The amount (and degree) of variables is so large that the exercise is essentially worthless. How can you estimate the share price or probability of exit?
Re:We need to rethink employee compensation
by bcheung on Wednesday June 24, 2015 @08:53PM
(#9775375)
You can't really but if you were to think about it that's how I would go about it. You can test different values and probabilities that you think are (likely|conservative|optimistic) and go from there. That gives you a range and a ballpark for different scenarios.
Personally though, if I can't predict something with > 90% accuracy/reliability then I'm not interested in investing in it.
So let's say that comes out to $100K.
You have to discount that to present value. Money is worth more now than it is in the future.
Assuming an interest rate of 5% and there being a liquidity event in 5 years that is (1.05 ^ 5).
So $100K in 5 years at 5% is worth $78K now.
You also have to factor in risk. There are various models but I like to simply multiply by the probability of exit.
So if there is a 10% chance you will see something then I take the $78K and multiply by 0.10 which comes out to $7.8K.
Also, if you exercise early there is even more risk. Let's say you paid $10K for them. That $10K invested at 5% would have netted $10K * 1.05 ^ 5 = $12.8K.
So you are risking $12.8K to make $78K. But I would compare it as $12.8K vs the adjusted average expected return ($7.8K).