What The Heck Are My Startup Stock Options Worth?! - 9 Feb 2009

What The Heck Are My Startup Stock Options Worth?! Seven Questions You Should Ask Before Joining A Startup

By Uncle Saul

Wow. You just received a job offer from a startup which includes 50,000 stock options. That is wonderful…or is it?

I reviewed and approved hundreds of Employment Offer Letters at my
various startups, all of which included stock option grants. The number
of otherwise intelligent prospective employees who never ask relevant
questions about their stock options was frankly shocking. By getting
answers to the seven questions described below, you will be able to
make a reasonable estimate of what your options may ultimately be worth.

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Options Are Just That

I am sorry to disappoint the MBA crowd, but estimating the value of
your startup stock options is not something you can do using the
Black-Sholes option pricing model or other Wall Street-centric
approaches. In contrast, estimating the potential ultimate value of
your startup options requires you to intimately understand the
adVenture’s business model, the mindset of the Core Team,
and the company’s five-year pro forma financial statements.
Understanding these issues will help you make an informed decision
regarding the viability of your next adVenture and should be performed
absent any concerns you may have about your options’ value.

Math 101

In order to properly evaluate the ultimate value of your stock
options, you must obtain the necessary data to solve the following four
equations. At first glance, these equations may seem complicated,
however; the math is actually very simple. To minimize potential
confusion, the variables which are used in multiple equations are
color-coded.

These formulas represent the same approach to determining a
company’s ultimate value that is used by venture capitalists.
Sophisticated investors start their analysis at the “end” of the
transaction (the company’s exit) and then work backwards to determine
how much money to invest and at what valuation, in order to achieve
their desired financial return. You are investing your time and hard
work and a portion of the return on your investment is what you will
derive from your options. As such, act like a sophisticated investor
and estimate the value of your options using this backwards approach.

Questions To Answers

Politely and persistently ask the following questions until you
obtain all of the information necessary to make educated guesses for
each of the variables in the above formulas.

How many shares will I be granted?
The size of your initial option grant should be articulated in your
Offer Letter, as well as in a separate Stock Option Agreement. In most
cases, your shares will vest over a four-year

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