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As part of my offer package I'm offered stock options in a private company that was self sufficient for 8 years and almost didn't take any funding. For the last 3-4 years revenue numbers have been doubling each year. Approximate numbers: last year revenue was $50M with 20% profit margin, company has approximately 130 employees (100 engineers). Company took $10M funding 5 years ago, and there are no plans for funding rounds. Company plans to go public within 2-3 years.

What kind of rough valuation can be given to the company to approximate current stock option value? Obviously, valuation could be off by 10 times, still what's a general total value that can be given to the company now given the numbers provided? I have other offers from a couple of big companies (google, fb, etc) and my goal is to compare value of stock options in a private startup with sock bonuses in public company (e.g. I want to compare apples with oranges).

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    Check out inc.com/articles/201109/… . Aggressive growth really ups the evaluation, so the result is very dependent on your growth assumptions. – Hilmar Jul 6 '16 at 16:06
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This situation sounds better than most, the company it seems likely to be profitable in the future. As such it is a good candidate to have a successful IPO.

With that your stock options are likely to be worth something. How much of that is your share is likely to be very small. The workers that have been their since the beginning, the venture capitalist, and the founders will make the majority of profits from an IPO or sale. Since you and others hired at a similar time as you are assuming almost no risk it is fair that your share of the take is small.

Despite being 1/130 employees expect your share of the profits to be much smaller than .77%. How about we go with .01%?

Lets also assume that they go public in 2.5 years and that revenues during that time continue to increase by about 25M/year. Profit margins remains the same. So revenues to 112M, profits to 22.5M.

Typically the goal for business is to pay no more than 5 times profits, that could be supplanted by other factors, but let's assume that figure. So about 112M from the IPO. So .01% of that is about 11K. That feels about right.

Keep in mind there would be underwriting fees, and also I would discount that figure for things that could go wrong. I'd be at about 5K.

That would be my expected value figure, 5K. I'd also understand that there is a very small likelihood that I receive that amount. The value received is more likely to be zero, or enough to buy a Ferarri.

There might also be some value in getting to know these people. If this fails will their next venture be a success.

In my own life, I went to work for a company that looked great on paper that just turned out to be a bust. Great concept, horrible management, and within a couple of years of being hired, the company went bust. I worked like a dog for nothing.

  • In my case I'm offered a bit more than 0.05%. Rev for this year is expected to be 100M, even though I'm 1/130, my experience puts me in top 10-15%. So, I'm waiting one more offer from a big company and then I'll ask smaller company to match amount of apples offered to me elsewhere with similar weight of oranges. That's the reason behind my questions. – Pavel Jul 6 '16 at 21:45
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You also need to remember that stock options usually become valueless if not exercised while an employee of the company. So if there is any chance that you will leave the company before an IPO, the effective value of the stock options is zero. That is the safest and least risky valuation of the stock options.

With a Google or Facebook, stock options can be exercised and immediately sold, as they are publicly traded. In fact, they may give stock grants where you sell part of the grant to pay tax withholding. You can then sell the remainder of the grant for money at any time, even after you leave the company. You only need the option/grant to vest to take advantage of it. Valuing these at face value (current stock price) makes sense. That's at least a reasonable guess of future value.

If you are absolutely sure that you will stay with the company until the IPO, then valuing the stock based on earnings can make sense. A ten million dollar profit can justify a hundred million dollar IPO market capitalization easily. Divide that by the number of shares outstanding and multiply by how many you get. If anything, that gives you a conservative estimate.

I would still favor the big company offers though. As I said, they are immediately tradeable while this offer is effectively contingent on the IPO. If you leave before then, you get nothing. If they delay the IPO, you're stuck. You can't leave the company until then without sacrificing that portion of your compensation. That seems a big commitment to make.

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