How to evaluate stock options. Understanding stock options to me means, understanding how to value them — post-liquidation and pre-liquidation. Most people understand their stock options just fine post-liquidation (company is sold or goes public). The tricky part is trying to evaluate your stock option pre-liquidation — and that's the.

How to evaluate stock options

Employee Stock Option Basics, 2014

How to evaluate stock options. I recently helped my wife negotiate an offer letter for a senior level position with a late stage start-up and realized that a lot of people don't understand how to evaluate a stock option grant. Most offer letters describe your title, salary, bonuses and potentially an option to purchase a certain number of shares, but that is all.

How to evaluate stock options


Ideally, it sweetens the pie and make candidates more eager to see the company succeed. Most people understand their stock options just fine post-liquidation company is sold or goes public. When a company issues you stock, you have ownership in the company. What do you own? Having read this, you may be wondering where the value of the company comes from.

This takes us to the notion of market capitalization. The market capitalization is given by the following equation:. The number of shares outstanding is the total number of shares a company has. A stock option is the option to purchase stock at a set price over some specified period of time. We now have the basic tools to begin evaluating the stock options we get as part of our startup offer!

If the startup is being cagey about this, it probably means you own a depressingly small fraction of the company. With the number of shares you have and share price known, you can compute the market cap for the startup. Alright, at this point, you should know the following:. If the startup has public competitors that is, the companies are traded on public exchanges you should see how much those companies are valued at. Moreover, you should see how long it took for those companies to attain their current market cap.

Alternatively, you can look at acquisitions in your space to see what similar companies are acquired for. Something else you should consider is whether there are any other viable suitors in the space. In other words, are there companies that would be a likely purchaser of this company? Or, have all viable candidates already purchased other companies or built their own in-house solution?

Alternatively, you can look at the annual revenues of the company. A way to assess this is by looking at the sales momentum of the company. Are the sales constantly escalating and if so why? Why will this trend continue happening? All this talk of exercising options is missing some other relevant bits of information. Namely, we need to know the current valuation of the company and what percentage of the company we have the ability to own.

So, after talking with your recruiter, you find out that your 40, shares corresponds to. The recruiter also told you that at the last board meeting the advisors decided that a good price for each share would be 50 cents. Alright, the time has come to evaluate whether or not these options make sense! This is not the price that anyone paid or a public market decided for AirBnB.

We need to know how much someone is actually willing to pay for a company like PDBnB, or how valuable the market thinks such a business is. We check out the market cap for a number of hotel chains: The recruiter is dodging your questions on revenues as this is sensitive information. You also need to be aware of how long Homeaway has been around. It was founded in It took 10 years to reach its liquidation event. So, a relevant question is what year is PDBnB in? So, to have this exit, you need to be willing wait for about 7 years although your shares will likely finishing vesting in 4 years.

Since the future is actually an array points and not a single point, we accounted for at least for some of it. But now is the time to start asking more questions. Is the appeal to dogs and dog owners something that might take PDBnB to the next level?

Any additional information you can get around this would be helpful. For example, what fraction of the business is coming from dogs and dog owners? The worst case scenario is that PDBnB never has a liquidation event e.

I hope some of these ideas help you evaluate your stock options in your startup offers! Sign in Get started. Stock When a company issues you stock, you have ownership in the company. The market capitalization is given by the following equation: Stock Options A stock option is the option to purchase stock at a set price over some specified period of time. Alright, at this point, you should know the following: Inference from public companies If the startup has public competitors that is, the companies are traded on public exchanges you should see how much those companies are valued at.

Inferring from Public Companies We check out the market cap for a number of hotel chains: Never miss a story from The Compiler , when you sign up for Medium. Get updates Get updates.


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