You should play around with different figures for the company’s valuation at exit. What would things look like if the company’s exit valuation were 5x its current worth? What if the valuation only grew moderately or even declined in the coming years?
It’s worth noting that our example is simplified and assumes no dilution takes place, which is not always a realistic assumption.
Dilution is when your company increases the amount of outstanding shares. This happens during fundraising when your company issues new shares for investors to buy. Dilution means the exit value would be divided among more shareholders.
To arrive at your potential take-home gains, you’ll need to subtract your costs from the resulting gain in the stock's value. Your costs have two parts: the cost to buy your options and taxes.
Let’s start with the cost to buy your options. This is based on the strike price and the number of options. If you have multiple grants, you’ll need to look at these numbers for each grant. Returning to the example above, your future gains rang in at $30,000, but you will have paid $5,000 to acquire shares. So, your projected gains are $25,000.
You’ll also have to pay taxes, which are more complicated and depend on when you exercise:
Check out our Stock Option Tax Calculator to explore various tax scenarios.
Unfortunately, you can’t be 100 percent sure how much money you’ll make from your options; their value is uncertain.
Here’s one reason why: The higher the company’s exit value, the more valuable your options will likely be. You can try to predict the exit value for your company, but until an exit actually happens, you can't know it for sure. If things go downhill, the company’s valuation could be $0.
Simply put, a successful exit isn’t guaranteed — and exit valuation has a very strong influence on the value of your options.
Timing and liquidity also matter. An early-stage company may have the potential to greatly increase its valuation over time — but this may take several years to materialize, and the road could be bumpy along the way (i.e., the valuation could experience volatility). On the other hand, a company on the verge of an IPO offers a near-term opportunity to experience stock options gains, but perhaps a more moderate valuation upside.
Vesting schedules are another component of timing. Someone with fully vested options is likely to value them differently than another person who just joined the company and is subject to a four-year vesting schedule with a one-year cliff.
Ultimately, every person will weigh these factors differently, which means they will value their options differently. We have several resources to help you continue thinking about the value of your options, including our stock option starter guide. The guide also includes ideas to help you decide when to exercise and how much to spend. Additionally, you can check out our Stock Option Exit Calculator to see how much your shares could be worth in a future IPO.
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