Option Pricing in High-Risk Startup Valuation: A Model for Uncertainty and Volatility
Jing Yang
Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Accounting
Faculty Research Mentor: Huaibing Yu
Abstract:
Valuing high-risk startups, particularly in technology and other volatile sectors, presents a significant challenge due to the inherent uncertainty and rapid changes in market conditions. Traditional valuation methods, such as discounted cash flow (DCF), fail to fully capture the unpredictable nature of startups’ future potential. This research explores the application of the Black-Scholes Option Pricing Model to the valuation of high-risk startups. By treating startup investments as financial options, the model accounts for the significant volatility, uncertainty, and growth potential of early-stage companies. The study demonstrates how the Black-Scholes model can be adapted to estimate the value of startup equity, treating it as a call option on future company success. The key parameters of the model, including the stock price, exercise price, time to maturity, volatility, and risk-free rate, are used to model the potential upside and downside risks of investing in a startup. The research illustrates how this approach allows investors to assess the value of startups more effectively, incorporating both risk and opportunity in a single valuation framework. By applying the Black-Scholes model, this study aims to provide a more accurate, flexible, and robust method of valuing startups in high-risk environments, offering significant insights for investors seeking to navigate uncertainty and volatility in early-stage investments.