Are employee options now a joke?

Having been involved in startups that failed, startups that turned into profitable but un-traded companies and startups that straight-out conned employees out of their share - I tend to regard them as a lottery, if they come up great, but don't count on it.

With examples like Skype are options now become like "a percentage of the profit" in a Hollywood movie?

Is me offering options, in however much good faith, just making me look stupid?

Is an employee accepting them a sign of innocence or foolishness?

Or am I just over cynical?

I think offering options is still a good thing to do. You don't have to give out options, and options at startups can typically just be given out to the first few employees.

As an employee of a few startups, I will say that when a company offers me options I don't tend to add them into my monetary package. Most options that I have received never have vested or the company went under before there was even a chance.

So while it is good to offer options, you can never know where they will take you.

Ever since FASB changed the accounting rules and the "409A Value" appraisal starting coming in too high (IMHO), I've been increasingly disappointed about the capacity of options to create meaningful wealth for the large marjority of option grantees. First, unless you are in very, very early, the strike price will be high enough to be painful -- painful because the check you have to write is high, painful because it reduces your profits and painful because it's a lot to lose if the company goes under. (I'm assuming that you exercise before the IPO or M&A deal here; if you do a cashless exercise at those times, this isn't a problem.)

Second, the tax code is against you. If you are an employee and exercise an ISO, you have to be careful of the Alternative Minimum Tax impact. If you are an advisor, you get immediate 1099 income on the difference between the 409A value of the shares and the exercise price. If you wait til liquidity (IPO or M&A), the tax rate will be the same as ordinary income -- not the preferred long term capital gain. Basically, the wonderful years before the rules changed are gone. It's much harder to make more than a nice bonus out of most option grants, UNLESS YOU ARE EARLY.

Early employees have the benefit of low strike prices. If your option allows "early exercise" and you can afford to write a check for the shares (and you believe in the Company's future), I recommend exercising early, before the 409A value grows. Make sure to file an 83(b) election. But then you are CAPITAL, not LABOR. And, in case you haven't noticed, capitalists make out much, much better than service providers when it comes to taxes -- lower rates, not social security/medicare bite, etc.