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That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the share

by gjem97 10y ago

That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the shares that investors buy are the same as the shares that you would get through your ISOs. They typically are not the same, with the investors getting preferred shares that are superior to your common shares. Furthermore, terms like liquidation preferences and "participation" can make the preferred shares much much more valuable in many types of liquidity events. So in all, I worry that this tool does more harm than good. Even given all the information you solicit from the user it is still very hard to say what the options/shares are worth. Typical errors in the estimate could be an order of magnitude or more.

calcsam 10y ago
That is a pretty big assumption, and I would like to highlight it more. The reason why it's a reasonable assumption is that in any material outcome, common share preferences converge to preferred share preferences. Yes, once in a while you have an exit at 0.3x to 0.8x latest round where the investors are made whole and common share holders take an excessive haircut or are wiped out entirely. Good Technologies is an example here. But looking at VC returns, almost all come from ~5x+ exits: "home runs". In fact, most VCs will block acquisitions at less than 2x latest round valuation except in case of corporate distress.
- gjem97 10y ago
  I agree, there are cases where the values converge. They are, however, a very small percentage all startup outcomes. Most outcomes for venture-backed startups are wind-downs, or small-time acquisitions. In these cases preferred shares are much more valuable. Since what you're trying to do here is assign a current (expected) value to the employee's options, focusing on the "home runs" for the VC is not helpful.

by gjem97 10y ago

calcsam 10y ago

That is a pretty big assumption, and I would like to highlight it more. The reason why it's a reasonable assumption is that in any material outcome, common share preferences converge to preferred share preferences. Yes, once in a while you have an exit at 0.3x to 0.8x latest round where the investors are made whole and common share holders take an excessive haircut or are wiped out entirely. Good Technologies is an example here. But looking at VC returns, almost all come from ~5x+ exits: "home runs". In fact, most VCs will block acquisitions at less than 2x latest round valuation except in case of corporate distress.

gjem97 10y ago
I agree, there are cases where the values converge. They are, however, a very small percentage all startup outcomes. Most outcomes for venture-backed startups are wind-downs, or small-time acquisitions. In these cases preferred shares are much more valuable. Since what you're trying to do here is assign a current (expected) value to the employee's options, focusing on the "home runs" for the VC is not helpful.