After seeing several option grant story arcs from start to finish (including one I’ve experienced personally), I find this type of compensation utterly worthless and frankly insulting to the workforce.

What happens in the average case scenario when your options vest, is that you are essentially allowed to make an equity investment in the company with really unfavorable terms (ie ur not even getting preferred stock or any voting rights unlike your average investor).

Let’s run the math here really quickly. You leave your high paying, hard, cold cash job at megacorp XYZ (let’s call it $300k), to join hot startup ABC that just raised a series A at a $50MM post. The startup offers you $150k in cash because … everyone is in it for “the mission”, and if they’re generous another $250k in options compensation to basically be on par with the XYZ salary that you’re leaving. Now, that $250k options grant is based on where the founders want the company to be by the time that your vesting schedule starts kicking in. So really, what you’re getting is more like 0.25 of the company if the company hits $100m valuation. We’re not going to even bother discussing pref, dilution and all the other factors that are constantly fighting to reduce that equity value. ANYWAY… once you vest you’re presented with the right to exercise, which costs money and is going to result in a tax bill which…costs money. Now you’re a wise financial planner and know that the sooner you exercise, the less tax you have to pay in the case of a liquidation event…so you fork up the cash. Now what’s it going to cost? Probably not 0, because strike prices are determined based on the valuation of the company when the options are issued…so you’re probably more in line to spend maybe $50k if you’re lucky but mostly closer to $100k. If there hasn’t been a 409A adjustment, you don’t have to pay tax on that. Now if you’re closer to a series B and let’s say the founders got where they wanted to be and valuation doubled, the 409a was filed and now you get to pay regular income tax, so you find yourself being taxed as if you just made that coveted $250k…but you didn’t. You are making an investment … just like any other investor, albeit with a lot less favorable terms. The best part is..guess what? If your circumstances change and you want to move on to a different job, you are now getting to choose between staying with the company until it has a liquidation event..or you have to effectively invest in it. Pretty shitty deal!

Now, this obviously assumes that you exercise your options and that you’re trying to optimize your tax bill. You could just as well be vesting and staying with the company for a long period of time, not having to really exercise your options and effectively you can make a ton of money without putting anything up for equity besides your sweat. Or you could have stayed at megacorp and taken that half of your salary that you gave up to invest in this ABC startup OR maybe a big bundle of the same kinds of startups with a much better risk profile because of diversification (and less reward).

Now let’s actually talk about a happy case. You joined early, you’re now an exec, you earned your stock, you vested, the company was gracious enough to give you a low interest loan to exercise your options…you’re golden. Company is getting acquired by a legacy big pocketed company or PE firm, you’re about to make bank and retire early. BUT…there is a caveat. During the sale proceedings it has been decided that half the purchase price is going to be stock and half is going to be cash. Moreover, all the execs should roll half of their equity into the new venture and you’re locked in for another 3 years, but now…you’re holding equity in a totally different beast of a company and you have 0 say or idea as to how that company works or trades.

In any case, as one of the comments here said…there are a lot more ways for your options to be worth nothing than there are for you to become rich from them. There are just too many variables to consider. It is not a good way to become rich. In order for it to be worth it, you have to be at a company that succeeds in making your equity worthwhile despite all of these caveats.