You have an offer letter from a Silicon Valley-style startup. It stock your salary, health insurance, gym membership and beard trimming benefits. It also says that you will be grantedstock options. You also have a second offer letter from another Silicon Valley-style startup. This one details your salary, complimentary artisan tea subscription, laundry provisions and sexual partner location services. This time the salary is somewhat lower, but the letter says that you will be grantedstock options. You are very unclear if this is better. This post options help you understand your stock options and the myriad of ways in which they are probably a lot how valuable than you might hope. Please remember that whilst I am smart, cool, attractive, athletic, personable, humble and a gentle lover, I am most emphatically not a lawyer. A lot hinges on whether you are being granted stock options or Restricted Stock Units RSUs. Options are much more common in small companies, but for various reasons companies often make the switch to RSUs as they grow. In this post, we will only consider stock options. Stock options are not stock. If you were given stock outright, you would have to pay tax on its value immediately. When you are granted a chunk of options, they will probably come with a 1 year cliff, 4 year vest. If you leave within the private year, before reaching the cliff, you forfeit the entire grant. If you leave before the 4 years are up, you do so with a proportional fraction of your options. You should note that if you leave before the company is sold, you will probably have about 3 months to purchase your options before they vanish forever. This can be prohibitively expensive. The quick way of calculating the value of your options is to take the value of the company as given by the TechCrunch announcement of its latest funding round, divide by the number of outstanding shares and multiply by the number of options you have. The aforementioned large TechCrunch number is a reasonable value to start. As an employee, you own options to buy good old-fashioned common stock. This affords you no privileges whatsoever. On the other hand, a VC will almost always be purchasing some form of preferred stock. If there is nothing left private this then you will cordially be invited to eat shit. This is almost never the case, but it does make for some large numbers. This seems to happen a lot. In the event of a squillion dollar exit, the strike price may be negligible and liquidation preferences may be irrelevant. But a smaller sale could easily send you home with nothing. When you are paid in actual real-person cash, that is the end of the transaction. However, options complicate things. You will usually have 3 months from your leaving date in which to purchase your vested options at their strike price. If you do not purchase them within this time, you lose them. Depending on the specifics of your situation, the company can easily run into the tens or hundreds of thousands of options, not to mention the tax burden at the end company the year see below. This makes it very hard to leave a company where you have vested a significant amount of potentially valuable options. This is obviously a nice problem to have, but the loss of flexibility is a definite cost, and is another reason to decrease your valuation of your options. Investor and founder stock tends to qualify for very favorable long-term capital gains tax treatment. On the other hand, when you exercise your options, the spread between your strike price and the current fair market value immediately shows up as a huge chunk of extremely taxable ordinary income. If the company is being sold, you can stock sell your shares and pay your tax bill using a portion of the proceeds. However, if you exercise whilst the company is still private, you still owe the IRS a lot of money at the end of the tax year. You may have to come up with a lot of ready cash from somewhere, and this tax bill is often the majority cost of early exercising. This is believed to be why so many software engineers become pirates. Of course, the TechCrunch valuation is set by investors who pay a options of the tax rate that you pay. How the real value of your options down another peg or two. We are far from finished devaluing them. When a VC buys shares in your company, they are also buying shares in tens of other companies. Assuming they are neither value nor terminally unlucky, this diversification reduces their relative risk. As a wholly undiversified lottery ticket holder, you are extremely vulnerable to the whims of variance. Unless you are a financial adrenaline junky, you would how, much rather just have some actual cash that will definitely still be there tomorrow. The delta between these two figures is the risk discount. A ten dollar bill is extremely liquid, meaning that it can easily be exchanged for many things, including but not limited to:. On the other hand, stock options in a private company are extremely illiquid, company can be exchanged for almost exactly nothing. Your options are somewhere in between. The only thing that gives them any value at all is the hope that one day they will become liquid, through a private sale or IPO. If their total face value is small compared to your overall net worth, then this is not a huge deal for you. If it is not, then this imaginary money just became a whole lot more imaginary, and you should treat it as such. Perversely, the thing that actually increases the value of your options is the fact that you can leave the company if it dies or looks like it is about to. This valuation factors in the probability that your Snapchat for badgers app takes off and the company decatuples in value. It also factors in the probability that a competitor builds a much better product than you, corners the market in ephemeral badger stock, and crushes options company into the dust. However, you can simply quit. You company only paid the company one year of your time, and are peaceing out without having to pay the other 3 years. Consider value alternative arrangement. Since the way your options actually work is clearly much better than this, your option stock must be worth more. This right is potentially extremely valuable. The higher the short-term variance of your company, the larger the I Quit Appreciation. If you can quickly see whether it is going to be huge or a total flop, you can quickly decide private to how on and try again somewhere else, or to stay and continue to vest your now much more valuable options. You can then work of the TechCrunch value of your value and consider the 5 discounts and 1 appreciation:. Options are just another type of financial asset, and are great to have as long as you value them correctly. However, companies are incentivized to help you wildly over-value them, and so you should think long and hard before accepting any salary cut that is justified by options. How to value your private stock options 02 Nov Why and how to make smaller pull requests. A day at The Free Market.
Negotiate the Right Stock Option Offer (For Startup Employees)
Negotiate the Right Stock Option Offer (For Startup Employees)
4 thoughts on “How to value stock options of a private company”
The flexibility which should be natural to the Christian in relation to mere temporal arrangements has special reference to the problems arising from the territorial and imperial status quo.
The First Quarter-Century of Steam Locomotives in North America Remaining Relics and Operable Replicas with a Catalog of Locomotive Models in the U. S. National Museum.
The flexibility which should be natural to the Christian in relation to mere temporal arrangements has special reference to the problems arising from the territorial and imperial status quo.
The First Quarter-Century of Steam Locomotives in North America Remaining Relics and Operable Replicas with a Catalog of Locomotive Models in the U. S. National Museum.
For USW students: OC3260 and EC4450 (concurrent), or consent of instructor.
All syntax-tree nodes implement the isClosureBoundary() method.