Stock Option Value Calculator

On the one hand, there is paper. On the other hand, you have your bank account. The root of employee equity tension is that these two never seem to line up.

That’s where our tool comes in. The calculator (above) will plug in numbers for you, so you don’t have to calculate coefficients or conversion factors. It takes your contract lingo and turns it into cold hard dollars and cents. But before you write that check, or even sign on the dotted line, you should of know what those numbers represent.

How to Understand Your Stock Options

First of all, you have to look at spread. The value of the stock today minus the amount you paid for it. So if you purchased it for a buck and now it’s worth five bucks, then you made a spread of four bucks. That’s your gain, and that’s the amount you’re going to be taxed for. Most employees don’t realize when they recieve their stock that the cost to acquire the shares is strike price. So the spread is different than this.

Holding the shares equals profit (the spread). Those are two separate bucket. To purchase the shares you need cash; to pay taxes on the spread you need additional cash. The tool makes this clear so that you aren’t double counting.

So that’s where we get into “you don’t own anything” part of owning stock. The only thing you really do own is percentage that’s vested. Everything else is a promise. It’s a good promise, sure, but it’s a promise nonetheless. So put in your vested percentage. That will show you the amount you currently own. If you haven’t reached the cliff yet, then its zero. This is why folks stay around, but it’s also why your cash out depends on time. What you can sell depends on what you have. How fast you can move depends on what’s vested.

Where it gets tricky is in the tax holdback field, since exercising results in taxable income. You either have to wire them money or they’ll withhold shares to cover it. The calculator allows you to model a range of holdbacks. You can run it at fifty percent and then run it at thirty percent. How much cash do you need on hand? It’s not an abstract number. That is the money you need to exercise your options, and unless you have enough to cover the tax bill, the option isn’t worth anything. Valuation be damned; you need cash to get value.

You’re dividing your number of shares by the fully diluted cap table, which has a huge denominator: the reserves, plus all those other employees, plus investors. You don’t feel like an owner; of course you don’t! It’s just a thin slice. But that’s normal. Don’t get scared off by your percentage. Instead, look at the dollar value and look at the upside. A small slice of a huge pie can be better than a large slice of a crumb. The tool shows you how much you own, and helps you put your thin slice in perspective.

Then think about exit scenario (i.e., the price at which the company sells). The difference between your high case and your low case is enormous, but unknown. The fact is, private companies don’t always sell on schedule; they only sell when they’re good and ready, or they don’t sell at all. That’s where a price reduction for hard-to-sell assets grounds things, since it recognizes that having paper wealth isn’t the same as having cash. Maybe it’ll never be cash, so you should apply a discount for risk. This makes you both realistic and humble.

ISOs have different tax rules. It is laid out on the page in the reference table, for each type of option. NSOs are easier, though it gets complicated with early exercise. Because the type matters, you should know what you hold. The math is a little bit different, depending on type. And the tax timing is different. One size doesn’t fit all. Risk changes, the tax timing changes, and you need to match the inputs to your grant letter. Misunderstanding the type means that you get surprised later. Those surprises are usually bills.

The FMV is an estimate. The exit price is a guess and the tax rate is a prediction. Everything changes; all those inputs change, which changes your value. This isn’t a crystal ball. It’s a snapshot in time, capturing the moment, not predicting the future. That means you should update it and re-run the numbers whenever something changes. Your life changes, your vesting schedule changes, the market changes.

It’s all about leverage, because when you take action you invest time which has the potential of buying you upside. You accept risk, and the calculator tells you how much. It tells you the reward, and it tells the gap. How do you bridge that gap? With cash. And how do you bridge that gap? With patience. Don’t mix up the two; one buys shares while the other waits for value. Both are needed, but neither by itself is sufficient.

You’ve got options on paper, so you’d better have a plan for the rest.