How much startup stock options are worth

This is a fabulous article and I only want to add a tiny little bit of additional context:<p>* Exits north of $100MM are rare, and a $400MM exit is rare indeed; virtually any such exit will be from a famous company. Valuations are at least somehow tethered to sales, and companies that justify mid- 9-figure exits can usually consider IPO... as an example of how rare that event is.<p>* In most sectors of the industry there are rule-of-thumb valuations based on multiples on sales. An enterprise software company aiming for a $150MM acquisition is expecting 4-8x, and needs to be achieving 18MM (optimistically) to 40MM (conservatively) sales to do that. You can reconcile this estimate by asking for current sales, this year's "number" (in a well-run company, everyone knows the number), and then asking "what's going to happen to scale the number up".<p>* Last time I had to think pragmatically about VC, a round that took participating preferred shares (in which the VC takes their money off the table, <i>then</i> takes their percentage off the table) was an indication of a weak round; if they're shooting for the moon, you're entitled to hold that against them.<p>* Finally, remember that <i>if you quit, the equation changes again</i>. When you leave, you can execute your vested options, but that costs money. Perhaps nobody in the company is less protected than <i>former employees</i>: investors have contractual provisions to protect their money, and employees are given retention grants, but former employees can be written right out of the deal. I've seen it happen.

I didn't want to clog the article with an explanation of each of the heuristics I provided, so here it is in the comments.<p>#1 is pretty self-explanatory.<p>#2 is the expected value, halved because an awesome startup with every chance of success still fails half the time. If you're swinging for the fences (shooting for IPO), you're way more likely to either fail or get so much preference ahead of the common that you never see anything.<p>#3 is because everyone underestimates the amount they'll need to raise.<p>#5 The huge penalty is for two reasons. One, because it's tremendously bad for the common. Two, because it often means something worse: the company's up against a wall, the CEO's a bad negotiator, everyone's expecting the common to be worthless so they have to make it up in preferences, etc.<p>#6 Again, the direct impact isn't as bad as this makes it out to be, but a CEO who does a good job negotiating preferences is a leading indicator of other good things: s/he knows how to generate demand for the company, has leverage, knows how to squeeze every ounce out of a deal, etc. This is basically a proxy for if the CEO will do well during negotiations to sell the company.<p>#7 A common-dominated board will tend towards common-friendly exits, and indicates a CEO who does well in negotiations. Again, this is all guesswork, particularly trying to figure out the all important "will the CEO do a good job selling the company" factor. But I think it's a decent swag.

Does anyone have any advice on how you're supposed to tactfully get all the info required to do this computation?<p>During my recent job search, I received offers with options from companies who refused to tell me what the count of fully diluted shares was. No one was particularly comfortable answering questions about expected exit. When I tried to ask various questions to estimate some kind of ballpark value for the equity being offered, one company took this as a signal that I wasn't sufficiently enthusiastic about the offer or optimistic about their chances for success. They then started saying things like "We want to hire someone who's really excited to join our team..."<p>Ultimately the I had to use the "assume the options are worthless" stance, but then, with cash compensation being the only consideration, I ended up accepting an offer with a significantly more mature company.<p>How are you supposed to get this information while not giving the prospective employer the impression that you're either (a) too skeptical of the company's prospects or (b) too motivated by the money?

I generally assume they're worth exactly zero million dollars a piece, because that's what they're actually worth. A few places I've been have tried to pass off this whole "half your salary in stock options" rubbish while still giving me an acceptable wage in real money. This put a phantom value on stock options. At best, they're an exit bonus, which is an incentive to do your best to make your company thrive. It gives you a token that could be worth real money if everyone pulls together.<p>Don't expect anything from stock options.

I really appreciate this article. Unimaginably, most programmers I interview to this day in late 2010, react primarily to number of shares an offer includes option to buy. I've written offers with (made up numbers) option to purchase 10,000 shares at a strike price of $0.10 and had candidates, asking no questions, attempt to negotiate for 20,000 shares which is something that they'd be more comfortable with.<p>In my admittedly limited experience, just realizing that there are a number of shares out there (fully diluted or not!) and that this grant translates to a percentage of the company and that the strike price implies a valuation is beyond a solid majority of people I've seen receive stock option grants. Articles like this one are certainly needed to improve education on these matters.

I'm at a startup (that I otherwise like) where the CEO refuses to disclose the total number of outstanding shares. You can bet that I compute the expectation value of my options to be exactly zero.

Employees should consider their options to have an expected value of $0. (With a not insignificant variance...)<p>There are so many ways things can fail to pan out or you can get screwed, and employees simply can't protect themselves in the way an investor or founder can. If significant participation in an exit is important to you, the only logical option is to be a founder yourself. Trying to get a payoff as an employee is little better than gambling.<p>My rule of thumb is that if the options influence your behavior at all, you're over-valuing them.

In the first .com boom I worked for a company that had a 60 million funding round. By the time I left I decided not to bother exercising my options for pennies a share. The company never went public. None of the many people I knew working for startups at the time saw a dime of profit from their options either.<p>The stock I got from the much larger, already public company I worked for next turned out to be worth a nice chunk of change though.

What you REALLY want to know are things that you're not likely to find out in your offer:<p>* How does your share allocation compare to your peers, superiors and subordinates? In other words, are you getting an equitable share in the company for your position?<p>* What is the board's strategy for maintaining employee ownership in the face of dilution? Regardless of what you start with, it can be made irrelevant as the number of outstanding shares goes up in future financing rounds. It is natural to expect your ownership share to go down over time as the company grows, but additional share grants can mitigate that effect.

When people ask me this, I always run away crying. Finally I can point them somewhere.

With all due respect on this formula, it is only one instance of many possibities. There are numerous assumption being made. The range of outcome can easily be 10x different (with the mode being 0 obviously).<p>Could it gives a more reprentative picture if we can do a survey on successful exit? Something like glassdoor.com?<p>Also i've heard really good story happened to the talents in talent acquisition situations. I wonder if the number can turn out better in those cases, especially for non-founder and non-exec.

The frustrating thing about this is that you rarely ever hear about early employees getting filthy rich, even in HUGE companies.<p>This is why starting your own company and going for broke seems much more appealing, as having 10-20x what your first employees might have is really a game changer. Couple this with the fact that many first employees may end up doing much more work than the founders, and things can get really perplexing.

This could be a course for high school students -- like a 1 semester AP course. Understanding stock to me is like a multidisciplinary life skill.

Sometimes it's not worth to work for stock options. <a href="http://www.youtube.com/watch?v=hyM3HVdH1Kw" rel="nofollow">http://www.youtube.com/watch?v=hyM3HVdH1Kw</a>

Love the simple equation - really calls into clarity what is a very fuzzy subject.