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Start-Up Stock: What's it "sort of" worth?

By Mike Carroll

Before you accept stock as part of your compensation at a start-up company, make sure you understand the value of the stock. I've been through a few start-ups myself, and I've worked out a simple rule of thumb for "sort of" quantifying the value of such stock. I say "sort of" because there are many more factors that go into the analysis -- but this is a good way to get a basic idea of what you're looking at. For a detailed analysis of your own situation, it's best to consult an accountant and possibly an attorney.

First, the questions
Here are the basic questions to ask a start-up company about its stock:

1. How many shares of stock have been issued thus far?
Divide the number of shares they're offering you by that number. This will tell you what percentage of the company you will actually own when you sign on.

2. Will they need to raise more venture capital funds before the intended exit (initial public offering)?
Do they have enough money now to make it to exit? If they intend on raising more money, the stock will be diluted further and your shares will be worth less. Consider that whatever they tell you about this, it could change.

3. How much venture capital has been put into the company?
Usually, the value of the company is based on this investment, and it will affect the "market cap" when the company goes public.

Now, the math
Say the company has raised $100 million and they have issued 500 million shares. Each share is now worth 20 cents. If they give you 10,000 shares to come on board, these shares become vested gradually, usually over a period of four to five years. If 2,500 shares vest each year, your stock value is $500.00 per year.

Now let's go for the big win. If the company actually makes it to a successful exit and they manage to take it public, and if the stock skyrockets all the way to $10 a share, and if you are fully vested, you have made an extra $25,000 per year. Those are a lot of big if's.

10,000 shares sounds like a lot, but if they dilute the shares by issuing more shares to more investors, it really is quite insignificant. Of course, to further entice you, the start-up will show you stock prices of competitors, or they will tell you some incredible historical stories to show how you can become a millionaire, which is always a possibility, I suppose. In the end, you must make your own judgment based on the information you have.

Count on the experience
While there are many questions you can and should ask to determine the value of stock you are offered as compensation, the three questions above are a place to start -- and when you get answers to them, that's also where you may stop.

All in all, a start-up can be a great place to work because your contribution to its success is usually larger than it would be at an established company. The sad truth, though, is that most start-ups are destined to fail. If you want to trade some really hard work and long hours for the possibility of riches, then go for it! If you're used to working in the relaxed environment of a big corporation, you probably wonít like working at a start-up. But, while you probably wonít be any richer when itís over, you will get one very important thing out of it: you will learn to be a smarter and a harder worker.

Please tell us what you think of this article.

To learn more about stock options offered as compensation by start-ups, read Daniel S. Rippy's Sizing Up a Start-Up.

Mike Carroll is a security specialist in the IT industry who consults to venture-funded start-ups. He can be reached through his web site, carrolldot.com.







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