
Ask HN: How do I gauge the value of stock options that I have been offered? - tazoo
I&#x27;ve been offered stock options as part of my offer to join a company.<p>They have offered me a competitive salary, as well as 200 options at 1300 USD per option. The company is valued at around $1B. Options vest on a four year schedule.<p>Do I have enough information to make a call on whether this is a good deal, or do I need to know more?
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daveguy
If they are currently valued at $1300 each with a private company valuation of
$1B that means: You have to pay $1300 per share to acquire them and have no
ability to sell them.

If the company goes public or acquired the company will have to be valued more
than $1B for the options to be worth anything to you.

Honestly you shouldn't ever consider options to be worth anything more than
the paper they're printed on until an IPO or acquisition.

Options (before IPO) are mainly a gimmick by management to keep people from
jumping ship (they are typically dependent on continued employment). They cost
the company virtually nothing. After IPO they have easily determined value.

~~~
ThomPete
Doesn't that depend on whether they are RSU's? Then there is no strike price
as far as I remember only capital Gains.

~~~
charford
An RSU is not the same as a stock option.

~~~
ThomPete
No but I wonder if that's what he got instead the price taken into
consideration.

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patio11
You need to know the fully diluted count of shares. After that, calculate how
much of the company you beneficially own assuming full vesting, and start
wargaming out scenarios of exits at $500 million, $1 billion, $2 billion, $5
billion, $10 billion, $25 billion, $50 billion, etc. It's 4th grade math with
bigger numbers: 1 bps * $10 million = $1k; 1 bps * $1 billion = $100k; etc.
(bps = "basis point" = 10^-4)

You might also try asking the question "I'm trying to value my options. Do you
have any financial results or model which would suggest I value them upwards?"
HN readers might if surveyed pick "Options are basically witchcraft" but this
is very, very not true of CFOs at billion dollar companies. The information
you want exists in a spreadsheet somewhere; nobody is going to hate your guts
for asking to see it. (They might not say yes but, hey, that's signal, too.)

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chillydawg
Ask for more cash and hand back the options, invest the cash in your
retirement or property or whatever. You don't have enough years to play the
same lottery as VC's. The mere fact you are asking how to value these means
you are probably in no position to do so, therefore you are probably getting a
terrible deal.

~~~
nthState
@chillydawg, Based on the options they have been offered (200 * 1300 =
260,000), What reasonable amount of money do you think they should ask for on-
top of their salary, if they forego the options?

~~~
chillydawg
Ask for another 100 grand, then haggle until you agree, I guess. TBH, I'm on
the other side of this equation and I'd respect any potential employee who
just said to me "just cash".

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mathattack
Some people use Black Scholes to price options but that can be very hard, as
there are two unknowns (volatility and if anyone has preferences over you).

A few questions you can and should ask:

1 - What was the last valuation based on outside investors, and how long ago
was it?

2 - How many preferences are in the cap table? (If a group of investors put in
100 million with a 2X liquidation preference then they are guaranteed to get
200 million before others get anything)

3 - Related to 2, ask at what exit value all shareholders get treated the
same.

4 - Ask about how soon you would have to exercise upon leaving. (Frequently 90
days)

5 - See if the stock is trading in any secondary markets, or if there is news
of public market investors remarking their shares.

6 - Ask about growth projections. (EBITDA for PE funded companies, Revenue for
VC backed)

7 - Ask if future rounds will be needed. (If the business isn't close to cash
flow positive and there are a lot of growth projected, this will take a lot of
money)

Net - there is a price the investors put per share on their stock. Yours
should be at some discount to that. So if the investors value it at $1300 then
you should come in less, much less. (And if it's too much less than the strike
price, you are betting on a lot of growth)

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oroup
$1300 is really an unusually high strike price. While in theory there is no
difference between 200 options at $1300 per share and 20k options at $13 per
share, the former is very unusual and I'd at least want to know the story. If
the company is to IPO there will almost certainly be a stock split.

One way to force small stakeholders off your cap table is to do a reverse
stock split because fractional shares are typically paid out in cash. If that
were the case here, I'd call it sketchy behavior and steer clear.

~~~
patio11
Your scenario is the company with the $1,300+ strike price will do a _reverse
stock split_ because they want to IPO with a $6,500+ share price instead?

~~~
oroup
No my theory is that they may have already done a reverse split to wash out
small stakeholders. If there is an IPO in their future they will have to do a
split as well. The former small stakeholders would not get their shares back.

Obviously I know nothing about this but if I were the poster I would ask to
hear the story.

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calcsam
I actually built an app to do this kind of calculation. It walks you through
each of the calculation steps and variables involved, along with context:

[http://www.optionvalue.io/](http://www.optionvalue.io/)

The main pieces of information you need to know are:

* Total number of outstanding shares

* Strike price

The main thing you'll need more detail on (though perhaps you have it) about
is whether the $1300 number is the per-share value (= $1B / number of shares)
or a per-share strike price (the amount you have to pay to exercise each
share).

The base assumption you'll want to make when doing the calculation is that the
company exits at the current valuation. Obviously it could exit for a lot more
or a lot less, but the last VC valuation is a reasonable E(x), and while you
can add an asterisk around how VC shares work vs employee shares, it should be
accurate +-10-20%.

The other big thing you'll want to know is how long it could be until the
company IPOs or exits and you can actually get cash. A good optimistic
scenario, if they are a SaaS startup, is to ask them about 2015 and 2016
revenue and figure out how long it would take them to get to $200M revenue at
current growth rates.

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shove
Zero. All done, and no fancy math required.

Say what you will, but I've been coding professionally for over 20 years.
YMMV.

~~~
falcolas
I agree. If they end up being worth something, it's a bonus, not a part of
your compensation. There are just too many potential scenarios where you get
nothing out of them to rely on them.

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giis
Keep stock options as possible bonus in future. It may or maynt happen.

If its very small company with only handful no.of employees and you see this
company has bright future or may get acquired for billions - then try to
understand how they arrived on number 200.

If you faith in product & planning to stay for 4+ years. \- You can tell them
increase options with may be increased 5 year schedule.

If you think your basic income needs to be good. Then ask them reduce options
and put some money on your monthly salary.

I think 1300USD/option is very high, Google stock is $800 & I'm very doubtful
you will get $1300 per stock.

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dzyp
Oh man, I just went through something similar, with a startup that was also
growing quickly (and continues to grow to some degree).

First, the options are worth nothing, especially if you don't have a market.
The strike price is pretty much meaningless (although in your case unusually
high). Even if you IPO'd at this strike price (and you won't), you'll really
only care about how much the actual stock price moves from that strike price.

Second, there are inevitably investors that have options with greater
preference than yours. Before you IPO, your management is going to use the
opportunity to shuffle equity around. In my case, the directors performed a
reverse split that halved the number of my options and doubled the strike
price. The directors/early investors got a better split, hence equity was
shifted from employees to the upper level. Expect this is coming (and from
your strike price seems like it's already been done at least once).

As a cautionary tale, I actually "own" (not entirely vested) quite a few
options compared to my fellow employees. They are literally worth zero
dollars. The only _employees_ in my company that got anything were the really
really early ones.

tl;dr: if your company ends up being a unicorn these options might be worth a
lot; if your company is outstanding they may be worth a little; if your
company is typical they'll be worth next to nothing or nothing

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caseysoftware
Effectively zero for the foreseeable future.

The "valuation" of a company is a tricky figure because it can be based on a
variety of things.

While the company is still private, it's based on the latest investment round
which is whatever the investors agreed to. I can buy 0.0000001% of your
company for $1 but it doesn't mean your company is "worth" $1T anywhere but in
my head.

In the public markets, it's usually related to current and future estimate
sales. There's still no equation, just a gut feeling.

And wow. That's an amazingly high strike price.

------
kspaans
Knowing the number of options isn't nearly as useful as knowing what
percentage of the company you will own. This lets you calculate the various
ways the value of your equity will change as the business gets more
investment, sells, or goes public. The company should tell you are offered 200
shares of, say, 2 million outstanding shares. If the valuation you say is
accurate, it looks like they are giving you options for around 0.026% of the
company. Probably about right if you are a late hire (say employee number
between 10 and 100). Hopefully your salary is enough to be able to afford
~$65,000 worth of option exercises every year, should you be interested in
purchasing them! The link below also has tax consequences, which depend on the
type of option, and how much the value of the shares change between now and
when you exercise the options.

Ideally the company will also tell you roughly how much the company would need
to sell for in order for you to see a return. They can tell you this
indirectly by saying what kind of liquidation preferences other investors
have.

For a more detailed writeup, see [https://github.com/jlevy/og-equity-
compensation](https://github.com/jlevy/og-equity-compensation)

Good luck!

~~~
mdellabitta
> Hopefully your salary is enough to be able to afford ~$65,000 worth of
> option exercises every year, should you be interested in purchasing them!

Just dropping a quick clairification: OP should not assume it's necessarily a
good idea to buy the options as they vest, and should not assume that they'll
have to put up cash to excercise them in the future.

Probably covered by your link, but I wanted to point this out explicitly
because people have been burned by these assumptions in the past.

~~~
kspaans
Good point, I was keeping my post short but should have included this! I think
I was trying to highlight how expensive the options are, rather than the
necessity to exercise them.

------
gorbachev
Those options represent a .026% ownership stake of the company.

However, it's not quite a simple as that, because some of the investors almost
certainly have more preferential shares of the company, so what those options
really represent is 0.026% of anything after those investors take their cut.
mathattack's answer starts getting at it in a little bit more detail.

You should value them at $0 for purposes of evaluating the job offer. The only
way you could tell what they can/could be worth is having a peek at the future
at the time the company is about to exit.

------
swingbridge
Without knowing the total number of shares it's hard to know what you have.
You also need to know how your options will be treated under various
scenarios: company goes public, company is sold, company is acquired, company
gets more funding, etc. In general employee options get the short end of the
stick in most of those scenarios. One can still make out well, just usually
not as well as they had thought/hoped.

At the end of the day one must remember that more often than not options don't
work out the way one hopes. They're used as a cheap form of comp since it's
just paper to the company. They can provide a nice bonus under the right
scenario but be very cautious about accepting options in place of proper
compensation at your full value (e.g. cash in the bank). More people than
would care to admit it accepted options in place of cash for their base comp
and lived to regret it.

Negotiate proper comp up front and only accept options as part of the icing on
the cake. If they can't pay you properly then you have serious reason to
question if this thing is a "real company" or just a bunch of hyped up fluff
with a valuation that could vaporize overnight--making your options completely
worthless before you even knew what just happened.

------
aneesh
Some thoughts (I'm neither a CPA nor a lawyer, so caveat emptor):

0) Make sure you understand 409a valuation and Alternative Minimum Tax. These
two concepts will materially impact the post-tax value of late-stage private
company options.

1) Clarify what the $1300 price is. Is it a 409a price, or the latest
preferred share price, or something else? Also, get an exact number if $1300
is approximate.

2) Make sure your options are ISOs (and not NSOs). Ask for the count of total
outstanding shares.

3) Try to get a history of the company's recent 409a valuations. This will
give you some idea of how fast the fair market value is growing. Fair market
value at time of exercise affects the taxes you owe.

4) If you leave the company, check how long you have to exercise your options
or lose them. The standard is 90 days - this is something to be aware of so it
doesn't surprise you.

------
avengersx
Julia Evans wrote a great article about the topic here:
[https://jvns.ca/blog/2015/12/30/do-the-math-on-your-stock-
op...](https://jvns.ca/blog/2015/12/30/do-the-math-on-your-stock-options/)

------
tehlike
Does the company provide stock refreshers? If not, joining fang is worth
significantly more than 260k you have been offered.

Given the company looks like a unicorn, i assume there wont be much difference
between this and a fang company in terms of interesting stuff to do.

------
valarauca1

        How do I gauge the value of stock options that I have 
        been offered?
    

Faith.

Most metrics are generally useful for tax purposes and tax purposes only until
the company IPO's and 6-12 months (or longer) later you can cash out your
options the company's stock has no market value.

Will you work at the company for the full vesting cycle? Will you tolerate the
culture that long? Will the company still exist in 4 years? Will the company
even IPO? How long _until_ the company IPO's?

These are all risks. Most purely emotional. So your evaluation must also be
based on emotion.

~~~
tazoo
The company could IPO within 4 years, but I would put that at maybe a 20%
possibility.

But you are right. This is a fast moving industry. The company could fold
tomorrow. I could move to another startup or company.

------
brianwawok
You know valuation, option count, and strike price. I think the missing pieces
are total shares outstanding and cap table.

I.e. if there are 1 billion shares already out, your options are currently
worth -1299 and unlikely to gain that much value. If there are 10k options the
value changes a bunch.

But agree with others for a later stage company like this, I would value at 0
or maybe the same as an extra vacation day when comparing offers.

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krakensden
Value them as a "gesture of goodwill" if the company is not yet public, with
no particular monetary value.

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itamarst
As someone said, it's a lottery ticket. But to fair you have much better odds
than with a normal lottery ticket.

You should educate yourself about how they work, though, e.g. in the US if
you're not careful you can end up paying massive amount of taxes due to AMT if
you exercise the options but don't sell resulting stock.

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origami777
Would love to see what others more experienced have to say. The two
considerations I'd have myself are 1) do I have enough cash to actually buy
those ($1300 is a steep strike price) and 2) is the company still growing fast
and is that based on things I feel good about or hype.

~~~
tazoo
The company is still growing fast. Incredibly fast actually.

~~~
origami777
Are they really 1300/option? That'd mean you'd need a whole lotta cash to buy
those.

Great to hear about the growth!

Edit: not trying to second guess you I'm more shocked that options that high
exist. Seems like it'd be really tough for some employees to buy them.

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tytso
Make sure you understand the tax implications of your stock options:

[http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-
HOWTO.htm...](http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.html)

------
taeric
I posted this story a few years ago.
[https://news.ycombinator.com/item?id=7982848](https://news.ycombinator.com/item?id=7982848).
Pretty good discussion on this topic.

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raverbashing
Sorry, but unless it has some traction already and it has been IPO'd the
Expected value of those options 4yrs from now is zero.

Unless you are really sure about it, think of it as a bit more than a lottery
ticket

~~~
tazoo
Sure the expected value can be zero. I know that options are essentially a
lottery ticket. I'm just not sure if these options are very little or enough
or a lot.

~~~
philjohn
Remember that even if they don't hit zero, if they're underwater, say,
£1299.99 they are worth essentially zero as you'll not want to exercise them
(and why would you want to? You'd be losing money - and you can't write it off
as a tax loss in almost all circumstances).

Then, unless they're publicly traded, or there is a legitimate secondary
market, you can't even do a sell to cover.

The other way of providing equity is with RSU's, restricted stock units, where
the company promises to give you, at each vesting date, a portion of stock.
The problem there is that this is taxed as income on the value of the stock at
vesting, and once again if there is no secondary market you'll not be able to
sell enough to cover your tax liability and be in for a nasty invoice from the
IRS that you need to scramble to cover.

I'd recommend having a financial planner walk through the ins and outs with
you.

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itake
Really depends on how much risk you're willing to take. I personally don't
value stock options and would look purely at compensation that can be used
today.

~~~
logicallee
>I personally don't value stock options

Yes you do. I'll give you $50 for all of yours. What's that? Oh that's right:
you do.

~~~
itake
I wouldn't be interested in selling my exercised options, but my unexercised
ones that could work, but you would need to offer at least the purchase price.
Unfortunately, only employees can own shares... :[

~~~
logicallee
I simply don't believe you - if there were a hypothetical way you could have a
$50 bill on your desk but, in case they end up worth something, your
unexercised options are no longer yours, they're someone else's, and you
didn't need to deal with anything else and it were easy legally - then I don't
think you would actually want to do that, you wouldn't choose to make that
trade.

Let me compare it with something else - say you already belonged to a gym but
your employer as a christmas gift gave you a totally transferrable 50% off
gift certificate (but that there's no particularly liquid market for, it's not
like it has an obvious market price you can sell online) to a more expensive
gym that is far from you, that you don't like for some reason because its
focus doesn't match yours (maybe it's always fairly bustling and you like
fewer people distracting you, whatever, in fact maybe you like going at times
that that gym is closed!), and that is still more expensive after 50% off than
your annually paid-up membership 15 minutes from your house and that you like:
then you would be happy to give it to someone you know for, say $10 or if
it'll make them happy or as a favor or for a sandwich. It really is something
you value at closer to $0, and I judge that you would be glad to part with it
for that amount or for free in that case.

I judge you wouldn't actually part with your options for $10 or $50 even if
hypothetically it's legal and trivially easy for you. This is just my
impression. I don't think you would do it. If you reflect on the two scenarios
above (the first and the second paragraph of this comment) I think in your
heart of hearts you see the difference. It's not a small difference.

------
gomox
You need to know the total amount of shares that are out there to even begin
to speculate on whether the deal is good or not.

