I'm considering an offer with generous options. I have pretty high risk tolerance, so I'm just trying to estimate the expected value of the options.
To the extent possible, I want to base this on the valuations of professionals rather than my own judgement, since I don't know the company's financial details, and I'm not an experienced investor anyway.
The company is private, but they told me the total amount of stock issued, and they gave me a couple measures of the value of one share of stock:
- A higher value based on the last funding round, where a VC firm purchased some preferred stock.
- A (3-4x) lower value based on a third party 409a valuation of the common stock. This would be the exercise price of the options.
The higher value makes the options look very interesting, but I'm hesitant to focus on this number since the VC firm received preferred stock. I don't know exactly what liquidation preferences they have.
So I've been trying to value the options based on the (lower) 409a valuation. This makes the options seem much less interesting -- even if I could immediately exercise the options for free, the estimated value of the stock doesn't seem that high.
The company says that I shouldn't focus on this number, because the 409a valuation wasn't really a valuation of the company... that it didn't account for growth projections, or something like that.
Which value should I focus on? Is there a large spread between the two values because the preferred stock is much more attractive than the common stock, or because the 409a valuation was somehow too conservative? I know it's impossible to say without more details, but any guidance would be helpful.