"> Roberts: Options and optionality
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🗓 13 December 2021

Options and optionality

No.005 - The privilege of choice

I publish this newsletter so infrequently you’ve probably forgotten why you signed up to it; I write Designance as I explore the principles of design and finance. It’s me thinking aloud as I work out the best option for financial independence. Is it better to invest in other people’s companies, or in myself by creating a product from scratch.

If you’ve been reading from the start you’ll have noticed I structure them in these parts: some experience of a recent event, my research insights since I last wrote, and some tangential thoughts I as attempt to create a product.

Coming up:

  1. Experience: Why I think share options are worthless – ⏱ 5min.
  2. Research: I speak to a VC about investing in Open Source – ⏱ 4min.
  3. Tangent: An imagined dystopia to make sense of Brexit and Bitcoin – ⏱ 3min.

Plus a list of the things I’ve been reading, watching and listening to.

Grab a ☕️ – 15 minute read

I. Experience: share options

There’s something compelling about knowing that you’ll benefit when your company does well. Whether that’s a share of the profits or the promise of dividend from a liquidation event, the presence of these mechanisms keeps you invested (and, frankly, interested) in contributing to the success of the company.

One of those mechanisms is Share Options.

In 2011 I left a slightly backward looking privately-held company where I worked for a salary, and joined a relatively forward thinking and privately-held owned company where I worked for a salary and share options ✨.

I wasn’t naive enough to believe the options were guaranteed to pay off, but I did look at them as a sweetener. On top of receiving a salary, I worked for a company whose success I now actually cared about. And who knew, maybe they would pay off?

My attitude towards options today is totally different. Part hindsight, part bitterness. The share options that kept me “kicking the whale up a beach”1 expire this month with no sign of a liquidation event.

A short diversion.

There’s a conversation happening right now as to whether the market to invest in private companies should be opened up to include what equates to retail investors with idle cash2. Professional investors think this is a bad idea, retail investors think this is an other example of protecting the money machine.

One argument against opening up the private markets is that retail investors lack the volume and quality of information a VC or investment fund either has or is able to obtain, before making an investment.

I wrote last time about how I think crowd-funding serves the desire to “get in” early (poorly), and while I too believe that opening the private markets to retail investors is a bad idea, I disagree with the premise that it’s bad because information is scarce3.

My view – which will be unsurprising given the sub plot of this newsletter – is that you’re better off creating a company of your own. The time spent uncovering value is probably better spent creating it. And therein lies the catch with share options; belief that your contribution will pay off.

A hypothetical example

Let’s say you join a company offering share options as a perk. For simplicity, the options are given to your for free. The contract says:

We herby grant you 10,000 share options in our company, at a value of £5 each…

So you do some quick sums and yes, £50,000 sounds good. You read on:

… and our strike price is £20

What’s a strike price? It’s the price per-share that the company is willing to sell at, either to another company, or to the public on the stock market. If this price is achieved for the company, then the company directors will sell and you’ll become eligible to “exercise your options”.

This is exciting because the options you were given have a value of £5, but if the company sells, you get four times that; £20. Now your calculator says “£200,000” and you start to think about the optionality you’d have if you didn’t have a mortgage.

How can this can go wrong? A few ways:

Or all of the above.

And if it goes right? Well, since they’re share options you still have to stump up the £50k to actually exercise them. That is, you must first exercise your option to buy the shares, and actually buy them (for £50k) before you can sell them (at £200k)5.

But the biggest personal risk is opportunity cost. It’s reasonable to expect a startup to take 10 years to get to a liquidation event, if at all. Because it’s common for a startup to pay salaries below market value, choosing not to take the £10k pay increase to join an established company wipes out half the potential value of your options over the same period. And that doesn’t take into account taxes or career progression (read: salary increases) that’s more readily available in larger companies.

And before you know it, POOF 💨, there goes £200k and your dreams of doing more of what you want with your time.

The last time I was offered share options I asked for shares. Unsurprisingly, startups are rarely willing to put people who have only invested time and experience “on the cap table”. And at that point you’re back to salary negotiation.

My personal view is that it’s better to make sure your contract allows you to work on side projects. This way you keep the “option” to spend your free time on building something of your own, and not find yourself working longer hours, incentivised by share options with long odds.

II. Research: VC’s and OSS

For the last 6 months I’ve been trying to solve the challenge with Open Source software (OSS) - how to increase our engagement with / understanding of the userbase.

Because it’s free and all the code is visible, a developer choosing to use OSS doesn’t need to ask for someone to pay for it, and security reviews are easy. Consequently, OSS products end up being used by a lot of people in a lot of quite-important-organisations. It ends up in use by central banks, technology companies, financial institutions, insurance companies, and healthcare providers - to name a few.

The flip side of great distribution and ease of adoption is that, as the person making the software, you end up with very poor visibility of who’s using it. This is a real challenge when it comes to letting those users know when there’s additional value to be had in the paid-for edition - especially for commercial organisations who rely on this code existing.

Joseph Jacks – JJ – is someone who’s been here before, and is so into Commercial Open Source software (COSS) he founded a VC firm with COSS at the centre of its investment thesis. I asked JJ to share his thoughts on this challenge, and to speculate on how a the person responsible for the commercial success of a COSS business might solve that today.

These are my insights:

Open source as a distribution mechanism is a really compelling option, and raises questions about whether it’s possible to bring non-software products – like a book, for example – to market and capture that value through the same mechanism.

You can read the whole interview for yourself at roberts.work/articles/coss-challenges/.

III. Moneyland book review

In 2015 Adam Curtis released a documentary called Bitter Lake6. In it, Curtis refers to a book that describes “non-linear war”. The central premise is that the incumbency of a sitting government is assured through the instigation of chaos. When it’s not clear who the enemy is, no opposition leader can form a coherent plan for resolution and unseat the incumbent.

The BBC have broadcast many of Curtis’ documentaries7, giving them enough credibility to fall just short of conspiracy. The book Moneyland occupies a similar space in my mind.

In the book, Moneyland itself is an imagined and abstract idea of a “state” that exists because money can move freely across international borders, but (regular) people and laws cannot. Like non-linear war, it is in the interests of its incumbent “citizens” for the status quo to be maintained.

Welcome to Moneyland

Moneyland protects its citizens by enabling them to move their (often ill-gotten) gains out of the reach of regular citizens – the rightful owners – and their governments. They do this by exploiting the differences between the laws of different countries, buying their way out of legal violations if not moral ones.

Why is that interesting?

Oliver Bullough’s book offers a new way to look at two recent, and hereto – in my mind, at least – unrelated phenomenon; the UK’s exit from the European Union, and Bitcoin. Moneyland’s narrative conveniently explains both in one go.

Even if it’s not a stable store of value, Bitcoin looks increasingly like a good option if you ever found yourself needing to escape from your country and don’t want your capital – ill gotten or otherwise – confiscated.

The only trouble with this book, as the opponents facing the chaos of non-linear war find, is that it can’t provide a solution that keeps money in the hands of the citizens that create it.

Part of the purpose of this project is to provide me with long term financial stability, sooner. But even if I can do that, the obvious concern is that there remain other things beyond my control - like geopolitics.

If the economy tanks (further), hyperinflation happens and the UK goes south, then having liquid assets that can cross borders undetected is irrelevant if Brexit means the escape hatch is sealed shut.

But that dystopia isn’t here yet and the first step remains the same: find a way to increase optionality by growing my capital (however it’s stored).

I’ve made a start this week, researching how Open Source software projects turn into revenue generating companies and building gitacquired.org to solve a critical problem for developers looking to sell the businesses they create from their side projects.

Footnotes

  1. The obvious phrase here is “flogging a dead horse”, but a colleague at the company used to use this metaphor instead and I think of it anytime a project I’m involved with isn’t making progress. ↩

  2. See “Staying private: the booming market for shares in the hottest start-ups”, FT.com (pay-walled) ↩

  3. Research isn’t hard, but nor is it convenient - done properly it’s time-consuming. I spent four weeks researching Snowflake’s business (a year before their IPO), as part of my day job. My conclusion was that at $75 (the figure touted pre-IPO) was a good offer, based on my conservative estimates of their revenue and having spoken to their big-bank customers about how and why they used the product. That was part of my job, I doubt I would have found the time otherwise. Snowflake opened at over $200 and grew to a high of $400. ↩

  4. For example, by writing a disparaging blog post. ↩

  5. Unsurprisingly a market has sprung up in Silicon Valley to solve this first world problem of stumping up the capital… for a price ↩

  6. Wikipedia entry ↩

  7. Adam Curtis has a new series of films out on BBC iPlayer (but which you can find on YouTube). This is the Guardian’s review. ↩


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© Jonathan Roberts 2021
I occasionally update articles to fix typos, improve readability or modify content when new information is available to me: view revisions for this article

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