How to Evaluate a Startup Equity Offer

You have a job offer from a startup. The recruiter mentions equity: "We are offering you 10,000 stock options." That number, by itself, tells you almost nothing. Ten thousand shares of a company with 10 million shares outstanding is very different from 10,000 shares of a company with 500 million. And even once you know the percentage, the gap between paper value and real dollars can be enormous.

This guide walks through how to evaluate the equity component of a startup offer so you can make a grounded decision rather than guessing.

Why share count alone means nothing

A share count without context is like a salary quoted in a currency you have never heard of. You need to know the total number of shares to understand what your grant represents.

Companies can set the total share count at whatever level they want. Some have 10 million shares outstanding; others have 500 million. A grant of 50,000 shares could represent 0.5% of one company and 0.01% of another. The only number that matters is your fully diluted ownership percentage: the number of shares you are being offered divided by the total number of shares the company has outstanding, including all options, RSUs, warrants, and convertible instruments.

Always ask for the fully diluted share count. If a company will not provide it, that is a signal worth paying attention to.

The five numbers to ask for

Before you can evaluate any equity offer, you need five data points. A reputable company should be willing to share all of them.

• Number of shares in your grant. This is on the offer letter. It is the starting point, not the ending point.
• Strike price (exercise price). For stock options, this is the price you would pay per share to exercise. It is typically set at the current 409A fair market value.
• Total shares outstanding on a fully diluted basis. This lets you calculate your ownership percentage. Ask for the number that includes all outstanding options, RSUs, and the unallocated option pool.
• Latest 409A valuation (fair market value per share). This is the independently appraised value of the common stock. It is usually lower than the preferred price.
• Latest preferred price per share (or implied valuation). This is the price investors paid in the most recent funding round. The gap between this and the 409A tells you something about the discount applied to common stock.

With these five numbers, you can do real math. Without them, you are guessing.

How to calculate your ownership percentage

The formula is straightforward:

Ownership % = Your shares / Total fully diluted shares

If you are offered 10,000 options and the company has 50 million fully diluted shares, your ownership is 0.02%. That is your economic stake before dilution from future funding rounds.

Ownership percentage is useful because it lets you estimate dollar values at different company valuations. If you own 0.02% and the company is eventually worth $5 billion at exit, your slice is $1 million before taxes and exercise costs. At a $1 billion exit, it is $200,000. At the current valuation, it may be far less.

Keep in mind that your percentage will shrink as the company raises more capital. A typical funding round can dilute existing shareholders by 15-25%. Over multiple rounds, your 0.02% might become 0.01% or less by the time the company reaches an exit. This is normal, and it is one reason experienced candidates think in ranges rather than point estimates.

Valuing your equity realistically

The most common mistake candidates make is multiplying their shares by the latest preferred price per share and treating that as a cash value. It is not. Several discounts should be applied to get a more realistic picture.

Illiquidity discount

You cannot sell private company stock on the open market. Depending on the company's stage and secondary market activity, this discount typically ranges from 20% to 40%. Your shares may be worth something on paper, but you cannot turn them into cash until a liquidity event occurs, and that might be years away or might never happen.

Common stock vs. preferred stock discount

Investors hold preferred stock with special rights: liquidation preferences, anti-dilution protections, and sometimes guaranteed returns. Your common stock sits below preferred in the payout order. In a modest exit, preferred shareholders may get paid in full while common shareholders get little or nothing. The 409A valuation already reflects some of this discount, but it is worth understanding why the common price is typically 50-80% lower than the preferred price.

Future dilution

If the company plans to raise more capital, your percentage will shrink. For an early-stage company with several rounds ahead, assuming 30-50% cumulative dilution is reasonable. For a late-stage company near IPO, dilution may be minimal.

A practical approach

A conservative way to estimate current value is to use your ownership percentage, multiply by the latest preferred valuation, then apply a combined discount of 50-70% for illiquidity, common-vs-preferred differences, and future dilution. This is not a precise science, but it gives you a more honest range than the headline number. You can use our equity compensation calculator to model different scenarios with your specific numbers.

Vesting and what happens if you leave

Equity is not handed to you on day one. It vests over time, usually on a four-year schedule with a one-year cliff.

The cliff means that nothing vests during your first year. If you leave before the one-year mark, you walk away with zero equity. After the cliff, shares typically vest monthly or quarterly.

Three additional terms are worth understanding before you sign:

• Acceleration. Some offers include acceleration clauses that speed up vesting if the company is acquired or if you are terminated without cause. Single-trigger acceleration vests on acquisition alone. Double-trigger requires acquisition plus termination. If your offer does not mention acceleration, assume you have none.
• Post-termination exercise period (PTEP). For stock options, this is the window you have to exercise after leaving the company. The traditional window is 90 days, but many modern companies offer extended windows of one to ten years. A 90-day window can force you into a costly decision: pay potentially thousands of dollars to exercise (plus taxes) or forfeit the options entirely. Always ask about this before accepting.
• Early exercise. Some companies allow you to exercise options before they vest. This can have tax advantages if you file an 83(b) election, but it also means spending real money on shares you have not yet earned. It is a more advanced strategy worth discussing with a tax advisor.

Comparing total compensation across scenarios

The right way to compare a startup offer against a higher-paying alternative is to model total compensation under different outcomes. Do not assume the best case.

Build a simple table with three columns:

• Conservative (1x return). The company exits or you sell at roughly the current valuation. Your equity is worth your ownership percentage times the current preferred valuation, minus exercise costs, minus taxes, minus realistic discounts. In many cases this number is surprisingly small.
• Moderate (3x return). The company triples in value from today. Your equity becomes more meaningful, but remember that dilution and exercise costs still apply.
• Optimistic (10x return). This is the venture-scale outcome. Your equity could be worth a life-changing amount, but fewer than 10% of venture-backed companies achieve a 10x return for common shareholders.

Add your annual salary to each scenario and compare the four-year total (salary plus equity value) against a competing offer. This gives you a realistic range rather than a single fantasy number. Most of the time, the startup offer looks better only in the moderate-to-optimistic scenarios, which is fine as long as you understand and accept that tradeoff.

Red flags to watch for

The company will not share the fully diluted share count

If a recruiter refuses to tell you the total shares outstanding, you cannot calculate your ownership. This is a serious red flag. Transparent companies share this information readily.

No current 409A valuation

Companies are required to obtain a 409A valuation to set option strike prices. If the company does not have a recent one, or if the valuation is stale (more than 12 months old or predates a material event), that creates legal risk for you. Options granted below fair market value can trigger immediate tax consequences under Section 409A.

An unusually large option pool

If the company recently expanded its option pool significantly, your ownership percentage may be diluted before you even start. Ask whether the fully diluted count includes a recently expanded but largely unallocated pool.

Very short post-termination exercise window

A 90-day exercise window can force a difficult decision under time pressure. If the exercise cost is significant, that short window could effectively make your options worthless when you leave.

Pressure to sign quickly

Exploding offers, extremely short deadlines, or reluctance to answer questions about equity terms are all signs that the company does not want you to do the math. A company confident in its offer will give you time to evaluate it.

Worked example

Let us walk through a concrete scenario.

The offer: 10,000 stock options with a $2.00 strike price. The company's latest 409A fair market value is $2.00 per share. The latest preferred round valued shares at $20.00 each, implying a company valuation of $1 billion. There are 50 million fully diluted shares outstanding.

Step 1: Ownership percentage. 10,000 / 50,000,000 = 0.02%.

Step 2: Paper value at preferred price. 10,000 shares x $20.00 = $200,000. This is what a recruiter might quote. It is not what your equity is worth today.

Step 3: Spread at current 409A. Because your strike price equals the current 409A ($2.00), the intrinsic value today is zero. You are not underwater, but there is no built-in profit yet.

Step 4: Value at different outcomes.

• 1x outcome ($1B exit). Per-share value: $20.00. Your gross profit: (10,000 x $20.00) - (10,000 x $2.00) = $180,000. After estimated taxes (say 35% blended): roughly $117,000. But remember, this assumes full vesting over four years, no further dilution, and an exit at exactly the current preferred valuation.
• 3x outcome ($3B exit). Per-share value: $60.00. Gross profit: $580,000. After taxes: roughly $377,000.
• 10x outcome ($10B exit). Per-share value: $200.00. Gross profit: $1,980,000. After taxes: roughly $1,287,000.

Step 5: Apply dilution. If the company raises two more rounds before exit, assume 30% cumulative dilution. That reduces each of the above numbers by roughly 30%: the 1x outcome drops to about $82,000, the 3x to about $264,000, and the 10x to about $901,000.

Step 6: Compare. If a competing offer pays $30,000 more per year in salary, that is $120,000 in guaranteed cash over four years. The startup equity beats that only in the 3x or better scenario, and only if the company actually reaches a liquidity event within a reasonable timeframe.

This is not an argument against joining startups. It is an argument for doing the math so you know the tradeoff you are making. You can model your own numbers with our equity compensation calculator.

Final takeaway

Equity can be the most valuable part of a startup compensation package, but only under certain conditions. The share count on your offer letter is a starting point, not an answer. Ask for the five key numbers, calculate your ownership percentage, apply honest discounts, and compare total compensation across a range of outcomes. If you do that work before signing, you will make a decision based on understanding rather than hope.

Related guides

• What Is Equity?
• Stock Vesting, Explained
• Incentive Stock Options (ISOs)
• Restricted Stock Units (RSUs)