### How do you calculate the value of stock for a start up consulting company for the purpose of stock options?

The company is profitable, but the revenue is closely tied to the celebrity of the founder. If he wasn't involved, the company would be unremarkable, so I'm not sure it would even be possible to sell it. How do you place a value on stock options in a situation like that?

There are three questions here:
- the strike price of the options
- the market value of the company
- how much those options are actually worth to the recipient

1. The strike price is the price people pay to exchange their options for shares. You can set any strike price you like: it's just a negotiable contract term. However, if the strike price is less than the market value of the shares, the options are taxable (which people tend to avoid), so you typically set the strike price at or above the market value.

2. The market value of the company is how much the company is worth. The celebrity of the founder is clearly a big part of it. If the company were sold, the acquirer would want the founder to lock in as part of the acquisition. So figure out the value a couple of ways:
(1) off standard profitability metrics: X times yearly profit and/or revenue vs. comparable companies
(2) off the acquisition price: with and without the founder and add the percentage chance the founder would go with it
(3) off recent transactions in the stock (what people pay for the stock is a great indicator of value)
These will give three different answers: pick some sort of average number, so you can justify your strike price.

3. What the options are worth to the recipient: remember they are only worth something if the recipient can exercise them for stock, and then sell the stock (or receive dividends) for more than the option's strike price. So figure out the probability of the company being sold above the strike price in the next X years, and what an weighted average expected sale price is for the company in the next few years (noting the founder's importance), and that's what the options are worth.

I hope that helps.

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