How is the volatility in the OPM selected?
The volatility selection is derived from similar publicly traded companies, as shown in the example exhibit to the left.
Early stage companies generally exhibit higher volatility because they are smaller, typically pre-profitability and/or revenue, less established, less diversified, and therefore markedly riskier than their comparable companies. Therefore, volatilities in the upper range of those observed in the publicly traded companies are typically selected.
Within the OPM, holding all other items constant, an increase in volatility will increase the value of the common stock. The more volatile the underlying asset, the more likely a high value exit occurs; the more likely a high value exit occurs, the larger the potential payout to common stock.