This is not a well-kept secret. Stock great startup company a dozen or so people will typically pay its employees about a third less than a big company. This of course raises the simple question: Note that many people would prefer you not know this stuff. One of my favorite bloggers, Mark Suster, argues that you should just company the equity is valueless value be pleasantly surprised if you find otherwise. How my secret ulterior motive is this: I usually give my employees a stock deal on their equity. The little reason is that the above equation describes the value of shares. An option is worth less than a share. How much less is excruciatingly difficult to model accurately. If they invest a million bucks and the company sells for a million bucks, they get their money back and everyone else gets nothing. It has a colossal impact on the expected returns. Back when the IRS allowed such thingsthe rule of thumb was that common stock was worth one tenth as much as preferred stock. This becomes unbelievably complicated, since key factors are things like how good a negotiator your CEO is. To try and capture all of this, I banged out a set of heuristics definition: Terms are 1x preference, capped participation. The board is evenly split between founders and investors. I love it when people get rich from startups. I want you to join a startup, and I want it to shower you with riches beyond your wildest options. I want you to blow all this math out of the water. Special thanks to Dave Schappell of TeachstreetRand Fishkin of SEOMozand Tony Wright for proofreading and edits. Two, because it often means something worse: This is basically a proxy for if the CEO will do well during negotiations to sell the company. How much are startup options worth? If not before, then maybe now. Back when they brought in a management team to spin IGN out of Imagine Media, the new team constantly talked about how much money everyone was going to make. You private all the equity. I counsel all of my potential hires that if they want to make a pile of money in startup stock, they need to go start their own business, because odds are, even my stock is going to be worthless. The focus should be on making something great so that they have more opportunities to start their own company when inspiration strikes. Thanks for this post. Wish, I had read it before I actually joined the startup, where I need to work like donkeys. Only hope was stock options, but the actual value does not look that lucrative company This is misleading because an option is not worth less than a share. Actually, technically speaking an option is usually worth more than a share because it has both options intrinsic value and a time value. It is because the class how shares to which your option common stock, usually relates is worth less than the class of shares which investors get preferred stock, with all these additional rights which bump up their value. That does sound like a dysfunctional situation. And I can only imagine how hard it was to manage that during the worst of the bubble…. The valuation and percent sold dilution are more memorable than the pages of legalese for a funding round. Luckily we just have a 1x liquidity preference company no participation — the preferred shareholders get their money back or they get their pro-rata share of the company, whichever is larger. Unlike the concise equations above, the terms are all spelled out over multiple paragraphs. Options are worth less than an equal number of shares of stock because of the strike price and the difference between short term taxes for options and long term capital gains for stock. The best reason to work at a startup is because doing it is awesome. The second options is to learn, so you can do your own. Hitting a big win is not a great reason to be a startup how. Kick butt, network, and make yourself an invaluable team member with a great reputation. The Black Scholes model still gives me nightmares. I totally agree with Eric below that if composition options are not lucrative enough you should focus on the learning experience. It can be a tremendous opportunity if the start-up has a potential. You get to be flexible, there are few bureaucratic hurdles and they encourage experimentation and innovation because every start-up basically depends on these qualities. They also have an advantage over bigger companies in terms of flexibility; they can value introduce new features and modify existing features without great overheads or ego clashes. An option is worth less than a share, because if you have an option, you still need to pay the strike price to get the share. Good insights and advice on how to think about stock options in a private company. There are a few additional thoughts to also consider:. Likelihood of IPO compared stock company getting acquired. You will do much better in an IPO. For many employees, except for options and key executives, the amount they get from an acquisition is often equal value a good bonus. Know what type of options you are getting: Incentive Value Options ISOs or nonqualified stock options NQSO and whether you can exercise them immediately in exchange for stock that must then vest. The tax treatment is different, particular if you plan to exercise the options while the company is private and before you think it will get bought. You cannot sell shares to cover taxes. Check to see if there is any trading market in the stock on sites such as SecondMarket and SharesPost. This will only be for large private companies. For small private company, ask if it is a Subchapter-S corporation. If it is, that means the profits and losses will flow through to shareholders, which will be you how exercise. If profitable, find out if they distribute profits at least for the taxes owned. I also suggest you look on http: Bruce Brumberg, Editor, http: This is most important. Options are important, but if you can, I think it makes sense to think of them a little bit like the money you take to Vegas: This of course assumes you are more in learn mode than earn mode. If so, how much acceleration? The lean medical device startup compensation policy Jay Caplan on Medical Devices. Is a privately-held company obligated to tell you how many total shares of common or preferred stock they have issued? I know this helps to determine your percent of ownership of the company. SEO Hacker's First Company Acquisition. IPO plans fall through all the time. This value is for preferred stock, while what I get is stock options that convert to common. Did i get robbed? Private I missing something private If I had taken the 20K in cash, and invested that in the company, I would stock Preferred company which would be worth exactly what I paid for each share! I am not even talking about the associated warrants! Is this common and a regular occurrence at startups and the way of things at every startup? Half of the world does, you know. They might have mislead you, but that depends entirely on what they told you. Startups just pay less on average than BigCos, even after especially after accounting for equity. You must not see many accounting spreadsheets in your day to day. This is a very common business shorthand for million. What Should I Do with My Stock Options? The lefty will always have an advantage. So, you might consider revising your value. Yours truly, a left handed fencer. Some other code has overridden the WordPress copy of jQuery. Because of this, Page Links To cannot open links in a new window. Dan Shapiro quite possibly the only entrepreneur blog. November 23rd, Author: The value of a whack of equity is this: The basic math for this one is: Do you believe in the company? If you agree that this company looks like the comparables, then take the low number and divide it by 2. Ask how many rounds have been raised, and how much more they expect to raise before they exit. Stock them together, then double them, to get Y. Cube the preference as in, 2 x 2 x 2. Now for the grand finale: You should consider your shares to be worth 0. Completely random and private posts: Vesting is a hack Angel Investor: Calculating the cofounder equity split Shark Tank: Good information and advice though. I actually suspected it was a little higher. Good to have a number to that. I have never seen mm mean anything other than millimeters. There are a few additional thoughts to also consider: The phylum of organisms most closely linked to the evolution of land plants is the mc? But you can, and should, make it a prerequisite of working for that company. Hi Dan, You say that if the company is says they are going IPO, then divide by What if my company is about to go IPO in the next months? What should I divide by? Thanks for how it! Glowforge Glowforge is options most preordered product ever. It prints beautiful things in wood, leather, paper, and more. You should preorder one now at glowforge. The Startup CEO Guidebook Quite possibly the only book about entrepreneurship. Teaching Programming to Preschoolers I invented a game with my kids and put it on Kickstarter. It became the most-backed tabletop game in Kickstarter history. Now it's available in stores! Recent Posts Second chance to save a life Angel Investor: I have become that which I loathed The CTO Bro Glowforge private my new company join me? How to succeed at Kickstarter. Disclaimer I don't speak for anyone except myself.
Session 20: Private Company Valuation
Session 20: Private Company Valuation
2 thoughts on “How to value stock options of a private company”
In 1898, British India pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while in 1906, the Straits Settlements adopted a gold exchange standard against sterling, fixing the silver Straits dollar at 2s 4d.
But Nas being ghostwitten makes it hard for me to listen to so many of his songs.
In 1898, British India pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while in 1906, the Straits Settlements adopted a gold exchange standard against sterling, fixing the silver Straits dollar at 2s 4d.