make them all believe everything is peachy and growth is inevitable. I say a “really good startup CEO” but I mean one that is highly skilled at aligning greed with whatever will get them what they want. In the case of my startup history, my CEO did walk away with millions while my $16,000 early exercise will very likely be worth nothing at all. It will take many years to find out this is worth nothing, and until then I have $16,000 tied up in a stock that I cannot sell.

Meanwhile, at a prior company, I was “protected” in not being able to trade 1500 shares for acquiring company stock worth more because I was not an accredited investor, so I had to trade my stock for $3 a share. I didn’t have a lot of shares at that company, and I did make some money on my three years there, but it resulted in a tiny bonus versus anything substantial.

The reality is stock options are worthless and the whole game is rigged so the CEO always wins. The only way to win then is to start your own business and even to change the game and ensure that everyone in the company who has worked to build it has a fair shot of prospering from that work — that means that no matter what you as CEO do not walk away with any money unless your employees get part of that windfall. But what I’ve learned is that it’s possible for CEOs to build companies in a way that investors want to throw money at them, yet if you read all of the fine print you see that ultimately in a year or two that CEO will walk from the company with a clause that he will get a large chunk of that investor money, leaving the employees to deal with a complete mess to clean up. In many cases this mess cannot be saved.

This is not to say one should never work for a startup, it’s just important to negotiate in a way that does not idealize stock options as a golden part of the package. Join for fair market pay, a great work environment, a product you’re excited about, a CEO who seems not like a sociopath and who inspires you. And don’t buy your stock options unless it’s clear that your company is actually growing and has happy customers who are either recurring or buying more, depending on business model. If growth is actually scalable and sustainable then buy. Otherwise, put your money into something that may actually have a future, and isn’t a fake company built solely for CEO gain.

 

 

 

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