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This tool isn't really helpful. What you really want to know, as an employee, is what the expected value of your options are -- not what they will be worth if

This tool isn't really helpful. What you really want to know, as an employee, is what the expected value of your options are -- not what they will be worth if company IPO's for $xxb. This expected value is strongly correlated to your company's valuation which isn't an input into the posted model. As a general rule of thumb, I'd recommend taking the valuation of the company's last financing round and halve it. Then, multiple this valuation by your projected vested ownership percentage (and subtract any impact from exercise price). The biggest reasons you want to discount the company's last private valuation are liquid preference and risk intolerance. This rule of thumb is most effective if the last private valuation was recent and completed on standard terms. Edit: I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary.

kemitche 8y ago
I concur with your line of thought, as long as the base salary covers your basic needs (food, shelter, sufficient extra to put away for retirement, basic vacations). Once those bases are covered, the employee is already looking at "more money than they need" and should take a measured approach to how they want to invest/risk that money. But ultimately, it should be done objectively based on the reality of the company and the options presented.
roguecoder 8y ago
Given that 2/3rds of venture-backed startups fail entirely, your approach is going to massively over-estimate the likely value of options.
- sokoloff 8y ago
  I don't think that's the case. 2/3rds fail, 2/9ths return a small multiple, 1/9th return a substantial multiple to a typical decent VC. Valuing the shares at half the most recently priced round puts them into a quite reasonable range, IMO.
- smallgovt 8y ago
  The company's valuation at the last financing round already prices in the high likelihood of failure. That is, on average, the VC industry does a good job at assigning valuations to companies (see published reports on average IRR of the VC industry). As you point out, there's huge variance in outcome which may affect your appetite for shares, but when it comes to assigning an expected value to your shares, the last financing round is an appropriate place to start.
  - roguecoder 8y ago
    I don't know what your experience is, but what I have observed is that valuation is usually the product of multiplying how much money investors want to put in by how much stock the company is willing to give up.
twblalock 8y ago
> Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary. The problem is, there is no reliable way to value the options in most cases. Valuations are not very realistic, especially for young companies or companies that are overhyped. Your ownership percentage might also get diluted as a result of future financing rounds. Besides all of that, the chance that your options will end up being worth zero is the most likely outcome at most startups.
- smallgovt 8y ago
  I agree there's no reliable way to value a startup, but that doesn't mean you should throw your hands up and say they're worth nothing. In lieu of any reliable method, the best estimate you have available to you is the company's last private valuation. Though there is wild variation in outcome, on average, VC's do a decent job pricing investments.
  - TuringNYC 8y ago
    VCs price investments in the context of a portfolio, thus VCs have statistics on their side. As an employee, you don't have statistics on your side, so you have one shot at being right. Further, many VCs are managing OPM other people's money (OPM). You are investing your own money.
  - toast0 8y ago
    If the best estimate of the value of the stock is it's last valuation, that means current options, which are priced at last valuation have a paper value of $0. There's certainly a time-value, but that's hard to compute, given the most popular model uses a volatility component which you'll have no data for. If you have options from before the current valuation, or if you were offered RSUs, or underpriced options, you could use the valuation as a guess of the value, sure.
    - smallgovt 8y ago
      To my knowledge, almost all startup options have a strike price that is close to the last 409A valuation, which is typically an order of magnitude less than the valuation given to the company at its last private financing. Receiving options with a strike price close to the last private valuation would be highly unusual, but if it did occur, I'd advise people to value those at $0.
Traster 8y ago
>I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket A lot of people play the lottery, the prize is millions and the price is a buck or two. If your income is ~100k and you're valuing your options at a buck or two then it sounds like you're pretty much joining the view that options are worthless.
jiveturkey 8y ago
> This tool isn't really helpful. huh? You go on to describe exactly how it's helpful. "IPO" is just shorthand for the price at which your options become liquid. There are many spreadsheets you can find to calculate this, round-by-round so that you can run scenarios. Just search for 'cap table excel' or 'cap table example'. The beauty of this tool is the interactive slider. Of course it's very simplified for the sake of ease of use, but it is fun and helpful. And they do a great job being crystal clear about the oversimplification, and point you to resources to learn a lot more! It's really great. Could it be better? sure. But then it'd start encroaching on the author's commercial tool (captable.io)
dublidu 8y ago
Options have a strike price that is close to their last round of private valuation, so you are effectively valuing them at 0, which as you say is irrational.

kemitche 8y ago

I concur with your line of thought, as long as the base salary covers your basic needs (food, shelter, sufficient extra to put away for retirement, basic vacations). Once those bases are covered, the employee is already looking at "more money than they need" and should take a measured approach to how they want to invest/risk that money. But ultimately, it should be done objectively based on the reality of the company and the options presented.

roguecoder 8y ago

Given that 2/3rds of venture-backed startups fail entirely, your approach is going to massively over-estimate the likely value of options.

sokoloff 8y ago
I don't think that's the case. 2/3rds fail, 2/9ths return a small multiple, 1/9th return a substantial multiple to a typical decent VC. Valuing the shares at half the most recently priced round puts them into a quite reasonable range, IMO.
smallgovt 8y ago
The company's valuation at the last financing round already prices in the high likelihood of failure. That is, on average, the VC industry does a good job at assigning valuations to companies (see published reports on average IRR of the VC industry). As you point out, there's huge variance in outcome which may affect your appetite for shares, but when it comes to assigning an expected value to your shares, the last financing round is an appropriate place to start.
- roguecoder 8y ago
  I don't know what your experience is, but what I have observed is that valuation is usually the product of multiplying how much money investors want to put in by how much stock the company is willing to give up.

twblalock 8y ago

> Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary. The problem is, there is no reliable way to value the options in most cases. Valuations are not very realistic, especially for young companies or companies that are overhyped. Your ownership percentage might also get diluted as a result of future financing rounds. Besides all of that, the chance that your options will end up being worth zero is the most likely outcome at most startups.

smallgovt 8y ago
I agree there's no reliable way to value a startup, but that doesn't mean you should throw your hands up and say they're worth nothing. In lieu of any reliable method, the best estimate you have available to you is the company's last private valuation. Though there is wild variation in outcome, on average, VC's do a decent job pricing investments.
- TuringNYC 8y ago
  VCs price investments in the context of a portfolio, thus VCs have statistics on their side. As an employee, you don't have statistics on your side, so you have one shot at being right. Further, many VCs are managing OPM other people's money (OPM). You are investing your own money.
- toast0 8y ago
  If the best estimate of the value of the stock is it's last valuation, that means current options, which are priced at last valuation have a paper value of $0. There's certainly a time-value, but that's hard to compute, given the most popular model uses a volatility component which you'll have no data for. If you have options from before the current valuation, or if you were offered RSUs, or underpriced options, you could use the valuation as a guess of the value, sure.
  - smallgovt 8y ago
    To my knowledge, almost all startup options have a strike price that is close to the last 409A valuation, which is typically an order of magnitude less than the valuation given to the company at its last private financing. Receiving options with a strike price close to the last private valuation would be highly unusual, but if it did occur, I'd advise people to value those at $0.

Traster 8y ago

>I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket A lot of people play the lottery, the prize is millions and the price is a buck or two. If your income is ~100k and you're valuing your options at a buck or two then it sounds like you're pretty much joining the view that options are worthless.

jiveturkey 8y ago

> This tool isn't really helpful. huh? You go on to describe exactly how it's helpful. "IPO" is just shorthand for the price at which your options become liquid. There are many spreadsheets you can find to calculate this, round-by-round so that you can run scenarios. Just search for 'cap table excel' or 'cap table example'. The beauty of this tool is the interactive slider. Of course it's very simplified for the sake of ease of use, but it is fun and helpful. And they do a great job being crystal clear about the oversimplification, and point you to resources to learn a lot more! It's really great. Could it be better? sure. But then it'd start encroaching on the author's commercial tool (captable.io)

dublidu 8y ago

Options have a strike price that is close to their last round of private valuation, so you are effectively valuing them at 0, which as you say is irrational.