Do the math on your stock options

The same is true at time of negotiation. You don't really need to know how many shares are outstanding if you have the strike price and an estimate for the company's growth. That is, you're investing $X dollars and expect it to raise by a multiple of Y.

This can be seen in recruiting stagee as well, it is usually presented as the take home question. Give them a take home interview problem that takes two days to solve. Those that go for it, will be dedicated and desperate enough to be good workers.

Our company is a wholly-owned subsidiary of a private holding company and does not offer equity ownership. As an alternative to equity options, we have bonus plans based on performance, both annual as well as long-term. We make estimations about overall company performance on a few metrics in order to provide what amounts to a range of values for how those plans apply to a specific candidate's role with us.

But I get a lot of questions about how to compare an offer from us to an offer from a startup that includes equity options as part of compensation. It's simple to compare salary, benefits, etc. But invariably, we get into conversations where candidates ask me how to value equity options they've received from another company.

First, I'm totally upfront about the fact that I'm: 1) not an expert, and 2) biased. But I am always honest with a candidate, and do everything I can to put myself in the shoes of an advisor.

Without looking at any offer details they have, I point them to the equation inputs: # of outstanding shares, preferred percentages, any liquidation preferences in play (need the multiple too), and the valuation. I'm sure there are other data points that could apply, but this information seems like table stakes. Nonetheless, if they have this information, they could at least gauge the value of their own equity options with exit scenarios at different levels.

But converting those scenarios to present-day value? This is the part where I always check myself, but I express that those equity options are almost certainly zero value. The outcome of a significant positive exit is always an outlier on the distribution curve, so appropriate discounting applies. That's the math part, which is as good as your assumptions and estimates allow.

The hardest part of those conversations is understanding how to justify assumptions in those calculations, such as how high profile a startup may be (and how that affects those assumptions.) I've been around long enough to have friends who were employees with numbers less than 30 at some very high-profile startups who had significant public exits, yet those employees made little to nothing. And to say nothing of those companies that simply didn't make it.

As creatives, our natural instincts drive us to believe we can create the value necessary for us to derive positive outcomes and ultimately benefit in these situations. The historical numbers simply don't represent that fact, and indeed show that outcome to be a rare occurrence. Good on you if that happens, but the odds are simply not in your favor.

As I conclude with most candidates, I tell them their mileage may vary and that they should absolutely seek the advice of someone entirely independent. Maybe as luck would have it, we have had a few candidates join us that were strongly leaning to accepting their startup offer. Several told me their reasoning -- they trusted my honesty with them. Who knows, maybe that's the real value in equity options. :-)

If your company is growing every year, and the stock is liquid, Options are great. I know a fortune 1000 company that used to give people a bunch of options at bonus time, people loved it - bought houses, etc. Then the stock turned sideways, so they switched to 50% options, 50% shares (with the actual share count being option count / 4, to approximately take into account that shares are worth a lot more than options). The next year they flipped to 100% shares. No one would get mega rich with a small pile of shares, but everyone would have some money in the bank...