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1
00:00:00,000 --> 00:00:08,640
You should do these calculations in your journal yourself as we discuss them.

2
00:00:08,640 --> 00:00:14,600
Morgan and Catherine decide that the right sales head needs to be in their 40s and would

3
00:00:14,600 --> 00:00:21,600
probably be drawing around $200,000 per annum currently, but they can only afford to pay

4
00:00:21,600 --> 00:00:24,080
$75,000 per annum.

5
00:00:24,080 --> 00:00:29,240
So they need someone who resonates strongly enough with their non-financial vision to

6
00:00:29,240 --> 00:00:36,000
consider that salary and top that up with an attractive stock option strategy.

7
00:00:36,000 --> 00:00:41,920
They consider this role to be of the highest criticality rating, that is A, and agree

8
00:00:41,920 --> 00:00:47,000
that an attractive intended benefit for such a person should be at least eight times their

9
00:00:47,000 --> 00:00:49,400
current annual worth.

10
00:00:49,400 --> 00:00:55,440
They realize that this amount is not a guarantee from their side, but will be realized only

11
00:00:55,440 --> 00:00:58,920
if their business grows to a certain value.

12
00:00:58,920 --> 00:01:03,360
Seeing the right person who resonates with their values and vision is key to achieving

13
00:01:03,360 --> 00:01:10,360
that growth, and if they can find one, the financial benefit must also be attractive.

14
00:01:10,360 --> 00:01:15,600
A benefit of eight times in four years means that the sales head should be able to make

15
00:01:15,600 --> 00:01:21,320
$1.6 million after four years if things go as planned.

16
00:01:21,320 --> 00:01:23,360
But what is that plan?

17
00:01:23,360 --> 00:01:27,040
They need to drop their financial projections next.

18
00:01:27,040 --> 00:01:32,040
They have only started up a few months ago and have a half-finished product with them.

19
00:01:32,040 --> 00:01:36,360
They estimate their growth over four years and believe they would raise venture capital

20
00:01:36,360 --> 00:01:38,480
during this period.

21
00:01:38,480 --> 00:01:43,440
This would increase their number of shares, so they estimate the share capital to increase

22
00:01:43,440 --> 00:01:49,360
to 40,000 shares, from the current 10,000 shares in four years.

23
00:01:49,360 --> 00:01:54,760
They estimate that given the current market saturation in the education sector, it might

24
00:01:54,760 --> 00:01:58,760
take them some time to make a dent with their uniqueness.

25
00:01:58,760 --> 00:02:03,880
They estimate their company valuation at $40 million after four years.

26
00:02:03,880 --> 00:02:11,880
$40 million divided by 40,000 shares leads to a share price of $1,000 per share after

27
00:02:11,880 --> 00:02:14,160
four years.

28
00:02:14,160 --> 00:02:20,440
Since the intended benefit to the sales head is $1.6 million, they would need to grant

29
00:02:20,440 --> 00:02:27,400
1,600 options, assuming the options are granted at, say, 1 cent or almost zero exercise

30
00:02:27,400 --> 00:02:29,640
price today.

31
00:02:29,640 --> 00:02:35,320
So the arithmetic is done and now they have a number, 1,600 options.

32
00:02:35,320 --> 00:02:42,640
But then they look carefully and realize that 1,600 options amount to 16% of their current

33
00:02:42,640 --> 00:02:45,400
capital of 10,000 shares.

34
00:02:45,400 --> 00:02:48,560
And this is just the sales head we are talking about.

35
00:02:48,560 --> 00:02:52,920
They also need to grant stock options to a few other team members.

36
00:02:52,920 --> 00:02:55,080
Something is not right.

37
00:02:55,080 --> 00:02:59,280
So they start looking at each number more carefully this time.

38
00:02:59,280 --> 00:03:02,120
First, the intended benefit.

39
00:03:02,120 --> 00:03:07,480
They have considered it at eight times the current market worth of $200,000, which comes

40
00:03:07,480 --> 00:03:09,840
to 1.6 million.

41
00:03:09,840 --> 00:03:15,440
They could reduce that, but they realize that the intended benefit must be really attractive,

42
00:03:15,440 --> 00:03:22,080
so for now they decide to keep it at 1.6 million and consider the other figures first.

43
00:03:22,080 --> 00:03:28,040
Next, they notice they have considered the total number of shares in the fourth year at

44
00:03:28,040 --> 00:03:30,400
40,000 shares.

45
00:03:30,400 --> 00:03:35,560
They start analyzing that number and conclude they should be judicious by raising capital

46
00:03:35,560 --> 00:03:42,040
from the investors and also raise it at a good valuation so they don't dilute much.
47
00:03:42,040 --> 00:03:47,520
But that would mean delivering a really strong product with a healthy revenue.
48
00:03:47,520 --> 00:03:52,360
That would come not just from adding more people to the team, but by strengthening the
49
00:03:52,360 --> 00:03:54,520
core of the product.
50
00:03:54,520 --> 00:03:59,680
So they make a mental note that if they wish to reduce their equity dilution but still
51
00:03:59,680 --> 00:04:06,360
make the company valuable, they need to solidify the vision to attract the right people and
52
00:04:06,360 --> 00:04:10,440
think deeply about the value proposition of the product.
53
00:04:10,440 --> 00:04:16,200
They revise the total number of shares in the fourth year to 20,000 shares, from 40,000
54
00:04:16,200 --> 00:04:18,080
shares.
55
00:04:18,080 --> 00:04:22,000
Then they consider the valuation of 40 million dollars in the fourth year.
56
00:04:22,000 --> 00:04:28,000
Now, this is not just about changing 40 million to something else so that the numbers fit
57
00:04:28,000 --> 00:04:29,500
well.
58
00:04:29,500 --> 00:04:34,840
It tells them something very important about their stock options strategy.
59
00:04:34,840 --> 00:04:42,520
If they wish to give out 1.6 million as intended benefit, they have to get to a much higher
60
00:04:42,520 --> 00:04:43,920
valuation.
61
00:04:43,920 --> 00:04:48,920
The valuation of 40 million is certainly a good number, but at that valuation they may
62
00:04:48,920 --> 00:04:55,440
not be able to justify an intended benefit of 1.6 million dollars.
63
00:04:55,440 --> 00:05:02,960
So either the intended benefit needs to reduce or the value per share needs to go up.
64
00:05:02,960 --> 00:05:08,280
As they still wish to preserve the intended benefit, they revise the fourth year valuation
65
00:05:08,280 --> 00:05:10,800
to 1.60 million dollars.
66
00:05:10,800 --> 00:05:15,080
But they now make a mental note that this would mean a certain amount of revenue to be brought
67
00:05:15,080 --> 00:05:16,240
in.
68
00:05:16,240 --> 00:05:21,400
And they need to ensure even more that their product is far better than what others have
69
00:05:21,400 --> 00:05:23,040
an offer.
70
00:05:23,040 --> 00:05:27,160
This does not mean more advertisements and more customer phone calls.
71
00:05:27,160 --> 00:05:32,920
It means more contemplation on how that product could become valuable.
72
00:05:32,920 --> 00:05:39,240
More physical labor, more resources without any additional intellectual labor may not
73
00:05:39,240 --> 00:05:41,000
help much.
74
00:05:41,000 --> 00:05:46,080
By contemplating deeply about their product, they can significantly increase its value
75
00:05:46,080 --> 00:05:52,800
proposition, enhance valuation without spending a single extra dollar.
76
00:05:52,800 --> 00:05:57,760
Reducing the fourth year shares to 20,000 and increasing the fourth year's valuation

77
00:05:57,760 --> 00:06:05,560
to 160 million dollars brings down the number of options to be granted from 1600 to 200

78
00:06:05,560 --> 00:06:12,680
options, which is 2% of their current capital and 1% of the capital in the fourth year.

79
00:06:12,680 --> 00:06:17,560
Now if the eventual valuation were to get to a billion dollars, then the employee ends

80
00:06:17,560 --> 00:06:20,360
up making much much more.

81
00:06:20,360 --> 00:06:25,720
Similarly, if they were to reach only 40 million in valuation, those 200 options would

82
00:06:25,720 --> 00:06:28,120
fetch much lesser.

83
00:06:28,120 --> 00:06:34,720
So their strategy rewards the employee reasonably in case of a certain growth trajectory and

84
00:06:34,720 --> 00:06:40,160
rewards them exponentially in case of an exponential growth.

85
00:06:40,160 --> 00:06:45,280
Next they take up the other potential team members and rate them A, B or C depending upon

86
00:06:45,280 --> 00:06:50,480
the criticality of their role and apply a descending multiple to compute their intended

87
00:06:50,480 --> 00:06:51,580
benefit.

88
00:06:51,580 --> 00:06:54,560
The process is the same.

89
00:06:54,560 --> 00:06:59,800
Now they could further reduce the number of options by reducing the multiple or increasing

90
00:06:59,800 --> 00:07:05,080
the valuation in the fourth year or decreasing the number of shares in the fourth year even

91
00:07:05,080 --> 00:07:06,440
further.

92
00:07:06,440 --> 00:07:11,420
But what you need to focus on here is the process.

93
00:07:11,420 --> 00:07:17,640
Look at how the intended benefit can sometimes guide you to take decisions about your business.

94
00:07:17,640 --> 00:07:23,680
As far as possible, try not reducing the intended benefit.

95
00:07:23,680 --> 00:07:29,420
The key takeaway is let your vision and intellectual capital drive your stock option

96
00:07:29,420 --> 00:07:31,400
strategy.

97
00:07:31,400 --> 00:07:35,520
Use your non-financial vision to attract the right people.

98
00:07:35,520 --> 00:07:39,940
Use deep thinking to infuse value into your product.

99
00:07:39,940 --> 00:07:45,680
Valuation will take care of itself and your journey will be much more meaningful and enjoyable.

	1
	00:00:00,000 --> 00:00:08,640
	You should do these calculations in your journal yourself as we discuss them.

	2
	00:00:08,640 --> 00:00:14,600
	Morgan and Catherine decide that the right sales head needs to be in their 40s and would

	3
	00:00:14,600 --> 00:00:21,600
	probably be drawing around $200,000 per annum currently, but they can only afford to pay

	4
	00:00:21,600 --> 00:00:24,080
	$75,000 per annum.

	5
	00:00:24,080 --> 00:00:29,240
	So they need someone who resonates strongly enough with their non-financial vision to

	6
	00:00:29,240 --> 00:00:36,000
	consider that salary and top that up with an attractive stock option strategy.

	7
	00:00:36,000 --> 00:00:41,920
	They consider this role to be of the highest criticality rating, that is A, and agree

	8
	00:00:41,920 --> 00:00:47,000
	that an attractive intended benefit for such a person should be at least eight times their

	9
	00:00:47,000 --> 00:00:49,400
	current annual worth.

	10
	00:00:49,400 --> 00:00:55,440
	They realize that this amount is not a guarantee from their side, but will be realized only

	11
	00:00:55,440 --> 00:00:58,920
	if their business grows to a certain value.

	12
	00:00:58,920 --> 00:01:03,360
	Seeing the right person who resonates with their values and vision is key to achieving

	13
	00:01:03,360 --> 00:01:10,360
	that growth, and if they can find one, the financial benefit must also be attractive.

	14
	00:01:10,360 --> 00:01:15,600
	A benefit of eight times in four years means that the sales head should be able to make

	15
	00:01:15,600 --> 00:01:21,320
	$1.6 million after four years if things go as planned.

	16
	00:01:21,320 --> 00:01:23,360
	But what is that plan?

	17
	00:01:23,360 --> 00:01:27,040
	They need to drop their financial projections next.

	18
	00:01:27,040 --> 00:01:32,040
	They have only started up a few months ago and have a half-finished product with them.

	19
	00:01:32,040 --> 00:01:36,360
	They estimate their growth over four years and believe they would raise venture capital

	20
	00:01:36,360 --> 00:01:38,480
	during this period.

	21
	00:01:38,480 --> 00:01:43,440
	This would increase their number of shares, so they estimate the share capital to increase

	22
	00:01:43,440 --> 00:01:49,360
	to 40,000 shares, from the current 10,000 shares in four years.

	23
	00:01:49,360 --> 00:01:54,760
	They estimate that given the current market saturation in the education sector, it might

	24
	00:01:54,760 --> 00:01:58,760
	take them some time to make a dent with their uniqueness.

	25
	00:01:58,760 --> 00:02:03,880
	They estimate their company valuation at $40 million after four years.

	26
	00:02:03,880 --> 00:02:11,880
	$40 million divided by 40,000 shares leads to a share price of $1,000 per share after

	27
	00:02:11,880 --> 00:02:14,160
	four years.

	28
	00:02:14,160 --> 00:02:20,440
	Since the intended benefit to the sales head is $1.6 million, they would need to grant

	29
	00:02:20,440 --> 00:02:27,400
	1,600 options, assuming the options are granted at, say, 1 cent or almost zero exercise

	30
	00:02:27,400 --> 00:02:29,640
	price today.

	31
	00:02:29,640 --> 00:02:35,320
	So the arithmetic is done and now they have a number, 1,600 options.

	32
	00:02:35,320 --> 00:02:42,640
	But then they look carefully and realize that 1,600 options amount to 16% of their current

	33
	00:02:42,640 --> 00:02:45,400
	capital of 10,000 shares.

	34
	00:02:45,400 --> 00:02:48,560
	And this is just the sales head we are talking about.

	35
	00:02:48,560 --> 00:02:52,920
	They also need to grant stock options to a few other team members.

	36
	00:02:52,920 --> 00:02:55,080
	Something is not right.

	37
	00:02:55,080 --> 00:02:59,280
	So they start looking at each number more carefully this time.

	38
	00:02:59,280 --> 00:03:02,120
	First, the intended benefit.

	39
	00:03:02,120 --> 00:03:07,480
	They have considered it at eight times the current market worth of $200,000, which comes

	40
	00:03:07,480 --> 00:03:09,840
	to 1.6 million.

	41
	00:03:09,840 --> 00:03:15,440
	They could reduce that, but they realize that the intended benefit must be really attractive,

	42
	00:03:15,440 --> 00:03:22,080
	so for now they decide to keep it at 1.6 million and consider the other figures first.

	43
	00:03:22,080 --> 00:03:28,040
	Next, they notice they have considered the total number of shares in the fourth year at

	44
	00:03:28,040 --> 00:03:30,400
	40,000 shares.

	45
	00:03:30,400 --> 00:03:35,560
	They start analyzing that number and conclude they should be judicious by raising capital

	46
	00:03:35,560 --> 00:03:42,040
	from the investors and also raise it at a good valuation so they don't dilute much.

	47
	00:03:42,040 --> 00:03:47,520
	But that would mean delivering a really strong product with a healthy revenue.

	48
	00:03:47,520 --> 00:03:52,360
	That would come not just from adding more people to the team, but by strengthening the

	49
	00:03:52,360 --> 00:03:54,520
	core of the product.

	50
	00:03:54,520 --> 00:03:59,680
	So they make a mental note that if they wish to reduce their equity dilution but still

	51
	00:03:59,680 --> 00:04:06,360
	make the company valuable, they need to solidify the vision to attract the right people and

	52
	00:04:06,360 --> 00:04:10,440
	think deeply about the value proposition of the product.

	53
	00:04:10,440 --> 00:04:16,200
	They revise the total number of shares in the fourth year to 20,000 shares, from 40,000

	54
	00:04:16,200 --> 00:04:18,080
	shares.

	55
	00:04:18,080 --> 00:04:22,000
	Then they consider the valuation of 40 million dollars in the fourth year.

	56
	00:04:22,000 --> 00:04:28,000
	Now, this is not just about changing 40 million to something else so that the numbers fit

	57
	00:04:28,000 --> 00:04:29,500
	well.

	58
	00:04:29,500 --> 00:04:34,840
	It tells them something very important about their stock options strategy.

	59
	00:04:34,840 --> 00:04:42,520
	If they wish to give out 1.6 million as intended benefit, they have to get to a much higher

	60
	00:04:42,520 --> 00:04:43,920
	valuation.

	61
	00:04:43,920 --> 00:04:48,920
	The valuation of 40 million is certainly a good number, but at that valuation they may

	62
	00:04:48,920 --> 00:04:55,440
	not be able to justify an intended benefit of 1.6 million dollars.

	63
	00:04:55,440 --> 00:05:02,960
	So either the intended benefit needs to reduce or the value per share needs to go up.

	64
	00:05:02,960 --> 00:05:08,280
	As they still wish to preserve the intended benefit, they revise the fourth year valuation

	65
	00:05:08,280 --> 00:05:10,800
	to 1.60 million dollars.

	66
	00:05:10,800 --> 00:05:15,080
	But they now make a mental note that this would mean a certain amount of revenue to be brought

	67
	00:05:15,080 --> 00:05:16,240
	in.

	68
	00:05:16,240 --> 00:05:21,400
	And they need to ensure even more that their product is far better than what others have

	69
	00:05:21,400 --> 00:05:23,040
	an offer.

	70
	00:05:23,040 --> 00:05:27,160
	This does not mean more advertisements and more customer phone calls.

	71
	00:05:27,160 --> 00:05:32,920
	It means more contemplation on how that product could become valuable.

	72
	00:05:32,920 --> 00:05:39,240
	More physical labor, more resources without any additional intellectual labor may not

	73
	00:05:39,240 --> 00:05:41,000
	help much.

	74
	00:05:41,000 --> 00:05:46,080
	By contemplating deeply about their product, they can significantly increase its value

	75
	00:05:46,080 --> 00:05:52,800
	proposition, enhance valuation without spending a single extra dollar.

	76
	00:05:52,800 --> 00:05:57,760
	Reducing the fourth year shares to 20,000 and increasing the fourth year's valuation

	77
	00:05:57,760 --> 00:06:05,560
	to 160 million dollars brings down the number of options to be granted from 1600 to 200

	78
	00:06:05,560 --> 00:06:12,680
	options, which is 2% of their current capital and 1% of the capital in the fourth year.

	79
	00:06:12,680 --> 00:06:17,560
	Now if the eventual valuation were to get to a billion dollars, then the employee ends

	80
	00:06:17,560 --> 00:06:20,360
	up making much much more.

	81
	00:06:20,360 --> 00:06:25,720
	Similarly, if they were to reach only 40 million in valuation, those 200 options would

	82
	00:06:25,720 --> 00:06:28,120
	fetch much lesser.

	83
	00:06:28,120 --> 00:06:34,720
	So their strategy rewards the employee reasonably in case of a certain growth trajectory and

	84
	00:06:34,720 --> 00:06:40,160
	rewards them exponentially in case of an exponential growth.

	85
	00:06:40,160 --> 00:06:45,280
	Next they take up the other potential team members and rate them A, B or C depending upon

	86
	00:06:45,280 --> 00:06:50,480
	the criticality of their role and apply a descending multiple to compute their intended

	87
	00:06:50,480 --> 00:06:51,580
	benefit.

	88
	00:06:51,580 --> 00:06:54,560
	The process is the same.

	89
	00:06:54,560 --> 00:06:59,800
	Now they could further reduce the number of options by reducing the multiple or increasing

	90
	00:06:59,800 --> 00:07:05,080
	the valuation in the fourth year or decreasing the number of shares in the fourth year even

	91
	00:07:05,080 --> 00:07:06,440
	further.

	92
	00:07:06,440 --> 00:07:11,420
	But what you need to focus on here is the process.

	93
	00:07:11,420 --> 00:07:17,640
	Look at how the intended benefit can sometimes guide you to take decisions about your business.

	94
	00:07:17,640 --> 00:07:23,680
	As far as possible, try not reducing the intended benefit.

	95
	00:07:23,680 --> 00:07:29,420
	The key takeaway is let your vision and intellectual capital drive your stock option

	96
	00:07:29,420 --> 00:07:31,400
	strategy.

	97
	00:07:31,400 --> 00:07:35,520
	Use your non-financial vision to attract the right people.

	98
	00:07:35,520 --> 00:07:39,940
	Use deep thinking to infuse value into your product.

	99
	00:07:39,940 --> 00:07:45,680
	Valuation will take care of itself and your journey will be much more meaningful and enjoyable.