How to calculate startup equity over time?

Airbnb bluejayy
Apr 21 6 Comments

Said I joined a company at a 100 million dollar valuation with 1% equity. So right now my paper money should be 1 million dollars.

Then a funding round happens where the VCs fork over 50 million dollars and the company is now valued at 500 million dollars.

This should mean the company valuation grew by 5x (500 million / 100 million) and the dilution from the funding round is 10% (50 million / 500 million). Now my equity is worth 4.5 million dollars (1 million dollars x 5 x 0.9) instead of 5 million dollars right?

I’m seeing a bunch of people trying to look at their old Uber, Lyft, Pinterest, and Slack offers to try to figure out the opportunity cost of not joining, but the calculation should be pretty simple right (disregarding refreshers/bonuses/base of course)?

Even if there are stock splits or more shares being issued, the math above should hold right? Or am I completely missing something about how equity works?

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TOP 6 Comments
  • Facebook wrxXv73V8k
    From https://www.kalzumeus.com/2011/10/28/dont-call-yourself-a-programmer/:

    How to value an equity grant:

    Roll d100. (Not the right kind of geek? Sorry. rand(100) then.)

    0~70: Your equity grant is worth nothing.

    71~94: Your equity grant is worth a lump sum of money which makes you about as much money as you gave up working for the startup, instead of working for a megacorp at a higher salary with better benefits.

    95~99: Your equity grant is a lifechanging amount of money. You won’t feel rich — you’re not the richest person you know, because many of the people you spent the last several years with are now richer than you by definition — but your family will never again give you grief for not having gone into $FAVORED_FIELD like a proper $YOUR_INGROUP.

    100: You worked at the next Google, and are rich beyond the dreams of avarice. Congratulations.

    Perceptive readers will note that 100 does not actually show up on a d100 or rand(100).
    Apr 21 2
    • Facebook BEYr31
      The probability of working at the next google is significantly lower than 1%
      Apr 21
    • Pinterest PJqy52
      BEYr31, that's literally the point made at the end...
      Apr 21
  • OP, there is no way for an employee know what their shares are worth without looking at the cap table & the terms of all previous rounds of investment. Most of this information is only available to board members and executives. It is not as simple as, "The company has issued 72,000,000 shares, and I own 72,000 of them; therefore when the company liquidates my shares will be worth 1% of the sale value".

    Have a look at how liquidation preference works. Not all shareholders are treated equally. Early investors may have 2-3x liquidation preference (i.e. upon a liquidation event, this shareholder is guaranteed to be payed out 2-3x their investment *before* other shareholders receive any slice of the pie. If the pie is not large enough, persons with non-preferred shares may receive nothing).

    Have a look at these posts, they give a brief intro to the topic.
    https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidation-preferences-478dda9f9332
    https://www.seedinvest.com/blog/startup-investing/liquidation-preferences
    Apr 21 1
    • Airbnb bluejayy
      OP
      Thanks for the information! If the company went public the liquidation preferences become irrelevant right? That’s my understanding from reading the article at least. Are there other factors I should be aware of that might throw my proposed calculation off?
      Apr 21
  • New / Mgmt
    FourHrWkWk

    New Mgmt

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    EY, IBM, Financial Times, Google
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    Founder with Interests in investing, energy, crypto, cannabis, tech. Multiple startups, I enjoy mentoring entrepreneurs.
    FourHrWkWkmore
    Are you referring to what your equity in Airbnb is worth? If so just send me a few shares and I’ll figure it out for you ;)
    May 5 0

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