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  • From: mdthomas AT mindspring.com
  • To: internetworkers AT franklin.oit.unc.edu
  • Subject: Re: [internetworkers]Re: stock option valuation
  • Date: Wed, 12 Jul 2000 15:42:39 -0400


Michael S Czeiszperger wrote:

>taking a $20,000-$60,000/year pay cut in real cash isn't
>worth trading for the stock options.

Definitely true! Given a 1-10 odds on $200,000, you
can only count that as (($200,000)*(1/10))=$20,000.
So employing risk analysis, the stock options are a
bad bet if you have to take a pay cut greater then
$20,000 (and assuming that they payout will come within
a year.) So:

-if a 100 people were to take a $20,001 pay
cut in the hopes of $200,000 payout,
-and another 100 people didn't,
-and the 1/10 odds are right and 10 people get
the payout,
-and the payout comes exactly 1 year later,

:= the stock options takers combined will have $100 less
money, ignoring taxes, which I believe would hurt the
options takers because those that did get the payout would
be in a higher tax bracket.

Now, Let's assume that the payoff comes after 4 years.
That $20,000 a year would then be $97,400 invested at an
8% return per year. If you took the $60,000 pay cut it
would be worth $292,200... you would have lost $92,200
on the deal not including any differences in pay increases!

I'm definitely an advocate of steadily increasing the
salary history and looking at stock options as a lottery
ticket. But entrepreneurship isn't strictly rational...
it's the magical force that mates capital and labor. I mean,
the whole VC space is far from pure math... If your start
up was a sure thing you'd go down to the local First Union
branch to get your money, one desk over from home improvement
loans.

Regardless, stock options and other stock market-based benefits
such as ESPP are here to stay... Even IBM is doing options now!
So here's my free advice that I'm sure everyone has been waiting
for:

*Stock options have to be valued like any other security. It's hard
to value the future of securities -- i.e., very few mutual funds
beat the S&P 500 index, and they have teams of securities
professionals. If you don't have a lot of experience with securities,
it may be best to not value them at all and treat them as a lottery
ticket. If you want to try to value stock options, you better hit
the books and keep up with industry trends.

*Taking the above in to account, the whole point of stock options
is that employees our owners and will think that way. I.e., the odds
may be 1-10 before you take the job, but after that you have some
level of control of those odds. Smaller the company, the more control.
But then, you might personally make the odds 1-20 :-)

*401k investing has probably made a lot more millionaires than stock
options. And your 401k can be transferred between jobs, whereas stock
options can't.

There. I've done my part to help area techies understand those
bothersome stock options.





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