Why You Should D.O.W.T. (Doubt) Venture Capital Returns—Option Pool Reserve

Differences in how venture capitalists, valuation professionals, underwriters, and auditors treat stock options when valuing a company's securities has a huge impact on the differences in conclusions reached bytype="plain" these parties.

In this chapter, we take a look real VC-backed cases to illustrate how the varying perspectives (VC, valuation professional, underwriter, and auditor) result in value conclusions that can be internally inconsistent in many cases or simply wrong in some cases. We take the various assumptions, such as considering that the ungranted (reserved) option pool is totally vested on the valuation date, that the reserved pool is ignored, and other variations, apply those to the cases presented and see how big the differences in value conclusions are in different circumstances. Being aware of these differences should allow you to D.O.W.T. (doubt) venture returns, to carefully consider the impact of assumptions concerning how dividends, options, warrants, and time impact investment cash flow. See Exhibit 6.1.


In the simplest sense, there are three alternatives for how to treat the unissued option pool for purposes of venture-capital valuation:

1. Ignore the unissued pool and don't include it in any of the analysis.

2. Assume that the entire option pool is both granted and vested in its entirety at each step of the analysis.

3. Specifically estimate ...

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