In the last several years at Kickstarter and advising startups, I’ve spent a lot of time trying to build models for awarding stock options in the fairest ways possible, talking to startups about the models they use, and thinking about the different ways to value companies and options.
This post explains one simple way to think about the value of your startup stock option grant, especially if you want to compare two or more offers. On the company side, it may also help you in building a model to award options fairly.
Option value is much more complicated than this, and I’ll write more about it in the future (as best and practically as I can, I’m no expert), but this gives a framework to begin understanding value.
Discount Value
A practical way to understand and value your options at the moment of grant is their Discount Value. Their Discount Value is the dollar amount the startup is transferring to you at the moment of grant, based on the difference between what an investor most recently paid for special “preferred” shares and the price you’d have to pay to exercise the options to buy the regular “common” shares.
Discount Value = Number of Options x (Investor’s Price for Preferred Shares — Your Exercise Price to Buy Common Shares)
It’s a “discount” value because if the company is successful, the value of your common shares will increase, the investor’s preferred shares will convert into common shares, and the value of both will be the same. So, with the Discount Value formula, you have a decent approximation of the dollar amount that the company is awarding to you on the day of grant based on the value the company and investors agreed upon for the company’s preferred shares.
In practice, if the company is successful, both the preferred and common shares will end up being much more valuable, but that future growth is difficult to predict and above even where investors are valuing the company at that moment, so for this simple version for calculating value, we’ll ignore that.
Check out the three examples in this spreadsheet.
To walk through the one in row 2: A startup offers Megan 10,000 options with an exercise price of $0.15 a share and an investor price of $1 a share, the Discount Value Megan’s getting is:
10,000 x ($1 — $0.15) = $8,500
If you divide that value over the four-year vesting period, Megan is getting $2,125 of Discount Value each year.
Before joining a startup, ask for the data you need to calculate your Discount Value. (If the company won’t tell you, that may be a sign that something’s wrong.)
The true value of options is much more complicated to calculate, but this should give you an idea of how to think about the value you’re getting. Don’t just look at your potential number of shares or potential percentage of ownership and compare that across offers. That’s the wrong way to compare value. You need to know the total size and value of the pie to know what your piece is worth. Just knowing the size of your piece in share amount or percentage isn’t enough.
Keep in mind that most options in startups end up being worth nothing, and a few end up being worth much more. But, consider them worthless, until they become real money in your bank account that you can use to buy bitcoin or a hat. Don’t rely on them for your retirement plan.
Please tweet at me if you have any comments, I’d love to hear them and improve this if you have feedback.
Resources for Startup Operators 