A Free Call Option on the American Economy
2009-01-07 00:29:57.024311+01 by Dan Lyke 0 comments
I explained to my wife, a doctor, that a call option lets you profit from a stock if it goes up, without actually owning the stock if it drops: hedge fund managers share in the fund’s gains but not its losses. I looked at her as if this was quite a trick. “But,” she said, “aren’t all of you paid in options too?”
It took a moment to realize she was right. Venture capitalists take 20% or more of their fund’s gains, but few risk much of their own money in a loss. At startups, entrepreneurs and executives don’t usually own stock, at least not any they can sell, but options to profit from the stock if the company is bought or goes public. Little if any of the money invested in a startup comes from the entrepreneur.
The startups I've participated in with any sort of equity have been funded by the founders and entrepreneurs, which means I've assumed the risk, and spent a lot of money. The article's a good look at the other side of this.