Looking for some expertise in valuing eso as part of total comp in a private company? Black-Scholes, NPV? Are they worthless out of the gate or not?
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Honestly I would just view the stock options as a lottery ticket. First of all, you need some solid internal numbers to even start creating a valuation for the company, which is private. Second of all, if your company is a tech company with no revenue or profit but with huge growth potential, valuations are pretty much speculative and shouldn’t be relied on. Finally, you own shares of a “private” company. So essentially you are relying on the chance that the company will grow big enough to IPO or that there is a buyer willing to purchase your private shares (assuming that you can sell these shares).
But to answer your question, I wouldn’t consider stock options as a part of comp for a private company. And even if you can derive a valuation for the company, I would discount it by like 30% to be conservative. But ultimately, your decision depends on your conviction in the future of this private company.
Typically options are issued at a significant discount to the last round valuation in private markets as companies try to mitigate tax ramifications for employees. I often see like 80% discounts.
Accordingly they are close to common equity.
Ask what the share price was in the last round and deduct the strike price of the options and that should be an anchoring point to the valuation you assign. Then adjust for performance since last round (growth and adjustments for expectations versus that growth).
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