Net Present Value: What Future Income Is Worth Today

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Calculate what future income is worth today by applying a discount to its future value.

Nivi: Let’s talk about net present value (NPV).

Naval: Net present value is when you say, “That stream of payments I’m going to get in the future—what’s it worth today?”

Here’s a common example: You’re joining a startup and getting stock options, and the founder says, “This company is going to be worth $1 billion, and I’m giving you 0.1% of the company; therefore, you’re getting $1 million worth of stock.”

Figure out what future income is worth today by applying a discount rate

The founder is negotiating based on what it’s going to be worth in the future. You have to figure out what it’s worth today by applying a discount rate, or an interest rate, that accounts for the massive risk startups face.

You’ll end up with the amount the company is actually worth today. That’s the price at which a venture capitalist would invest in the company.

If the founder recently raised a round at a $10 million valuation, then the company’s only worth 1% of what the founder says it will be worth. So your $1 million package is actually worth $10,000. You should get very comfortable doing rough net present value calculations in your head.