Stock Options

A colleague of mine today sent me this link from Hackernews that explains options ownership.  I think it's great! More people need to understand this stuff, and I'm very happy this is out there.  It does remind me however of how complicated everything has gotten and that always makes me ask why?

My colleague had a great observation:

I used to grant people options and I thought I understood most of it, but it seems like in an effort to get billion dollar valuations later stage companies have added all sorts of complicated conditions

When I was younger (so much younger than today) - I used to think that complexity was a sign of how smart everyone was, and I had a bit of imposter syndrome thinking I was not smart enough to be in the real world because I didn't understand all of this stuff.

Now that I am older (perhaps wiser? tbd) I now am more confident in my intelligence and what I see instead is people hiding in complexity.. specifically in levels of abstraction.  Dan Ariely did a test that I think is illustrative if not conclusive. He put 6 - $1 bills on a plate in a shared fridge in a college dorm. A week later he came back and they were all still there.  He then put 6 cokes in the fridge and a few hours later they were all gone! No one would steal money (that would be wrong!), but move the level of abstraction up 1 level (a coke = $1), and people suddenly have fewer issues taking the cokes. 

I see the same thing in finance. People trade all these derivatives, each one of which is another layer of abstraction away from money. Options are a layer of abstraction above shares (they abstract time), while shares are an abstraction over ownership, which is an abstraction over assets, which is an abstraction over money which is itself an abstraction. It's a long way between that awesome trade you made and the person paying real money for their mortgage whom you just screwed over.  It enables them to do some shady things they would never do to a real person (they would never go into a real person's wallet and take their money physically).  

I see the same with private companies and stock, stock options, etc.  I think people just assume they are not smart enough to understand, they just hear stories that stock is what you want, that's how you get rich! But I agree with my colleague above, people are using levels of abstraction to confuse people so they can play games.

Once upon a time a stock would pay dividends because as a partial owner in a company you were entitled to a partial share of the profits. That dividend was that share of the profit! You could then turn around and use that dividend to buy more shares, and then the next time it was paid you'd get even more money!  This is essentially the proof Benjamin Graham used to show that stocks would outstrip bonds back in The Intelligent Investor and kicked off the era of value investing where calculating the price a company should be trading at was based on the profitability of the company and the number of shares outstanding.  Until the 1980s.. where you can blame Microsoft for coming up with the idea of "growth" companies that don't pay dividends but instead pay back their shareholders with the growth of the value of the share price. Where it's worth more because more people want it? <-- This is some people's definition of value, but I can't use that to make a prediction about what the share price should be and so to me this is useless