Valuing Those Pesky Stock Options

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I receive many questions from my students and other startup joiners regarding how to evaluate the value of the stock options they are being offered. There is surprisingly little written about this topic, so this post will hopefully be useful to folks interested in answering this question.

In order to properly assess the value of your stock options, you need to know four pieces of information from the company:

  1. The number of shares they are offering to grant you
  2. The total number of fully diluted shares of the company
  3. The common stock strike price of your shares
  4. The preferred post-money valuation of the last round of financing

Many HR departments don’t know the answer to these four simple questions and get very defensive when asked by candidates, perhaps out of embarrassment or a false sense of confidentiality. Don’t be afraid to escalate the conversation to a more senior hiring manager or financial executive to get the answer. After all, it’s impossible to understand the value of the options package unless you have the data you need to evaluate it.

From these four data points, you should perform the following calculation using your best judgment:  what might be the dilution that I will face in the coming years as a result of future financings and what might be the range of valuation increases that the company might be able to achieve.

With this information in mind, you can derive a range of possible values of your stock options and evaluate whether the scenarios make sense to you and what range of value is possible under the different scenarios. The spreadsheet template below provides an example that you can play with or download here:

Hopefully, this template and post are helpful! I welcome any feedback or stories you might want to share on your own stock options negotiation process.

Many thanks to Matt Wozny for contributing to this post!

Experiments Lead to Product-Market Fit

The central theme of my Harvard Business School class, Launching Technology Ventures (LTV), is that startups are experimentation machines and the choice and design of experiments during a finite envelope of time and money is the central strategic decision that founders make. In other words, founders should test the experiments that matter most.

If done correctly, these early experiments eventually lead to finding product-market fit. But finding product-market fit in the context of a dynamic system that makes up the startup business model is complex and nuanced. Each component of the business model is linked to the other. Thus, experiments should be run that hold certain elements constant and focus on testing the most important, critical path business model elements first.

To help frame those decisions, I have developed a simple framework that builds off Professor Tom Eisenmann’s work on business model analysis for entrepreneurs to communicate the early strategic choices in experiment design. Founders need to answer two simple questions:

  • Which experiments should I run between testing the Consumer Value Proposition, the Go To Market and the Cash Flow formula (sometimes also referred to as the business model)?
  • What organization should I build to execute each of these experiments in the most efficient fashion?

The following two slides summarize these two questions visually:

Step One in my HBS LTV Course: figure out which are the most critical experiments to run

Step Two: figure out what organization to stand up to run those experiments in the most efficient fashion

The other day, my friend Ed Zimmerman of Lowenstein asked me to “speed present” my entire course in 5 minutes in advance of a panel that he hosted as part of his VentureCrush series. Here is that presentation, where I cover the experiments as well as the metrics that help determine where you are in your quest for product-market fit:

I welcome hearing about feedback from your own experiments!