EQUITY METHODS ADVANCED MODEL

TASK

Companies often issue equity (stock or options) to their employees. For start-ups, equity is particularly important for two reasons – first, it aligns employee compensation with company performance. As the share price rises or falls, employees’ share compensation follows suit. This can create powerful incentives. Second, it allows companies to conserve cash at a time when cash flows to the business may still be low or inconsistent.

That said, care must be taken to manage equity grants to ensure that dilution is managed and does not become excessive. To that end, companies will model out how ownership percentages and cash reserves will look depending on different variables such as share value fluctuations, compensation targets, etc.

Successfully managing these concerns requires accurate and flexible forecasting for many different future possibilities. Companies will want to use the model to answer questions like:
• How long can we expect our run on our existing cash reserves?
• If our stock price rises or falls, how long can we keep dilution above a certain threshold?
• Can we afford to pay above-market to our employees in order to attract top talent?
In this exercise, you will

1) take raw benchmarking data to seed the model,

2) build out a flexible forecast that allows assumptions to be easily tweaked, and

3) use the model to answer real-world questions that our clients face.