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Comment by calcsam | Hacker News Reader

No, this is not just a problem you're having.

I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers.

I built optionvalue.io as a calculator to help people answer some basic questions about what their stock is worth, and I'm building it out more to answer questions (eg, tax implications and exercise windows).

I've talked to grellas and some other folks with a long, long history dealing with this stuff. There seems to be some consensus that:

(1) People now are more educated about stock options than they've ever been.

(2) That's a pretty low bar.

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"I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers."

This is a tricky position to be in, considering that in this sort of situation, you're generally explaining to people a small subset of the ways that they can get screwed. As much as it might seem nice to see people spending lots of time trying to figure out what their stock options are worth, it's not worth the time or effort. By the time you have it figured out, it's changed. And the future is so unknown. If everything goes great and the company hits all of its targets, stock options will be worth something. If there's a bump in the road, you're toast.

The simplest heuristic to use is to assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case.

Then, understand when your company could (at soonest) go public, given that growth rates will slow down at a rate around what comparable companies exhibit.

Obviously it's still a crapshoot, but this will give you a value for E(x) and timeframe.

> assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case.

Sure, but even in this case, you have no idea what the provisions of that round are, most likely. The investors may have asked for better returns (money-back + participation), there may be lines of credit that have to be paid back first, there may be loans that are paid off the top. My point is that most non-executive employees can't get enough information to make an accurate assumption. It's possible, maybe even likely, that if you exit at your latest valuation, your stock is worth $0 of actual money when on-paper, it was worth something significant.

If cash-out is around latest valuation, weird terms will only change the $ amount by <10% or so.

If cash-out is less than the latest valuation, then it starts mattering. At ~40-50% of latest valuation, common shares can end up effectively worthless, for example Good Technologies.

That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the shares that investors buy are the same as the shares that you would get through your ISOs. They typically are not the same, with the investors getting preferred shares that are superior to your common shares. Furthermore, terms like liquidation preferences and "participation" can make the preferred shares much much more valuable in many types of liquidity events. So in all, I worry that this tool does more harm than good. Even given all the information you solicit from the user it is still very hard to say what the options/shares are worth. Typical errors in the estimate could be an order of magnitude or more.

That is a pretty big assumption, and I would like to highlight it more.

The reason why it's a reasonable assumption is that in any material outcome, common share preferences converge to preferred share preferences.

Yes, once in a while you have an exit at 0.3x to 0.8x latest round where the investors are made whole and common share holders take an excessive haircut or are wiped out entirely. Good Technologies is an example here.

But looking at VC returns, almost all come from ~5x+ exits: "home runs". In fact, most VCs will block acquisitions at less than 2x latest round valuation except in case of corporate distress.

I agree, there are cases where the values converge. They are, however, a very small percentage all startup outcomes. Most outcomes for venture-backed startups are wind-downs, or small-time acquisitions. In these cases preferred shares are much more valuable. Since what you're trying to do here is assign a current (expected) value to the employee's options, focusing on the "home runs" for the VC is not helpful.

Just checked your option value calculator. I understand you're still building it out but wanted to say nice work so far!

Something like this that's easy and clear could be really useful. Like some of the "estimate tax refund" calculators online, while details of the US tax code can be information overload, going through guided steps on an estimate calculator a person can learn a ton of key info. Cheers and GL.

Thanks! Am building out more stuff & would love to hear your take. My email is in profile, would shoot you an email but don't see your contact info?

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