Optionality and entrepreneurship

4 months in and I’m still only mid-way through Nassim Taleb’s “ Antifragile “. This 2012 work of his is a bit like Peter Thiel’s “ Zero to One “ — very dense and full of ideas expressed in simple words that require lots of thoughts.

Among all the things that Taleb fleshed out in this less known work of his, one that especially caught might attention is how he highlighted the idea of optionality in life.

Basically in any situation where there’s an asymmetry, optionality allows one to gain from the upside but is only exposed to limited downside. The key is to recognize the upside when it manifests itself.

He argues that such optionality is very fundamental in finance that everyone in finance recognizes it. Therefore in finance options tend to be overpriced, simply because many are looking for them.

In real life, however, optionality, as is asymmetry, is not always obvious. What’s more: most people don’t look for optionality in life. This means in real life there are many real options priced remarkably cheap.

Entrepreneurship is definitely this type of optionality. To most non-entrepreneurs, they see startup lives fraught with constant anxiety, relatively low pays and risk of unemployment all the time. They see also the billionaire entrepreneurs as exceptions and see only extremely low probability in achieving that, therefore a no-no for them as a career, especially with a mortgage to pay back and a family to raise.

This implies that the options in entrepreneurship is most likely underpriced. For example, most people would pick higher base salaries than joining a startup as an early employee for single-digit percentage of company stocks. If such is not true, early startup employees would be asking for higher percentages of stocks with lower salaries, going long on optionality. However this is seldom the case.

This also explains why when a startup successfully exits, e.g IPO or M&A, we often see the founders still holding much more shares than all other employees combined. If all human beings see optionality in real life, this wouldn’t be the case as employees will be asking for more stocks or just stay with large corporates.

Just some thoughts.

Originally published at http://www.jmyang.com on July 2, 2018.