The purpose of this post is to provide a simplified yet still rigorous way to calculate how many stock options a company should grant to each one of the employees participating in a Employee Stock Option Plan ESOP. When stock options are granted, their strike price is usually the market value of the common stock. In financial jargon we say that those options are at-the-money , their intrinsic value is zero, and all their value is time value.
The two most important factors determining the time value of an option are: Hence, the time value of stock options is yuuuuuge. Yeah, startups are creatures of Extremistan. There are three main reasons to grant stock options to employees:. In summary, there are three cases in which a company would grant stock options to an employee: We have previously seen that the value of a stock option is the sum of its intrinsic value and its time value. At the time they are granted, their intrinsic value is zero and all their value is time value.
One could argue that this is actually not very different from what happens with the stock itself of an early-stage startup: As a consequence of the previous two statements, I am going to assume that the value of an at-the-money stock option at the time it is granted is approximately equal to the market price of the stock.
After this long but necessary introduction we are now equipped with all the concepts and tools required to fulfill our purpose: As in every complex issue, there are always assumptions to be made. As we always say, we provide ours for illustration purposes. Sign in Get started. Home Knowledge Insights Portfolio About.
How to assign stock options in early-stage startups The purpose of this post is to provide a simplified yet still rigorous way to calculate how many stock options a company should grant to each one of the employees participating in a Employee Stock Option Plan ESOP.
To compensate them economically: To align incentives with shareholders: Determine the market compensation for the role e. Determine for how long this gap should be covered. We propose two years. Determine the value and strike price of the stock options. As we have previously reasoned, we will assume that a fair price for the stock options is the same as the price of the common stock. So, how much is the common stock worth?
The most frequent procedure is to apply a discount e. The concepts are totally different! This is quite trivial now. On a fully diluted basis, this means 1. Get updates Get updates.More...