Calculating the Value of a Startup

Most investors spend time evaluating a startup, determining its value and potential, before investing in a round. Employees that are joining a startup should also do their own due diligence to figure out the worth of their compensation.

[Professor Ilya A.] Strebulaev says using reported valuations can mislead employees, because those figures are based on the preferred stock that more recent investors get, not the common shares issued to employees. Preferred shares are typically worth more, since they often come with perks, such as guaranteed returns when companies go public and priority over other investors in the case of liquidation. In many cases, workers at secretive startups don’t have even basic information about their employers’ finances or ownership structure, Strebulaev says.

That can leave them guessing about how much their compensation is worth. “If you ask the startup CEO, she tells you they are winning lottery tickets. If you ask your grandmother, she tells you they are worthless,” the calculator website notes.

How Much Is Your Slice of That Unicorn Really Worth?

The online calculator may be able to provide a more realistic value of your shares, but who you are and what you do with those shares will play a bigger role in realizing that value.

This calculator values shares from the perspective of a diversified investor. The value of these shares to YOU may be substantially lower.

Can you tolerate risk?

Startup options are very risky, as illustrated by the dice roll example above. The more money you have and the more secure your job is, the better you are able to deal with that risk. Beyond that, some people are more worried about risk than others.

The less you are able to deal with risk, the less your shares are worth to you.

Are you impatient?

If you have high interest debt or need to buy a house, you may prioritize money today. That reduces the value of payoffs that will come years from now.

The more you need money today or in a few years, the less your shares are worth.

Will you quit?

If you leave a startup, you lose your unvested ownership. Vested ownership may also lose value as you may have to exercise options (creating tax and cash-flow issues) or be forced to sell them to the company.

The more likely you are to leave the company early, the less your shares are worth.

Startup Option Value Calculator

Startups, especially early-stage startups, are not for the faint of heart.

Photo by Aykut Eke on Unsplash

Post by Marcelino Pantoja