Disclaimer: The numbers are made up, but reflect the real proportions.

I was offered a job at a startup, which just closed a financing round with $10M valuation and has 10M outstanding shares. The offer included 25k options vesting over 4 years (25% vest per year, 1-year cliff). The strike price is $0.1.

According to the startup equity calculator and taking the current $10M valuation as expected exit value, these options should be worth $24k in total.

However, my potential future boss has told me that the offer is the equivalent of $10k per year flowing into stock options and are thus worth $40k in total. His calculation was as follows: The next 2 years, the valuation is $10M and and a fictive $20k flow into stock options, making up 20k of options. In 2 years, there will be the next financing round at about $40k valuation. Then another $20k flow into stock options, adding another 5k of options. Thus over 4 years, a total of fictive $10k per year have flown into options, thus this salary component has a value of $10k per year.

My question is now: Which of the two calculation options reflects the value of the stock options better? Is it common/good practice to evaluate the stock option offer not based on the current valuation but some future valuations in a next financing round?

My question differs from the following one because I am offering 2 potential evaluation methods: What are the questions to ask a pre-seed start-up in order to understand the value of the offered equity?.

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    I can't answer the question, it's not my area of expertise, but as a rule of thumb I'd value any promises of bonuses to be worth zero (until they're in my bank account), and stock to be worth 1/10th of what the person offering it to me claims it will be worth one day (until the company is established and successful). YMMV. Nov 24, 2021 at 23:50
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    Options of this nature have no intrinsic value and should not be considered compensation. Nov 25, 2021 at 15:37
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    While stock options are a good performance bonus that links your effort with the company's outcomes, so much is outside of your influence in a start-up that you shouldn't really value the money. You should also understand why you are considering joining a start-up. Are you joining because you believe in the leader, believe in the product or because you just need a job? Start-ups are notorious for long hours, poor cashflow and don't offer much security. It can be fun and rewarding, but it can also be a disaster.
    – DWGKNZ
    Nov 25, 2021 at 19:32
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    @Accumulation: the options described are paper only. They can't be exercised, traded, and will not be useful until some event comes along to make them valuable. Today they are worthless and shouldn't be considered compensation. Going a step further, OP is likely to have only common options which will have fewer rights during any kind of event like a buyout. It doesn't matter that they have potential value, today they have none. Nov 26, 2021 at 5:02

2 Answers 2


Options in a startup are a lottery ticket, and should be treated as such. You'll either hit it big, or make literally nothing. There is some in between, but it will be a small bonus at most if you don't hit a home run. I evaluate them as worth 0, then decide whether the extras I get for working at a startup (freedom to do things the way I want, being more important to the success of the company, working on more interesting things, etc) are worth the money I'd miss working at a big corp. And that answer can change depending on where you are in life. Right now I'm cashing out for a few years, but I could see myself returning to startup land when I've socked away some more money.

Please note that there are a LOT of games that can be played on stock options. THe biggest one out there right now if investors getting a multiplies (they put in say 5M but get 10M back on sale BEFORE calculating everyone's percentage based on shares). My last startup has I think around 20M invested but needed to sell for 40M to give any of our options even a penny. So don't assume even if you own .1% of the stock (a common offer to a senior engineer at a series B or C company) that it will get you .1% of the sale price. You'll make less.

Also don't assume the number of shares you find is accurate. Investors may have put in convertible notes, which convert to shares, which means there's a bigger pool then you know

  • "they put in say 5M but get 10M back on sale BEFORE calculating everyone's percentage based on shares" I'm confused as to what you're saying here. They're giving employees options that are underwater at the time of granting? Nov 25, 2021 at 20:04
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    @Acccumulation Its called first money out, or liquidation preference. When giving startups capital, many firms will require the startup to accept those terms- basically their investment gets repaid first (sometimes 2x or more) upon a sale. Its not that the options are necessarily underwater, its that the sale value of the company has a chunk of it taken out first. Nov 25, 2021 at 21:22
  • @Acccumulation Just to be clear, its not that the investors get to put that in arbitrarily. A founder has to accept those terms, and they're set when the contract is signed. And a smart founder will try to avoid them, for obvious reasons, especially avoiding multiples. But at some point they may be desperate enough to take them. Nov 25, 2021 at 21:32
  • It's sort of like a bankruptcy where not all creditors have the same priority. Some gets first dibs, and those on the bottom gets nothing (usually).
    – Nelson
    Nov 26, 2021 at 8:36
  • I have a friend that bought “founder’s shares” in a company but they declared bankruptcy and recent legal changes in the US means that he still gets screwed and comes after the creditors in the money distribution so they’re worthless.
    – mxyzplk
    Nov 26, 2021 at 17:07

In 2 years, there will be the next financing round at about $40k valuation.

Your "this is my potential boss's argument" section is rather confusing, and I'm not sure how much of that is inherent to his argument and how is in you trying to recreate it. I take it you mean "the next financing round will be such that the stock I have options to will be value at $40k"?

Outside investors clearly aren't convinced that the company will be valued at $40m; if they were, they wouldn't have been able to buy it at a $10m valuation, as they would have been outbid by investors buying in at a $40m valuation. Now, your potential boss may be in a better position to evaluate the company's value, but he also is more subject to cognitive biases such as confirmation bias, and has a strong interest in the company being valued as high as possible.

So, there's a relatively objective evaluation of the company at $10m, and a highly self-serving evaluation at $40m. Is it standard/good practice to allow companies to set their own valuations? No. Also, keep in mind that even that the $10m is based on a highly diversified portfolio. Unless you have a large net worth, the combined risk of having both your job and your stock options relying on the same company is going to make this a large, undiversified part of your portfolio. Gabe Sechan compared them to lottery tickets in their answer and concluded that they should be treated as being worth zero, but I wouldn't go that far. Everyone has a different risk discount rate, but most people don't have a 100% discount rate (and the $10m valuation is after the investors have applied their own risk discount rate).

  • That valuation is long term though. If you need that money right now, it is actually worth $0 or almost zero. You will not be able to turn around and liquidate it anytime soon.
    – Nelson
    Nov 26, 2021 at 8:38

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