startup options valuation

8/9/2019 Startup Options Valuation

1/9

Startup Options Valuation by Financing Stage

ff Venture Capital

About

We created this model with the purpose of valuing options for an illiquid, early-stage start-up.

It is particularly valuable to assess equity compensation in the form of options paid out to emplo

Also, dilution effects are calculated in seed and Series A financing rounds.

It's also helpful for understanding the value of the common equity over time.

nli!e every other model we've seen, this is based on real probabilities of success for your start

drawing on data from the most thorough research study we've seen on the topic"

#eturns of Angel Investors in $roups. %auffmann &oundation study, ovember ())*.

Assumptions

$iven an early-stage startup is typically such a blan! slate,

we thin! the safest way to value it is to assume it will have the same return characteristics

as other angel or +-bac!ed startups as per the %auffmann &oundation's #eturns of Angel Inv

We ignore any correlation between year of eit /i.e., how many years old the company is0 and v

Instructions

ote that cells in blue or yellow are inputs. ells in blac! tet are outputs.

1he top part of the spreadsheet is the assumptions,

where the angel investment and the eit multiple are assumed.

1he sensitivity tables at the bottom illustrate the total amount of

compensation /salary plus equity options0 that the employee in this scenario

www.ffvc.com

2ffvc

teten.com

2dteten

/ http"33www.!auffman.org3research-and-policy3returns-of-angels-investors-in-groups.asp 0
http://www.ffvc.com/http://www.twitter.com/ffventurehttp://www.teten.com/http://www.twitter.com/dtetenhttp://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspxhttp://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspxhttp://www.twitter.com/dtetenhttp://www.teten.com/http://www.twitter.com/ffventurehttp://www.ffvc.com/


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will earn.

Credits

4eveloped by

4avid 1eten /5artner, ff +enture apital 6 1eten.com, info2teten.com0

and #aul 1revino /78, 5articipa.me, rtrevino2participame.com0

9ost recently updated :une ;, ()33)3what-is-a-good-venture-return.html
http://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspx.http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.markpeterdavis.com/getventure/2009/07/management-equity-compensation-benchmarks.htmlhttp://www.markpeterdavis.com/getventure/2010/02/how-to-calculate-sweat-equity.htmlhttp://www.markpeterdavis.com/getventure/2010/02/make-sure-sweat-equity-vests.htmlhttp://angelsoft.net/a/venture-valuationhttp://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/http://www.slideshare.net/weblover/mint-founderinstitute-accountinghttp://www.avc.com/a_vc/2009/03/what-is-a-good-venture-return.htmlhttp://www.avc.com/a_vc/2009/03/what-is-a-good-venture-return.htmlhttp://www.slideshare.net/weblover/mint-founderinstitute-accountinghttp://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://angelsoft.net/a/venture-valuationhttp://www.markpeterdavis.com/getventure/2010/02/make-sure-sweat-equity-vests.htmlhttp://www.markpeterdavis.com/getventure/2010/02/how-to-calculate-sweat-equity.htmlhttp://www.markpeterdavis.com/getventure/2009/07/management-equity-compensation-benchmarks.htmlhttp://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspx.


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yees and investors.

up,

stors in $roups report.

luation at eit.


4/9

edsupport.

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luation-differently-from-founders3

ion-benchmar!s.html

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luation-differently-from-founders3

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http://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspx.http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.markpeterdavis.com/getventure/2009/07/management-equity-compensation-benchmarks.htmlhttp://www.markpeterdavis.com/getventure/2010/02/how-to-calculate-sweat-equity.htmlhttp://www.markpeterdavis.com/getventure/2010/02/make-sure-sweat-equity-vests.htmlhttp://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.markpeterdavis.com/getventure/2010/02/make-sure-sweat-equity-vests.htmlhttp://www.markpeterdavis.com/getventure/2010/02/how-to-calculate-sweat-equity.htmlhttp://www.markpeterdavis.com/getventure/2009/07/management-equity-compensation-benchmarks.htmlhttp://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/http://www.kauffman.org/research-and-policy/returns-of-angels-investors-in-groups.aspx.


5/9

From the original blog post at Teten.com introducing this model.

Valuing Startup Employee Options

This is the third of three blog posts on nancial modeling for startups. The rst was on best practice

Ive often found it helpful to have on hand a simple model shoing the impact of each !nancing stag

Enter Raul:

4ownload the 8riginal Startup 8ptions +aluation model here.

"a model that you can email to everyone in the !rm" because then everyone sees clearly that youre cmessage to the hole team %including outside consultants and the advisory board" if any Such a mfounders loo'ing for a co(founder or 'ey employee#

)hile or'ing on my most recent startup" *avon +artners" e ere fortunate to have Raul ,revino" aColumbia -.A" interning ith us# i'e me" he had the pleasure/pain of being trained as an i

graduated" hes no Founder and C0O of a atin America(focused based startup" +articipa#me %1I parblog post" and or'ed closely ith me to develop this !nancial model# )e had a simple balanceearlier master template !nancial model" but this model is more suitable for use in employment negot

,his capital table startup options valuation model as created ith the purpose of valuing options for

In my previous life as an investment ban'ing analyst at Citi" e used to spend hours deriving thecapital %)ACC& for a particular company# )e used to ta'e medians and means of unlevered betcompanies# 6aily updates of the ris'(free rates and corporate bond spreads ere mandatory" evenother consisted of only a couple of basis points#

In ban'ing" a lot of my time as spent on modeling cash 7os# +ro8ections ere based on do9enpricing" production" mar'eting spend" etc# -ar'et assumptions including mar'et share and macroec!nancial assumptions such as capital structure and ta$es had to be considered# After capturing all ohad to do sensitivities on the do9en or so that ere most important#

In the discounted cash 7o %16CF2& methodology" the terminal value carries a lot of eight and c

more& of the total value of the !rm# *eedless to say" a lot of time and analytics as dedicated to the

=iven all the tea's and ad8ustments involved in calculating the overall value of a standalone !rm"valuations that e came up ith# In the end" e presented the results that made the most sense toI heard 6avid ,eten once say 1if you torture the data enough" itll confess2#
http://teten.com/assets/docs/Startup-Options-Valuation.xlshttp://teten.com/assets/docs/Startup-Options-Valuation.xlshttp://teten.com/assets/docs/Startup-Options-Valuation.xlshttp://teten.com/assets/docs/Startup-Options-Valuation.xls


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Financial Model

If you have any comments or 4uestions" please enter your comments at the bottom of this blog post#

Valuing startups is a far fu99ier process# In particular" most valuations are negotiated rather than der

,o bring the case in point to life" I ill introduce my startup" +articipa#me# +articipa#me is an online m

For my start(up" I built a very robust operational and !nancial model ith a detailed revenue build uphaving con!dence in my !nancial pro8ections" I am realistic enough to admit that at this stage %prmay be hard for potential investors to believe them# %Im hopeful that they ill change their minds svalidation from potential customers

,he valuation method I discuss here is ho people %other than friends" family and fools& really invethe 6CF methodology" it is 4uite simple and is based on one thingD returns" based on a range of posinvestor has a hurdle rate and based on that they choose hether they ant to invest or not#

.y de!nition" IRR is calculated using amount invested" amount received at some point in the future"

7os# )hen an investor loo's at a company" he pro8ects himself into the future and calculates thetime# .ased on his onership share of the company at that point %most li'ely a diluted percentage&Couple ith his personal hurdle rate and ta'e(home amount" he !gures out hat his post(money sorder for him to ma'e that personal hurdle rate# ,o illustrate the VC method ith real numbers" letvaluing start(ups#

,he good nes for us engineers %me" by academic training& that favor science over art in valuation is

As a classic VC rule of thumb" according to?ohn Fran'elof 5 Venture Capital and others" a third of stathe remaining third are here the returns are# If a third of those" or about H;< of the portfolio" or',he bottom line is that that the top H;< of deals provide ;< or so of the returns# %6avid ,etenD ?ohe invest heavily in our inners as they start to pull aay from the pac'" so that even if a third of oucapital#&

.ased on these estimates from some domain e$perts" e built the attached model to !gure out hcould potentially be orth at e$it based on di5erent capitali9ation rounds and ho much could the pa

4ownload the 8riginal Startup 8ptions +aluation model here.
http://www.businessinsider.com/yipit-vinicius-vacanti-2010-5http://www.participa.me/http://sites.kauffman.org/pdf/angel_groups_111207.pdfhttp://teten.com/assets/docs/Startup-Options-Valuation.xlshttp://teten.com/assets/docs/Startup-Options-Valuation.xlshttp://sites.kauffman.org/pdf/angel_groups_111207.pdfhttp://www.participa.me/http://www.businessinsider.com/yipit-vinicius-vacanti-2010-5


7/9

cond was a template nancial model for a startup.

ring ith everyone in the company# I couldnt !nd one online" so I built it#


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9/9

Startup Options Valuation by Financing Stage

Data We Know Today

General

,odayGs 6ate H/J;/;HK

L 3ours/)ee' )or'ed by 0mployee MK

L 3ours/-onth HNN

Ris' Free Rate H#K< our y ! : # 6 9 7 $ 8 ; !5

.ase P: HK;";;; HK;";;; HK;";;; HK;";;; ; ; ; ; ; ;

Options H MJ"PK MJ"PK MJ"PK MJ"PK ; ; ; ; ; ;

,ota Annua Comp NP 1!;#":79 1!;#":79 1!;#":79 1!;#":79 15 15 15 15 15 15

"iscount rate ##$ #%$ #&$ #'$ #($ #)$ #*$ +#$ ++$ +&$

?+V %nnual )ompensation =ntil E'it $69"677

ImportantD the lo discount rate assumed here only ma'es sense hen ta'ing account of the ris'iness of this investment" by loo'ing at the -ean *+V of all outcomes shon belo#

Sensiti3ity %nalysis ( ?+V o/ Total %nnual )ompensation

Return Ma', Return E'it

startup options valuation

Documents