File size: 7,725 Bytes
1c37325 | 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 | start end text
0 8640 You should do these calculations in your journal yourself as we discuss them.
8640 14600 Morgan and Catherine decide that the right sales head needs to be in their 40s and would
14600 21600 probably be drawing around $200,000 per annum currently, but they can only afford to pay
21600 24080 $75,000 per annum.
24080 29240 So they need someone who resonates strongly enough with their non-financial vision to
29240 36000 consider that salary and top that up with an attractive stock option strategy.
36000 41920 They consider this role to be of the highest criticality rating, that is A, and agree
41920 47000 that an attractive intended benefit for such a person should be at least eight times their
47000 49400 current annual worth.
49400 55440 They realize that this amount is not a guarantee from their side, but will be realized only
55440 58920 if their business grows to a certain value.
58920 63360 Seeing the right person who resonates with their values and vision is key to achieving
63360 70360 that growth, and if they can find one, the financial benefit must also be attractive.
70360 75600 A benefit of eight times in four years means that the sales head should be able to make
75600 81320 $1.6 million after four years if things go as planned.
81320 83360 But what is that plan?
83360 87040 They need to drop their financial projections next.
87040 92040 They have only started up a few months ago and have a half-finished product with them.
92040 96360 They estimate their growth over four years and believe they would raise venture capital
96360 98480 during this period.
98480 103440 This would increase their number of shares, so they estimate the share capital to increase
103440 109360 to 40,000 shares, from the current 10,000 shares in four years.
109360 114760 They estimate that given the current market saturation in the education sector, it might
114760 118760 take them some time to make a dent with their uniqueness.
118760 123880 They estimate their company valuation at $40 million after four years.
123880 131880 $40 million divided by 40,000 shares leads to a share price of $1,000 per share after
131880 134160 four years.
134160 140440 Since the intended benefit to the sales head is $1.6 million, they would need to grant
140440 147400 1,600 options, assuming the options are granted at, say, 1 cent or almost zero exercise
147400 149640 price today.
149640 155320 So the arithmetic is done and now they have a number, 1,600 options.
155320 162640 But then they look carefully and realize that 1,600 options amount to 16% of their current
162640 165400 capital of 10,000 shares.
165400 168560 And this is just the sales head we are talking about.
168560 172920 They also need to grant stock options to a few other team members.
172920 175080 Something is not right.
175080 179280 So they start looking at each number more carefully this time.
179280 182120 First, the intended benefit.
182120 187480 They have considered it at eight times the current market worth of $200,000, which comes
187480 189840 to 1.6 million.
189840 195440 They could reduce that, but they realize that the intended benefit must be really attractive,
195440 202080 so for now they decide to keep it at 1.6 million and consider the other figures first.
202080 208040 Next, they notice they have considered the total number of shares in the fourth year at
208040 210400 40,000 shares.
210400 215560 They start analyzing that number and conclude they should be judicious by raising capital
215560 222040 from the investors and also raise it at a good valuation so they don't dilute much.
222040 227520 But that would mean delivering a really strong product with a healthy revenue.
227520 232360 That would come not just from adding more people to the team, but by strengthening the
232360 234520 core of the product.
234520 239680 So they make a mental note that if they wish to reduce their equity dilution but still
239680 246360 make the company valuable, they need to solidify the vision to attract the right people and
246360 250440 think deeply about the value proposition of the product.
250440 256200 They revise the total number of shares in the fourth year to 20,000 shares, from 40,000
256200 258080 shares.
258080 262000 Then they consider the valuation of 40 million dollars in the fourth year.
262000 268000 Now, this is not just about changing 40 million to something else so that the numbers fit
268000 269500 well.
269500 274840 It tells them something very important about their stock options strategy.
274840 282520 If they wish to give out 1.6 million as intended benefit, they have to get to a much higher
282520 283920 valuation.
283920 288920 The valuation of 40 million is certainly a good number, but at that valuation they may
288920 295440 not be able to justify an intended benefit of 1.6 million dollars.
295440 302960 So either the intended benefit needs to reduce or the value per share needs to go up.
302960 308280 As they still wish to preserve the intended benefit, they revise the fourth year valuation
308280 310800 to 1.60 million dollars.
310800 315080 But they now make a mental note that this would mean a certain amount of revenue to be brought
315080 316240 in.
316240 321400 And they need to ensure even more that their product is far better than what others have
321400 323040 an offer.
323040 327160 This does not mean more advertisements and more customer phone calls.
327160 332920 It means more contemplation on how that product could become valuable.
332920 339240 More physical labor, more resources without any additional intellectual labor may not
339240 341000 help much.
341000 346080 By contemplating deeply about their product, they can significantly increase its value
346080 352800 proposition, enhance valuation without spending a single extra dollar.
352800 357760 Reducing the fourth year shares to 20,000 and increasing the fourth year's valuation
357760 365560 to 160 million dollars brings down the number of options to be granted from 1600 to 200
365560 372680 options, which is 2% of their current capital and 1% of the capital in the fourth year.
372680 377560 Now if the eventual valuation were to get to a billion dollars, then the employee ends
377560 380360 up making much much more.
380360 385720 Similarly, if they were to reach only 40 million in valuation, those 200 options would
385720 388120 fetch much lesser.
388120 394720 So their strategy rewards the employee reasonably in case of a certain growth trajectory and
394720 400160 rewards them exponentially in case of an exponential growth.
400160 405280 Next they take up the other potential team members and rate them A, B or C depending upon
405280 410480 the criticality of their role and apply a descending multiple to compute their intended
410480 411580 benefit.
411580 414560 The process is the same.
414560 419800 Now they could further reduce the number of options by reducing the multiple or increasing
419800 425080 the valuation in the fourth year or decreasing the number of shares in the fourth year even
425080 426440 further.
426440 431420 But what you need to focus on here is the process.
431420 437640 Look at how the intended benefit can sometimes guide you to take decisions about your business.
437640 443680 As far as possible, try not reducing the intended benefit.
443680 449420 The key takeaway is let your vision and intellectual capital drive your stock option
449420 451400 strategy.
451400 455520 Use your non-financial vision to attract the right people.
455520 459940 Use deep thinking to infuse value into your product.
459940 465680 Valuation will take care of itself and your journey will be much more meaningful and enjoyable.
|