A Startup CFO Chose Cash Over Stock Options And Called It Cleaner

Startups contain a surprisingly diverse range of people. Some are young, ambitious, full of energy, and look exactly like what you’d picture when you imagine “someone who’d be at a startup.” Others look for all the world like ordinary middle-aged salarymen.

Some startups are the kind where “even when we throw a drinking party, basically nobody shows up.” These are cases where the average age of the members is high, many have families or have just had children, or the team is mostly made up of people with low sociability and a craftsman-like temperament. Zero “party people” vibe. Quite a lot of startups, in reality, are far removed from the general stereotypical image of young people gathering to party late into the night and doing outdoor activities together on weekends. I privately call this kind of company a “mercenary startup.” I want to talk here, in a very matter-of-fact way, about my friend H, who belonged to a startup of exactly this type.

He changed jobs into a certain startup in his early thirties. His specialty is finance, and he also has a career background at an audit firm in Silicon Valley. A few years after joining, he became CFO, but he never received stock options. Of course he doesn’t hold any common stock either. In other words, he served as CFO at that company while holding zero capital gains exposure to it whatsoever. Frankly, I’ve rarely heard of such a case. The reasons he gave were: “I’m not worth that much,” “I’ll be leaving eventually anyway,” “It feels cleaner to just take cash,” and “Not having SOs or common stock lets me say what actually needs to be said.”

As for “I’ll be leaving eventually,” his own self-assessment is that “I’m not good at building something from 0 to 1. Also, skill-wise, raising more than 10 billion yen is beyond me.” In other words, he believes it’s “mutually preferable” to join a startup partway through, help it grow to a certain size, and then step away partway through. This is an extremely level-headed self-analysis, combined with a total absence of lingering attachment. Hearing this, I was frankly impressed.

His statement that “it’s better not to hold SOs” is something anyone who belongs to a startup, or who aspires to, really needs to listen to carefully. The harm of holding capital gains exposure is capital gains exposure itself. Stock options in particular do nothing just by being held. Realizing their value requires an IPO or a buyout. Only at that point can SOs be turned into cash. He’s saying that this isn’t necessarily the right answer. I strongly agree.

Take IPOs, for example. They tend to fall into one of two polarized patterns. “We can no longer raise funds, so let’s IPO” and “We seem to be able to IPO, so let’s IPO.” The former can be called a relatively healthy kind of IPO. The valuation has grown so large that raising the amount needed for the next funding round becomes difficult, and no one is able to invest. In that situation, deciding to raise funds through the public markets instead is, in most cases, reasonable. Occasionally a company on the verge of bankruptcy bets on an IPO as a last chance, but that’s rare.

The problem is the latter case. An IPO is an extremely labor-intensive undertaking. It also costs money. You can’t just decide to do it and pull it off immediately — it requires time and advance preparation. You need to meet with people across many different fields, consult with them, and secure their cooperation. Many people who have been through an IPO make similar comments: “During that period (while preparing for the IPO), the quality of our service declined.” In no small number of cases, the company ends up failing to achieve the growth curve it had hoped for afterward, and gets labeled with something like “IPO as the finish line.” If you can see that kind of story unfolding at your own company, the proper response as an insider is to oppose the momentum toward an IPO. But once you hold SOs or the like, the equation “IPO = my own imminent personal payday” gets completed, and you risk becoming unable to make the right call each time it matters. Ideally, ideally, it would be admirable to hold an iron will and say “I won’t do anything that isn’t good for the company!” But people can rarely act with that much strength. “That includes me,” is what H is saying.

Eventually obtaining capital gains through employment at a startup is certainly a story everyone dreams about, and it does carry a sense of romance. Naturally, most people’s dreams fall short, and only a tiny fraction of people ever reach that harvest. But in reality, if you join a startup partway through as an employee rather than as a founder, the capital gains you end up receiving usually amount to little more than “getting, all at once, the bonuses I never received along the way.” The story of everyone at YouTube becoming a millionaire when it was acquired by Google is famous, but that’s ultimately nothing more than an extremely rare event that happens maybe once every several years somewhere in the world.

Let’s stay level-headed here. The appeal of joining a startup is by no means limited to that alone. To begin with, why is “IPO as the finish line” a bad thing? Because only some of the stakeholders end up happy. Customers and employees in particular get neglected. But a company should really exist facing toward its customers and employees. What makes startups so exciting is precisely the closeness and the high level of commitment you have with those stakeholders who “ought to be prioritized.” For someone like H, in particular — someone who takes pride in his expertise and holds an honest self-assessment of both his strengths and weaknesses — I imagine this becomes an extremely rewarding kind of day-to-day life, one in which he can very directly demonstrate his own “value.”

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Originally published in Japanese at https://clazytech.com/2022/08/1097/. Translated with LLM assistance and reviewed before publication.