TLDR Options

Guesstimate the possible value of startup options

#3 Product of the DayJune 01, 2017

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Beth
Maker
@bethcodes · LTSE dev
Hi! I'm Beth, a developer from the Long-Term Stock Exchange. We built TLDR Options to help job seekers feel less in the dark when considering an offer from a startup. I've been a developer for over a decade, but when I was looking at my first-ever start up job I felt like an idiot. I had gotten equity before, sure, but always at a public company. Startup equity had at least six extra dimensions of uncertainty and I didn't even know which scenarios I should be considering! Even after educating myself and asking experienced folks I knew for the right questions to ask, I got as far as figuring out that it's a power law with a median value of zero and a mean value strictly greater than zero, and basically gave up there. TLDR Options was born of the realization that I didn't need a perfect answer: I just needed access to intuition around possible outcomes. People who already know about things like exit sizes and dilution and valuation growth have that implicitly, but for newbies like me the most common answer we get is an only-half-joking '$0!' You can't get an accurate answer without understanding the ins and outs of valuation and exit scenarios and preferences, so instead of "accurate" TLDR Options just aspires to provide a more useful answer than '$0'. Looking forward to hearing what y'all think!
Ahmad Awais@mrahmadawais · Full Stack Dev— WordPress Core Developer
@bethcodes looking nice. Shared in the local startup community
Hunter Walk@hunterwalk · Partner, Homebrew
Great to see LTSE putting out tools which support transparency
Ryan Hoover@rrhoover · Founder, Product Hunt
Curious to hear your thoughts about startup compensation, @ericries and @bethcodes. It's very opaque at many companies and today's options structure introduces a large risk for many employees (e.g. you pay thousands of $ within a short exercise window for equity earned in a company that might be worth nothing several years in the future). Much of this stems from the way startups are legally structured in the beginning.
Eric Ries
Hunter
@ericries
@rrhoover @bethcodes I am writing a bit about this in my new book, so it's definitely top of mind. I think the concept of startup equity, where employees are compensated not out of today's cashflows but via a financial derivative that is tied to far-future impact, is a really good model. It directly incentivizes learning about the future and long-term thinking far better than most other common compensation instruments, like salary and bonuses. But these benefits only kick in if employees actually understand what they have. If most employees don't value their equity (just assume it's worth $0), then it has none of the incentive benefits above. And if they over-value their equity (just assume they will be rich if the company does well), this can lead to a lot of cynicism and mis-allocation of talent. And then there are a lot of common practices today (like the excessively short exercise window) that are just bad. We built our own stock option grant legal documents for LTSE, which have a couple new features that I think improve on the standard grant setup. We hope to publish these some day, once we're confident they really work as designed.
Beth
Maker
@bethcodes · LTSE dev
@rrhoover In addition to what Eric said, there is also another reason to use options: using stock options instead of stock attracts more-confident-than-average employees [1]. This makes sense: the non-linear payoffs of options don't trigger loss aversion the way stock does, and since they will only be worth more than zero if a lot of things go very well, the people who value them most will be the people who think things are most likely to go very well. One of the things I've learned using TLDR Options was just how much "do we succeed at all?" dominates the eventual payoff. Hiring people with above-average confidence in the startup's success is valuable; startups want employees that believe the idea is going to work! Being somewhat overconfident makes success more likely, especially when innovating. There are two problems with this particular tool, though. First, too much overconfidence makes success less likely, so just finding the *most* overconfident people can be counterproductive (plus those people might be overconfident about everything, not just this particular startup.) And second, even if we wanted to hire those people, screening for confidence by using a whimsical financial instrument that is opaque, plagued by information asymmetry, and subject to a bunch of different ways the value can be wiped out can be unfair to employees. In turn, that unfairness shrinks the possible talent pool (especially of experienced employees that had been previously disappointed) and pushes compensation back towards the cash the startup wanted to avoid paying in the first place. I'm not sure what less-capricious instrument would cheaply rewards folks who believe in the company early and keeps incentives aligned with the risky-taking high-growth startups want, but there may well be one out there. Addressing some of the information asymmetry and reducing the sophistication required to value options seems like the easiest place to start, though. [1] See, for example, http://ebusiness.mit.edu/researc..., which also explains why this is particularly effective for private companies where employees can't otherwise invest.
Rand Fishkin@randfish · Wizard of Moz
I really appreciate the transparency that a simple tool like this provides. So few folks who join startups understand what stock options can bring, and what their drawbacks are, but at least this gives a sense of range and impact. Thank you for creating it Beth & LTSE!
Niv DrorHiring@nivo0o0 · Words @ProductHunt & @AngelList
This is cool 👍