Startup NSOs (Stock Options) - any good?

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u/jiujitsu · Joined Oct 2024

You're given some NSOs to vest? Awesome! Your boss says it's a reward to good work. But how does it actually compares to your ETF investments?

Last update Nov 2024
  • Scenario 1: Vest 1 Share - Real Cash Value
  • Scenario 2: Nope, Just Invest my ETF
  • Scenario 3: Purchase Price to compare with

Based on company's 409A valuation and your best guesses, here is the cash value comparison (before capital gains tax) against the purchase price (so you see the capital gain) of every share. Of course, you can't sell it whenever you want!

# Years from Now

Try your numbers:

This comes straight out of the company's 409A Valuation. You should have access to knowing this price. If not, ask your Corporate Flying Object (CFO).

A =

This is a fixed per-share price of your stock options. You'll always have the privilege to buy shares at this fixed price.

B =

This should come from 409A valuation too. If it's outdated, make your best guess.

C =

Pffffff... startups are highly unpredictable, so make your best guess based on how your company is valuated!

D =

You may be able to look it up from public data (press releases on the company's side and on the investors' side).

E =

Now, let's guess how much the primary investors own the company, not only because they decide the fate of your shares, but also because they may have "liquidation preference" that'll impact your payout, if the company doesn't do very well.

F =

Liquidation Preference determines who gets paid first when the company is sold. For example, 2x (200%) liquidation preference means the investors are *entitled* to two times its original investment in the company. Scary?

G =

Make your uninformed and uneducated guess: what was the $/share the investors paid, at their entry?

H =

Fill in your marginal income tax rate. We need this, because if your option price is lower than FMV (A > B), at your purchase you will have to pay income tax on the price difference, because it's a "bonus" from the company.

I =
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Time Value Assumptions

Heads Up!

If you're using Cost Basis (cb) for calculating capital gains:

Please be aware that very few countries currently use inflation-indexed cost basis. Double-check your local tax rules before publishing.

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How is Cash Value calculated?

To calculate the real cash value, we need to 1) subtract the opportunity cost of the income tax you'd pay at the time of purchase; 2) calculate the price of Non-Investor shares, after investors' liquidation preference.

Decisions / Expectations

(Expressions are evaluated at Year 0 only.)

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(Expressions are evaluated at every year.)

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