3 ms·
It's a good explanation but what should also be mentioned that you have a very high (let's say 90%) probability that you won't see any money from those options.
by kjksf 11y ago
It's a good explanation but what should also be mentioned that you have a very high (let's say 90%) probability that you won't see any money from those options.
In economic terms this is called expected value and assuming 10% of success, expected value of the options would be $150k * 0.1 i.e. $15k.
- hollerith 11y ago>assuming 10% of success, expected value of the options would be $150k * 0.1 i.e. $15k. That is wrong because the post-seed valuation ($3m) already has the risk of failure baked into it. i.e., those investing at that valuation already know about the high risk of failure. If the startup had a 100% chance of success and the seed-stage investors could be convinced of that fact, the post-seed valuation would have been about ten times higher. Your calculation would be correct if $3m were what the company would be worth if it succeeds, but it is not.
- TuringNYC 11y agoNot quite -- those investing are valuing your company at that in light of [probably] having an entire basket of companies, so they have the benefit of averages. As an employee, you have one shot at this, so the risk is far higher due to lack of diversification.
- rahimnathwani 11y agoLack of diversification doesn't play into the calculation of expected value. The expected value of 100% chance of $1m is the same as the expected value of 1% chance of $100m. If you're an individual trying to make a utility-based decision, though, you have to take into account the diminishing marginal utility of each additional dollar, i.e. you care much more about the first $1m than the next $1m.