How much is your startup stock worth?

JD Maturen, November 8, 2013, San Francisco, CA

Aileen Lee recently wrote about the cohort of companies from the past decade that have grown to a billion dollar plus valuation — the so called unicorn club. Notably she estimated that approximately 0.07% of venture backed companies reached this pinnacle. As employees of venture backed companies what can we learn from this data?

You can’t get rich on salary.

Equity is an important component of startup compensation. However, if you’re taking a hit on your salary, insurance, 401k, or other benefits in order to work for a startup how do you quantify what you are getting in return?

An easy way of investigating this is to ask, what percentage of the company do you need to own if you want to earn a $1M payout as an early employee at a random startup? The average valuation a in the unicorn cohort is $3.6B. At a 0.07% success rate s, a reasonable 20% dilution rate d per round, and a common 4 rounds of funding f the averaged remaining value of the entire random company is

a * s * (1 - d) ^ f
= $3.6B * 0.0007 * (1 - 0.20) ^ 4
= $1,032,192

which is just over $1M. So you need to own the whole thing. This certainly ain’t gonna cut it if you own between a tenth and a ten thousandth of a percent.

That seems pretty bad. The first thing to note is that we haven't accounted for the rest of the non-unicorn but still positive exits. Adam Marchik estimates that between 3-6% of VC backed companies have a $50-150M return. If we’re generous and assume the high end of that and add it to our pool of unicorns we get an average valuation of $285M and a much better 6.07% success rate. As $285M * 6.07% is about 7x better than $3.6B * 0.07% we now only need a 15% stake on average to hit our target $1M. This is still 150x greater than the typical 0.1% grant for an early employee.

There’s no such thing as an average user.

The second, and perhaps more important, thing to note is that the average representation is a fallacy. Even within the unicorn cohort company valuations follow an extreme curve, reminiscent of the power law [1]. This is precisely why we cannot take a portfolio, index or random sampling approach to choosing which company to work for. We must come up with our own hypotheses for which companies have a bright future.

It might be tempting to lean heavily on external information, such as the success of investors, to help make this decision. However there is no good data to say this significantly increases your odds. And intuitively the better the investors in the company, the larger the stake they will have, the higher the valuation of the company will be going in and the smaller your share becomes.

What about joining a later stage company? I’d be super curious to investigate this more. What do the conditional odds look like after surviving N rounds of funding, or generating $X in revenue? If you have data on this — Hi, VCs! — please send it my way.

C.R.E.A.M.

In light of this analysis we might ask: what heightened responsibilities do founders, executives and managers at startups have to their employees? What other significant value does a startup bring to the table? And how can we be more explicit and intentional about harnessing this value?

References & Further Reading

  1. Welcome To The Unicorn Club: Learning From Billion-Dollar Startups
  2. Peter Thiel’s CS183: Startup - Class 7 Notes Essay
  3. Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity. In particular the mathematics here cross applies to all sorts of retention models.
  4. Wealthfront — Manage Your Tech Career

Appendix One: Calculator












Net Discounted Value:

You can tweak the assumptions above in this calculator to see the changed outcome.

You can also use this calculator to price your own circumstance by substituting the target company valuation for the average unicorn valuation and your best guess as to the likelihood of that being achieved for the unicorn success rate (be sure to note the units).