Valuation Returns-Formulas-Rules of Thumb

What the greatest technology investors say about Valuation Returns-Formulas-Rules of Thumb

The Option Pool Lowers your Effective Valuation

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

“The option pool lowers your effective valuation.  Your investors offered you a[n] $8M pre-money valuation. What they really meant was, “We think your company is worth $6M. But let’s create $2M worth of new options, add that to the value of your company, and call their sum your $8M ‘pre-money valuation’”. [] Slipping the option pool in the pre-money lowers your effective valuation to $6M. The actual value of the company [] is $6M, not $8M. [] The [option ‘shuffle’] puts pre-money [valuation] into your investor’s pocket. [] the option pool only dilutes the common stockholders.  [] [The] investor’s norm is that the option pool goes in the pre-money.”   Nivi recommends using a specific hiring plan to more accurately determine option pool size vs. allocating some arbitrary percentage.  Babak Nivi  The Option Pool Shuffle  April 10, 2007;