option valuation question
If this isn't the right place for this tell me to bugger off (but please direct me to a learning/student forum if you do!) I am a high school student reading and thinking about Wall Street careers so this is not a question for a class or an interview or anything. Im teaching myself about derivatives and wondered if someone could help me think through a real world option type problem. (It's actually related to a little business I have with a friend selling stuff on Amazon.)
Anyway so I have a little business that let's say makes $500k / year. Someone wants to come in as a partner, and their ask is an option on the equity that would only trigger if someone buys our company. (I hope I'm explaining this correctly.) Say they get 25% of the buyout price if we are bought, otherwise they get nothing.
So the question is, what is that option worth? How do I think about valuing it? I understand models like BS, Monte Carlo, binomial lattice, but don't know how to apply it to an asset (our company) that has no price. The distribution is the buyout price, whether or not it happens. For sake of simplicity assume that it is a perpetual option.
Sorry if this question is annoying but I'm just trying to learn how to think about things like this. Thank you.
I believe if you were to use an Black Scholes OPM to value the option, you'd need an exit date. If there is no liquidation/exit/acquisition, the option would never be excersized.
Yeah I know and also the price of the underlying is not traded and certainly isn't discreet. The exit date is when an acquisition occurs at which point the payoff of the option is 25% of the buyout price. Has to be a distribution for that buyout price and of course it might not occur at all. There has to be a way to value this but I can't seem to track it down so I'm just asking around. Thanks for your thought on it!
Modeling this as an option isn't appropriate here. Amazingly, what you are valuing here is actually straight up stock with no dividend. Think about it - private stock isn't worth anything until you sell out of it.
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