How to value unvested stock options

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3. How to value your equity?
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5. RSUs and Taxes;

How much will you stand to benefit? At a high level, the calculation below can help you understand what your equity could be worth. Note: We are simplifying these concepts to some extent to help give you a framework for how to value your equity. Your percentage ownership matters more than the number of options you were given. To calculate percentage ownership, take the number of shares you were offered and divide by the total number of fully diluted shares outstanding.

What You Need to Know About Dividing Stock Options in Divorce

You can find your equity information in your offer letter, or in the equity management platform your company uses like Carta , for example. To determine the number of fully diluted shares outstanding, you'll have to ask someone on the talent or finance team at your company.

This number should include common stock, RSUs, preferred stock, options outstanding, unissued shares remaining in the options and RSU pool, and warrants. When asking about the shares outstanding It's usually a signal they have something they're trying to hide. You don't own all your equity on day one. Both options and RSUs are doled out according to a vesting schedule. After the cliff, your options will vest monthly until you are fully vested after four years.

After you begin working, you may get additional equity grants as part of a promotion, a reward for exceptional performance, or an incentive to motivate you to stay at the company longer. Those kinds of grants typically don't require the one-year cliff, but they still usually vest over four years. Sometimes staying a full four years to vest your initial equity grant just isn't in the cards, but as long as you've hit your initial vesting cliff, you typically keep anything you've vested when you leave the company.

However, there's a catch: If you've been given options, you'll have to exercise within a certain amount of time after leaving usually 90 days.

How to value your equity

It's important to pay attention to the vesting schedule your company is offering: if the terms are less favorable, like a 5-year vesting schedule, that should give you pause. For example, Snap Inc. Vesting acceleration You might find yourself in an accelerated vesting situation — where your stock vests faster than the original schedule dictates — if your company gets acquired or participates in a merger.

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• What Happens to Your Employee Stock Options When You Leave Your Company?;

Be sure to ask your employer about the specifics. These days, a very successful company may need at least four or five rounds of financing before it has the opportunity to go public. If your company raises more money and takes on more investors, they could issue more shares, and thus dilute the value of your shares. But dilution isn't the end of the world — raising money to grow faster can make it worthwhile if it's meant to accelerate growth.

Curious to know which companies we think have enough momentum to become successful businesses?

Check out our Career-Launching Companies List. It's important to understand how your percentage ownership and vesting impact the value of your equity — but at the end of the day, the value of your equity is more closely linked to the success of your company. In other words, the size of the pie is far more important than your particular slice. Not all companies have the same potential upside. The ultimate value of a company is most influenced by its long-term growth rate.

Growth is influenced by market size, so it's important that your company addresses a large enough potential market that it won't place a limit on growth.



The keyword here is potential, because companies that attempt to take share from others in a mature market seldom grow as quickly as companies that exploit a new market. Company valuations will change after each round of funding, so ask your employer what they think they could be worth in four years the length of a standard vesting schedule. Their answer will be their best guess — so try to evaluate their logic versus anchoring on the number. If the market is actually trading options with exactly the same exercise price and maturity as the vested stock options, Kalepu can use the quoted price for those options instead of the model on which that quoted price would be based.

What happens if an employee holding the grant decides to leave the company before vesting, thereby forfeiting the unvested options? When options vest in the money, however, some employees may choose to exercise immediately rather than retain the full value by waiting to exercise until the options are about to expire. In this case, the firm can use the market price of its shares at the vesting and exercise dates to close off the reporting for the grant. The objective of financial accounting is not to reduce measurement error to zero.

In a similar way, if the FASB and International Accounting Standards Board were to recommend fair-value expensing for employee stock options, companies could make their best estimates about total compensation cost over the vesting life of the options, followed by periodic adjustments that would bring reported compensation expense closer to the actual economic cost incurred by the company.

You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Kaplan and Krishna G. Reprint: RJ Now that companies such as General Electric and Citigroup have accepted the premise that employee stock options are an expense, the debate is shifting from whether to report options on income statements to how to report them.

Fair-Value Expensing. A version of this article appeared in the December issue of Harvard Business Review.

Your percentage ownership

Read more on Accounting or related topics Financial management , Budgeting and Compensation. Robert S. Krishna G. Palepu kpalepu hbs. However, California courts have determined several ways to deal with the division of stock options in divorce. The couple is unsure whether the start-up will continue as is, be acquired, or fold up like many other companies in the Valley.

The couple later decides to divorce, and during a discussion about the division of assets, the stock options come up. They want to figure out what to do with the options, but the rules are unclear. First, they will need to understand some of the foundations of marital property rights in California.

Understanding Startup Stock Options

Separate property is not part of the martial estate, which means the spouse that owns the separate property, owns it separately from their spouse not jointly and gets to keep it after the divorce. Separate property is not subject to division in a divorce. In California, separate property includes all property that is acquired by either spouse:. The date of separation is the date that one spouse subjectively decided that the marriage was over and then objectively did something to implement that decision, such as moving out.

Many divorcing couples argue over the exact date of separation, because it may have a major impact on which assets are considered community property and thus subject to equal division or separate property. For example, stock options received before the date of separation are considered community property and subject to equal division, but any options or other property received after that date are considered the separate property of the spouse that receives them.

They now have to determine how this might impact the division. But what about those options that were granted during marriage but had not vested before the date of separation? However, the courts in California disagree with this view, and have held that even though unvested options may not have a present fair market value, they are subject to division in a divorce.

So how does the court determine what portion of the options belong to the non-employee spouse? Two of the main time rule formulas used are the Hug 1 formula and the Nelson 2 formula. Before deciding which formula to use, a court may first want to determine why the options were granted to the employee e. The Hug formula is used in cases where the options were primarily intended to attract the employee to the job and reward past services. The formula used in Hug is:.

The Nelson formula is used where the options were primarily intended as compensation for future performance and as an incentive to stay with the company.