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> Yes, options are like a lottery ticket but that doesn't make the ticket worthless, and you need to know how to properly value the ticket when a company offers you an option between shares and salary.

The problem is, there is no reliable way to value the options in most cases. Valuations are not very realistic, especially for young companies or companies that are overhyped. Your ownership percentage might also get diluted as a result of future financing rounds.

Besides all of that, the chance that your options will end up being worth zero is the most likely outcome at most startups.

I agree there's no reliable way to value a startup, but that doesn't mean you should throw your hands up and say they're worth nothing. In lieu of any reliable method, the best estimate you have available to you is the company's last private valuation. Though there is wild variation in outcome, on average, VC's do a decent job pricing investments.

VCs price investments in the context of a portfolio, thus VCs have statistics on their side.

As an employee, you don't have statistics on your side, so you have one shot at being right.

Further, many VCs are managing OPM other people's money (OPM). You are investing your own money.

If the best estimate of the value of the stock is it's last valuation, that means current options, which are priced at last valuation have a paper value of $0. There's certainly a time-value, but that's hard to compute, given the most popular model uses a volatility component which you'll have no data for.

If you have options from before the current valuation, or if you were offered RSUs, or underpriced options, you could use the valuation as a guess of the value, sure.

To my knowledge, almost all startup options have a strike price that is close to the last 409A valuation, which is typically an order of magnitude less than the valuation given to the company at its last private financing. Receiving options with a strike price close to the last private valuation would be highly unusual, but if it did occur, I'd advise people to value those at $0.

When you say "typically", how many data points do you have?

In my experience, an order of magnitude just happens when the company is at a very early stage (e.g. post seed). By the time the company is at Series C/D, the 409A valuation is typically between 1/2 and 1/3 of the last preferred round, or higher.

Even if the valuation was accurate, how could you account for the possibility of dilution?

> This tool isn't really helpful.

huh? You go on to describe exactly how it's helpful.

"IPO" is just shorthand for the price at which your options become liquid. There are many spreadsheets you can find to calculate this, round-by-round so that you can run scenarios. Just search for 'cap table excel' or 'cap table example'.

The beauty of this tool is the interactive slider. Of course it's very simplified for the sake of ease of use, but it is fun and helpful. And they do a great job being crystal clear about the oversimplification, and point you to resources to learn a lot more! It's really great.

Could it be better? sure. But then it'd start encroaching on the author's commercial tool (captable.io)

Given that 2/3rds of venture-backed startups fail entirely, your approach is going to massively over-estimate the likely value of options.

I don't think that's the case. 2/3rds fail, 2/9ths return a small multiple, 1/9th return a substantial multiple to a typical decent VC. Valuing the shares at half the most recently priced round puts them into a quite reasonable range, IMO.

The company's valuation at the last financing round already prices in the high likelihood of failure. That is, on average, the VC industry does a good job at assigning valuations to companies (see published reports on average IRR of the VC industry). As you point out, there's huge variance in outcome which may affect your appetite for shares, but when it comes to assigning an expected value to your shares, the last financing round is an appropriate place to start.

I don't know what your experience is, but what I have observed is that valuation is usually the product of multiplying how much money investors want to put in by how much stock the company is willing to give up.

I concur with your line of thought, as long as the base salary covers your basic needs (food, shelter, sufficient extra to put away for retirement, basic vacations). Once those bases are covered, the employee is already looking at "more money than they need" and should take a measured approach to how they want to invest/risk that money.

But ultimately, it should be done objectively based on the reality of the company and the options presented.

>I see a lot of people recommending that people value their options at $0. Imo, this is an irrational approach for most tech employees who have a non-zero tolerance to risk. Yes, options are like a lottery ticket

A lot of people play the lottery, the prize is millions and the price is a buck or two. If your income is ~100k and you're valuing your options at a buck or two then it sounds like you're pretty much joining the view that options are worthless.

Options have a strike price that is close to their last round of private valuation, so you are effectively valuing them at 0, which as you say is irrational.