I am in a similar situation. I think that for larger startups, you
should consider the value of the equity, since they have a firmer
You should be able to calculate the value of the equity if you know
the number of shares outstanding and the valuation, this should give
you a pretty good idea of the value of the stock per share.
Let's say you have an offer for 100,000 shares vesting over 4 years
with a strike price of $10. That is an option on $1M worth of stock,
It is easier to estimate value if they are giving you a stock grant,
but this also has undesirable tax consequences. For options, you
should probably do a Black-Sholes calculation, but a call option
cannot be worth more than the underlying stock. You should work out
what you think it is worth yourself, but it will be something pretty
close to $10 per option in the above example for a typical start-up.
I think it is appropriate to then include a liquidity and risk
discount for pre-IPO shares or options. Each person has a different
risk profile, but 0.7 or 0.5 is entirely appropriate. I used 0.5 when
I did my calculations.
Now I have a question for you: the company I am considering an offer
from has a widely different 409a valuation for their common shares,
compared to the valuation of the most recent funding for the
preferreds. Which value should I use in my formula?
In the above example, let's say that the 409a valuation was $10/share
but the value at the last round of funding was $20/share. Should I
consider this options on equity worth $1M or $2M? I don't think that
there is a clear answer, just curious what you think.