Stock options can build significant wealth for people who work at venture-backed companies. But it's hard to know what, if anything, the options may ultimately be worth. You could always assume an exit price and do the math. But we've put together a model based on thousands of data points which takes probable future financing rounds into account to determine what your options may be worth in a successful exit.
The number of options and the strike price (also known as exercise price or grant price) determine the initial value of the grant.
There are two types of options: Non-qualified Stock Options (NSO or NQSO) and Incentive Stock Options (ISO).
NSOs are reported as ordinary income when you exercise your options. As a result, you have to pay withholding tax at the time of exercise.
ISOs are tax free at exercise, but you may be subject to Alternative Minimum Tax (AMT). Additionally, you are only able to receive $100k worth of ISOs each year (calculated by multiplying the number of options eligible for exercise in any given year by the exercise price).
Option grants typically have a vesting period. This means that the longer you stay, the more options you can exercise. The current standard is a 4 year period with a 1 year cliff. This means that you can buy 25% of your options after 1 year with the balance vesting (and purchasable) over the next 3 years.
Startups are valued by investors every time a round is raised. The rounds are typically named Seed, Series A, Series B, Series C, etc. Each round represents the stage and maturity of the startup. Typically, the Seed round is for building/developing an idea. The Series A round is for finding product-market fit. Series B represents market validation and beginning to scale. Series C and beyond aim to help grow the company. Investors typically invest based on a valuation that they assign to the company, however, valuations follow this formula:
Valuations of a company can increase from both price increases and increasing the number of shares of a company. However, if you own a set number of shares, an increase in share count means you own less of the company (also known as dilution).
Depending on the age/maturity of the startup, we can try to estimate what your common stock will be worth if the company exits successfully.
There are 4 main inputs to our model:
The strike price in the model would be the strike price of your grant (also known as the exercise price or grant price). This number represents the price at which you can buy your shares in the future. Even if the price per share of the stock rises, your strike price remains the same. Ultimately, you will earn the difference between the final sale price in an acquisition or IPO and your strike price.
The current fair market value per share price for common stock is the 409a value. Startups are required to go through a 409a valuation (409a value) where a third party firm prices the common shares. (Note: VC's typically buy preferred shares with downside protection called a liquidation preference, which are senior to common shares.) An extremely successful exit is when the final sale/IPO price is a multiple of what the last VCs paid. If the sale price is less than the last VC price, then common shareholders many not be left with much. For our model, we use both the 409a value and the price the last VCs paid to try to value the shares.
Using our data between rounds, we need to know what the name of the last round (Series A, Series B, Series C, etc). There is a big difference between a Series A and a Series E company. The earlier the round, the more growth potential.
The final variable is how long it will take the company to exit. Our data shows that acquisitions typically happen 4-5 years after the Series A round and IPOs take 8-9 years after the Series A round.
Our model is a rough estimate of what the value of common shares would be if the company has a successful exit. Of course, this amount is an estimate based on averages. Highly successful exits will generate more value.
This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!