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Previous episode Dilution: why your part of a startup shrinks at every funding round

How startup stock options work, from the job offer to the day they pay

Startup valuation: how a smaller part of a company can be worth more

Nobody can tell what a share of a young startup is worth, until an investor pays for some. What does that price say about your stock options?

  1. 1 Before the investor came, nobody had ever paid for a share, so your 50,000 had no price. The round gave them one: $2 million for 2.5 million shares is 80 cents a share.$2 million2.5 millionshares$0.80 a shareexample numbers

    Before the investor came, nobody had ever paid for a share, so your 50,000 had no price. The round gave them one: $2 million for 2.5 million shares is 80 cents a share.

  2. 2 At 80 cents, all 12.5 million shares come to $10 million. That price of the whole company is its valuation, and your 50,000 hold $40,000 of it. So that is why Miva smiled: her part is smaller, but it has a price now.12.5 million shares$10 millionyour 50,000:$40,000

    At 80 cents, all 12.5 million shares come to $10 million. That price of the whole company is its valuation, and your 50,000 hold $40,000 of it. So that is why Miva smiled: her part is smaller, but it has a price now.

  3. 3 A year later, a million people use the app. A bigger investor comes for the next round, the Series A, and pays $2 a share: $15 million for 7.5 million new shares.$2 a share$15 millionexample numbersSeries A investor

    A year later, a million people use the app. A bigger investor comes for the next round, the Series A, and pays $2 a share: $15 million for 7.5 million new shares.

  4. 4 Your part is diluted again, down to 0.25%. This time, though, it is a part of a company valued at $40 million, four times more than before.after the seed:$10 millionyou: 0.4%after the Series A:$40 millionyou: 0.25%MivaRonoseedSeries A

    Your part is diluted again, down to 0.25%. This time, though, it is a part of a company valued at $40 million, four times more than before.

  5. 5 At $2 a share, your 50,000 come to $100,000, and you call your mother. Then Rono reminds you that you hold options, not shares. How much of that $100,000 is yours, and when?you$100,000!RonoOptions,not shares!

    At $2 a share, your 50,000 come to $100,000, and you call your mother. Then Rono reminds you that you hold options, not shares. How much of that $100,000 is yours, and when?

  6. Quick check

    A smaller part, a bigger company.You own 1% of a companyvalued at $5 million.After a round, you own 0.8%,and it is valued at$20 million. On paper,more money or less?

    A smaller part, a bigger company.

    Show the answer

    More. 1% of $5 million is $50,000, and 0.8% of $20 million is $160,000.

  7. Go further

    Three names you meet in the news about a round.pre-money, post-moneythe valuation just before theinvestor's money, and just after:$8 million and $10 million here$paper valuewhat your shares come toat the last price paid.Nobody paid you anything yetdown rounda round at a lower pricethan the one before: yourpart shrinks and so does its price

    Three names you meet in the news about a round.

Next episode The strike price: what a stock option lets you buy, and for how much

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