Fred Wilson has another good post – this one on option value. I’ve highlighted a couple excerpts below…
Option value means the potential for a gain. If you own 20% of a company, you own 20% of the current value plus 20% of the potential upside. It's the latter that I am calling option value.
So the next time you buy or sell early stage stock, think less about the current value of what you are buying, because there honestly isn't much value in an early stage company, and think more about the potential value creation, the odds of success, and the time frame it would take to get there, and value what you are buying or selling as an option. You may be surprised at the results of that analysis.
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