If they are currently valued at $1300 each with a private company valuation of $1B that means: You have to pay $1300 per share to acquire them and have no ability to sell them.

If the company goes public or acquired the company will have to be valued more than $1B for the options to be worth anything to you.

Honestly you shouldn't ever consider options to be worth anything more than the paper they're printed on until an IPO or acquisition.

Options (before IPO) are mainly a gimmick by management to keep people from jumping ship (they are typically dependent on continued employment). They cost the company virtually nothing. After IPO they have easily determined value.

Doesn't that depend on whether they are RSU's? Then there is no strike price as far as I remember only capital Gains.

An RSU is not the same as a stock option.

No but I wonder if that's what he got instead the price taken into consideration.

RSUs are taxed when they're granted at the same rate as income but with the withholding of a bonus.

Capital gains tax only applies to the difference of sell price and grant price.

The main thing we need more detail on is whether the $1300 number is the per-share preferred share value (= $1B / number of shares or a per-share 409a valuation / strike price.

It is the strike price.

You need to know the fully diluted count of shares. After that, calculate how much of the company you beneficially own assuming full vesting, and start wargaming out scenarios of exits at $500 million, $1 billion, $2 billion, $5 billion, $10 billion, $25 billion, $50 billion, etc. It's 4th grade math with bigger numbers: 1 bps * $10 million = $1k; 1 bps * $1 billion = $100k; etc. (bps = "basis point" = 10^-4)

You might also try asking the question "I'm trying to value my options. Do you have any financial results or model which would suggest I value them upwards?" HN readers might if surveyed pick "Options are basically witchcraft" but this is very, very not true of CFOs at billion dollar companies. The information you want exists in a spreadsheet somewhere; nobody is going to hate your guts for asking to see it. (They might not say yes but, hey, that's signal, too.)

Ask for more cash and hand back the options, invest the cash in your retirement or property or whatever. You don't have enough years to play the same lottery as VC's. The mere fact you are asking how to value these means you are probably in no position to do so, therefore you are probably getting a terrible deal.

@chillydawg, Based on the options they have been offered (200 * 1300 = 260,000), What reasonable amount of money do you think they should ask for on-top of their salary, if they forego the options?

Ask for another 100 grand, then haggle until you agree, I guess. TBH, I'm on the other side of this equation and I'd respect any potential employee who just said to me "just cash".

Some people use Black Scholes to price options but that can be very hard, as there are two unknowns (volatility and if anyone has preferences over you).

A few questions you can and should ask:

1 - What was the last valuation based on outside investors, and how long ago was it?

2 - How many preferences are in the cap table? (If a group of investors put in 100 million with a 2X liquidation preference then they are guaranteed to get 200 million before others get anything)

3 - Related to 2, ask at what exit value all shareholders get treated the same.

4 - Ask about how soon you would have to exercise upon leaving. (Frequently 90 days)

5 - See if the stock is trading in any secondary markets, or if there is news of public market investors remarking their shares.

6 - Ask about growth projections. (EBITDA for PE funded companies, Revenue for VC backed)

7 - Ask if future rounds will be needed. (If the business isn't close to cash flow positive and there are a lot of growth projected, this will take a lot of money)

Net - there is a price the investors put per share on their stock. Yours should be at some discount to that. So if the investors value it at $1300 then you should come in less, much less. (And if it's too much less than the strike price, you are betting on a lot of growth)

$1300 is really an unusually high strike price. While in theory there is no difference between 200 options at $1300 per share and 20k options at $13 per share, the former is very unusual and I'd at least want to know the story. If the company is to IPO there will almost certainly be a stock split.

One way to force small stakeholders off your cap table is to do a reverse stock split because fractional shares are typically paid out in cash. If that were the case here, I'd call it sketchy behavior and steer clear.

Your scenario is the company with the $1,300+ strike price will do a reverse stock split because they want to IPO with a $6,500+ share price instead?

No my theory is that they may have already done a reverse split to wash out small stakeholders. If there is an IPO in their future they will have to do a split as well. The former small stakeholders would not get their shares back.

Obviously I know nothing about this but if I were the poster I would ask to hear the story.

I agree; I've never seen such a high strike price. The highest I've ever seen when interviewing at pre-IPO companies was in the $20-$30 range.

I'm curious now which company this is, because that kind of price doesn't pass my sniff test. In fact I'd steer clear altogether.

I thought exactly this. $1300 per share seems like an obvious way to keep the small fry out.

I actually built an app to do this kind of calculation. It walks you through each of the calculation steps and variables involved, along with context:

http://www.optionvalue.io/

The main pieces of information you need to know are:

* Total number of outstanding shares

* Strike price

The main thing you'll need more detail on (though perhaps you have it) about is whether the $1300 number is the per-share value (= $1B / number of shares) or a per-share strike price (the amount you have to pay to exercise each share).

The base assumption you'll want to make when doing the calculation is that the company exits at the current valuation. Obviously it could exit for a lot more or a lot less, but the last VC valuation is a reasonable E(x), and while you can add an asterisk around how VC shares work vs employee shares, it should be accurate +-10-20%.

The other big thing you'll want to know is how long it could be until the company IPOs or exits and you can actually get cash. A good optimistic scenario, if they are a SaaS startup, is to ask them about 2015 and 2016 revenue and figure out how long it would take them to get to $200M revenue at current growth rates.

Zero. All done, and no fancy math required.

Say what you will, but I've been coding professionally for over 20 years. YMMV.

I agree. If they end up being worth something, it's a bonus, not a part of your compensation. There are just too many potential scenarios where you get nothing out of them to rely on them.

The first thing to cone ibto my mind was "Mark it zero!" scene from "The Big Lebowski"

Keep stock options as possible bonus in future. It may or maynt happen.

If its very small company with only handful no.of employees and you see this company has bright future or may get acquired for billions - then try to understand how they arrived on number 200.

If you faith in product & planning to stay for 4+ years. - You can tell them increase options with may be increased 5 year schedule.

If you think your basic income needs to be good. Then ask them reduce options and put some money on your monthly salary.

I think 1300USD/option is very high, Google stock is $800 & I'm very doubtful you will get $1300 per stock.

Oh man, I just went through something similar, with a startup that was also growing quickly (and continues to grow to some degree).

First, the options are worth nothing, especially if you don't have a market. The strike price is pretty much meaningless (although in your case unusually high). Even if you IPO'd at this strike price (and you won't), you'll really only care about how much the actual stock price moves from that strike price.

Second, there are inevitably investors that have options with greater preference than yours. Before you IPO, your management is going to use the opportunity to shuffle equity around. In my case, the directors performed a reverse split that halved the number of my options and doubled the strike price. The directors/early investors got a better split, hence equity was shifted from employees to the upper level. Expect this is coming (and from your strike price seems like it's already been done at least once).

As a cautionary tale, I actually "own" (not entirely vested) quite a few options compared to my fellow employees. They are literally worth zero dollars. The only employees in my company that got anything were the really really early ones.

tl;dr: if your company ends up being a unicorn these options might be worth a lot; if your company is outstanding they may be worth a little; if your company is typical they'll be worth next to nothing or nothing

Effectively zero for the foreseeable future.

The "valuation" of a company is a tricky figure because it can be based on a variety of things.

While the company is still private, it's based on the latest investment round which is whatever the investors agreed to. I can buy 0.0000001% of your company for $1 but it doesn't mean your company is "worth" $1T anywhere but in my head.

In the public markets, it's usually related to current and future estimate sales. There's still no equation, just a gut feeling.

And wow. That's an amazingly high strike price.

Knowing the number of options isn't nearly as useful as knowing what percentage of the company you will own. This lets you calculate the various ways the value of your equity will change as the business gets more investment, sells, or goes public. The company should tell you are offered 200 shares of, say, 2 million outstanding shares. If the valuation you say is accurate, it looks like they are giving you options for around 0.026% of the company. Probably about right if you are a late hire (say employee number between 10 and 100). Hopefully your salary is enough to be able to afford ~$65,000 worth of option exercises every year, should you be interested in purchasing them! The link below also has tax consequences, which depend on the type of option, and how much the value of the shares change between now and when you exercise the options.

Ideally the company will also tell you roughly how much the company would need to sell for in order for you to see a return. They can tell you this indirectly by saying what kind of liquidation preferences other investors have.

For a more detailed writeup, see https://github.com/jlevy/og-equity-compensation

Good luck!

> Hopefully your salary is enough to be able to afford ~$65,000 worth of option exercises every year, should you be interested in purchasing them!

Just dropping a quick clairification: OP should not assume it's necessarily a good idea to buy the options as they vest, and should not assume that they'll have to put up cash to excercise them in the future.

Probably covered by your link, but I wanted to point this out explicitly because people have been burned by these assumptions in the past.

Good point, I was keeping my post short but should have included this! I think I was trying to highlight how expensive the options are, rather than the necessity to exercise them.

> If the valuation you say is accurate, it looks like they are giving you options for around 0.026% of the company

Don't forget about dilution - outstanding shares is only a portion of currently issued shares. With 3 dilutions or more this percentage is going to be much smaller.

Those options represent a .026% ownership stake of the company.

However, it's not quite a simple as that, because some of the investors almost certainly have more preferential shares of the company, so what those options really represent is 0.026% of anything after those investors take their cut. mathattack's answer starts getting at it in a little bit more detail.

You should value them at $0 for purposes of evaluating the job offer. The only way you could tell what they can/could be worth is having a peek at the future at the time the company is about to exit.

Without knowing the total number of shares it's hard to know what you have. You also need to know how your options will be treated under various scenarios: company goes public, company is sold, company is acquired, company gets more funding, etc. In general employee options get the short end of the stick in most of those scenarios. One can still make out well, just usually not as well as they had thought/hoped.

At the end of the day one must remember that more often than not options don't work out the way one hopes. They're used as a cheap form of comp since it's just paper to the company. They can provide a nice bonus under the right scenario but be very cautious about accepting options in place of proper compensation at your full value (e.g. cash in the bank). More people than would care to admit it accepted options in place of cash for their base comp and lived to regret it.

Negotiate proper comp up front and only accept options as part of the icing on the cake. If they can't pay you properly then you have serious reason to question if this thing is a "real company" or just a bunch of hyped up fluff with a valuation that could vaporize overnight--making your options completely worthless before you even knew what just happened.

Some thoughts (I'm neither a CPA nor a lawyer, so caveat emptor):

0) Make sure you understand 409a valuation and Alternative Minimum Tax. These two concepts will materially impact the post-tax value of late-stage private company options.

1) Clarify what the $1300 price is. Is it a 409a price, or the latest preferred share price, or something else? Also, get an exact number if $1300 is approximate.

2) Make sure your options are ISOs (and not NSOs). Ask for the count of total outstanding shares.

3) Try to get a history of the company's recent 409a valuations. This will give you some idea of how fast the fair market value is growing. Fair market value at time of exercise affects the taxes you owe.

4) If you leave the company, check how long you have to exercise your options or lose them. The standard is 90 days - this is something to be aware of so it doesn't surprise you.

Julia Evans wrote a great article about the topic here: https://jvns.ca/blog/2015/12/30/do-the-math-on-your-stock-op...

Does the company provide stock refreshers? If not, joining fang is worth significantly more than 260k you have been offered.

Given the company looks like a unicorn, i assume there wont be much difference between this and a fang company in terms of interesting stuff to do.

    How do I gauge the value of stock options that I have 
    been offered?

Faith.

Most metrics are generally useful for tax purposes and tax purposes only until the company IPO's and 6-12 months (or longer) later you can cash out your options the company's stock has no market value.

Will you work at the company for the full vesting cycle? Will you tolerate the culture that long? Will the company still exist in 4 years? Will the company even IPO? How long _until_ the company IPO's?

These are all risks. Most purely emotional. So your evaluation must also be based on emotion.

The company could IPO within 4 years, but I would put that at maybe a 20% possibility.

But you are right. This is a fast moving industry. The company could fold tomorrow. I could move to another startup or company.

You know valuation, option count, and strike price. I think the missing pieces are total shares outstanding and cap table.

I.e. if there are 1 billion shares already out, your options are currently worth -1299 and unlikely to gain that much value. If there are 10k options the value changes a bunch.

But agree with others for a later stage company like this, I would value at 0 or maybe the same as an extra vacation day when comparing offers.

Value them as a "gesture of goodwill" if the company is not yet public, with no particular monetary value.

As someone said, it's a lottery ticket. But to fair you have much better odds than with a normal lottery ticket.

You should educate yourself about how they work, though, e.g. in the US if you're not careful you can end up paying massive amount of taxes due to AMT if you exercise the options but don't sell resulting stock.

Would love to see what others more experienced have to say. The two considerations I'd have myself are 1) do I have enough cash to actually buy those ($1300 is a steep strike price) and 2) is the company still growing fast and is that based on things I feel good about or hype.

The company is still growing fast. Incredibly fast actually.

Are they really 1300/option? That'd mean you'd need a whole lotta cash to buy those.

Great to hear about the growth!

Edit: not trying to second guess you I'm more shocked that options that high exist. Seems like it'd be really tough for some employees to buy them.

Make sure you understand the tax implications of your stock options:

http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.htm...

I posted this story a few years ago. https://news.ycombinator.com/item?id=7982848. Pretty good discussion on this topic.

Sorry, but unless it has some traction already and it has been IPO'd the Expected value of those options 4yrs from now is zero.

Unless you are really sure about it, think of it as a bit more than a lottery ticket

Sure the expected value can be zero. I know that options are essentially a lottery ticket. I'm just not sure if these options are very little or enough or a lot.

Remember that even if they don't hit zero, if they're underwater, say, £1299.99 they are worth essentially zero as you'll not want to exercise them (and why would you want to? You'd be losing money - and you can't write it off as a tax loss in almost all circumstances).

Then, unless they're publicly traded, or there is a legitimate secondary market, you can't even do a sell to cover.

The other way of providing equity is with RSU's, restricted stock units, where the company promises to give you, at each vesting date, a portion of stock. The problem there is that this is taxed as income on the value of the stock at vesting, and once again if there is no secondary market you'll not be able to sell enough to cover your tax liability and be in for a nasty invoice from the IRS that you need to scramble to cover.

I'd recommend having a financial planner walk through the ins and outs with you.

Really depends on how much risk you're willing to take. I personally don't value stock options and would look purely at compensation that can be used today.

>I personally don't value stock options

Yes you do. I'll give you $50 for all of yours. What's that? Oh that's right: you do.

I simply don't believe you - if there were a hypothetical way you could have a $50 bill on your desk but, in case they end up worth something, your unexercised options are no longer yours, they're someone else's, and you didn't need to deal with anything else and it were easy legally - then I don't think you would actually want to do that, you wouldn't choose to make that trade.

Let me compare it with something else - say you already belonged to a gym but your employer as a christmas gift gave you a totally transferrable 50% off gift certificate (but that there's no particularly liquid market for, it's not like it has an obvious market price you can sell online) to a more expensive gym that is far from you, that you don't like for some reason because its focus doesn't match yours (maybe it's always fairly bustling and you like fewer people distracting you, whatever, in fact maybe you like going at times that that gym is closed!), and that is still more expensive after 50% off than your annually paid-up membership 15 minutes from your house and that you like: then you would be happy to give it to someone you know for, say $10 or if it'll make them happy or as a favor or for a sandwich. It really is something you value at closer to $0, and I judge that you would be glad to part with it for that amount or for free in that case.

I judge you wouldn't actually part with your options for $10 or $50 even if hypothetically it's legal and trivially easy for you. This is just my impression. I don't think you would do it. If you reflect on the two scenarios above (the first and the second paragraph of this comment) I think in your heart of hearts you see the difference. It's not a small difference.

I am fine with purely the base compensation.

Then value at 0 and accept. Maybe pleasant surprise

totally agree

You need to know the total amount of shares that are out there to even begin to speculate on whether the deal is good or not.