Employee Share Options, which entitle the holder to buy shares in a company at a future date for a pre-determined price, are an integral part of employee compensation in the start-up scene. It’s a way for privately held companies that may be large on ideas and growth but short on cash fight for and retain fresh talent. ESOs also incentivize employees as their payoff through exercising their options will be directly tied to the performance of the company. Deliveroo is no exception to this compensation structure, but it is their valuation of their existing ESOs that has garnered attention in Shubber’s article.
Shubber focuses the assumption Deliveroo makes in valuing their options in employing a volatility of 2%. To put it in perspective, this …show more content…
In their 2015 report, the firm assumed a 45% volatility to calculate the fair value of their ESOs, which seem much more in line with the figures used by competitors. A possible explanation could be that as Deliveroo witnessed rapid growth and gained its “unicorn” status, there have been increasingly more jitters on the possibility of their IPO in the near future. In such a case, Deliveroo may be gearing up to present themselves to a different audience; the public. When receiving funding from industry veterans in the PE/VC world who will see right through such valuations and rather focus on the growth potential of the company, such play on numbers may have not made a difference. However, as a company that recorded a negative operating cash flow of £111m last year, that is preparing themselves to be publicly traded, window dressing their financial statements and making the headline numbers like EBIT look better may have risen higher in Deliveroo’s list of priorities.
The biggest problem about valuing options on unlisted equity instruments is that so much relies on the validity of the assumptions being made. The Deliveroo case is a perfect example of how the degree of subjectivity allowed in just one of the inputs in the Black Scholes method can materially impact the financial reporting of a
Shubber focuses the assumption Deliveroo makes in valuing their options in employing a volatility of 2%. To put it in perspective, this …show more content…
In their 2015 report, the firm assumed a 45% volatility to calculate the fair value of their ESOs, which seem much more in line with the figures used by competitors. A possible explanation could be that as Deliveroo witnessed rapid growth and gained its “unicorn” status, there have been increasingly more jitters on the possibility of their IPO in the near future. In such a case, Deliveroo may be gearing up to present themselves to a different audience; the public. When receiving funding from industry veterans in the PE/VC world who will see right through such valuations and rather focus on the growth potential of the company, such play on numbers may have not made a difference. However, as a company that recorded a negative operating cash flow of £111m last year, that is preparing themselves to be publicly traded, window dressing their financial statements and making the headline numbers like EBIT look better may have risen higher in Deliveroo’s list of priorities.
The biggest problem about valuing options on unlisted equity instruments is that so much relies on the validity of the assumptions being made. The Deliveroo case is a perfect example of how the degree of subjectivity allowed in just one of the inputs in the Black Scholes method can materially impact the financial reporting of a