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I currently have unvested restricted stock units with my employer. It's a very stable publicly-traded company.

I received a job offer from a private company hoping to IPO in the next few years and part of the offer is options. The strike price is close to 50% of the share price as of the last investor valuation. The company projects anywhere from ~ 10x growth in the value of those options after IPO.

My question is: How does one go about valuing stock options? What should I be considering when trying to decide how much of my RSU's to give up in exchange for stock options of a private company.

My current thinking is: I can't. The RSU's are almost a sure thing, provided I remain with my current employer. Stock options require me to fork over a lot of money to buy them, I cannot easily resell until after IPO, and the strike price becomes the break even point, so if the value cuts in half, it's all a waste.

The closest answer/advice I can find is this answer: https://money.stackexchange.com/a/38718/9191

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  • Note that in order to receive favorable tax treatment, stock options are usually priced at the fair market value on the date of the grant. So I question if the "strike price is close to 50% of the share price as of the last investor valuation". Do you mean the price investors paid for preferred shares? If so, those shares probably have terms that explain why they're twice as valuable as the common shares you would receive when exercising your options.
    – Craig W
    Commented Jun 17, 2019 at 11:57

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Stock options are hard to value since there is a lot of risk associated with it. The amount of risk varies a lot with the specifics. They are worth less than the projected win and more than 0. The tricky part is: how to put a number against that?

You want to look at

  1. Strike price vs current price
  2. Business plan, future outlook. Is there a market for this ? Do they have a clear plan how to sell their product or services.
  3. What's the competition like: who else is in this space and how are you going to be different & better?
  4. Are there refresh grants or is this a one-time deal?
  5. Path to liquidity: IPO, private investor, sell the company. What's the time frame.
  6. Projected dillusion: what rounds of additional financing are expected and what will they do to your options.
  7. Your own comfort with risk and ambiguity

Your prospective employer should be able to talk intelligently about all this items.If not, I'd value the options close to zero. If yes, double check their assumptions with your own research.

If all of this looks reasonably good, I'd value it at about 10:1. For example, if there is credible projection of a $1M win in 5 years, I'd value it at $100k or $20k/year. Adjust up & down depending on your assessment of the risk factors.

Make sure you try to assess this rationally and don't assess too conservatively either: my first attempt went bust, the second one paid off the mortgage and got three kids through college.

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  • The strike is at 50% of current valuation. OP not giving any real numbers, no dollar value or number of options. I would say the question doesn’t have enough information for a good answer. Your answer may be as good as we can do.
    – JTP - Apologise to Monica ♦
    Commented Jun 17, 2019 at 15:11

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