How to Value Your Startup Stock Options
Startup equity is one of the most misunderstood—and potentially most valuable—parts of a tech worker’s compensation. For founders, it’s a critical tool for attracting top talent. For both current and prospective employees, it can represent a life-changing upside—or a frustrating mystery.
My approach to demystifying the concept is a simple Options Value Calculator: a tool that allows users to evaluate their stock options and make informed decisions rather than focusing solely on base salary.
(If you don't need any more convincing as to why this is important, jump straight to the calculator here.)
Why Option Valuation Matters
Over the years, I’ve heard the same frustration from many founders:
“I sit down with our employees or candidates we're trying to bring onboard and offer what I think is meaningful equity. But, most of the time, it doesn't seem to move the needle for them in terms of value. They read the numbers, nod, say thanks, and then just focus on their cash compensation.”
This is a genuine problem for startup founders: options were always the main tool they had to compete for talent. Realistically, startups will struggle competing with large corporations - be they Magnificent 7s, investment banks, or PE firms - in terms of cash compensation. But, on the flip side, those large corporates are never going to be able to offer equity compensation with the return potential of a fast-scaling startup. So, it's essential that both current and prospective employees take stock (pun intended) in the value of those options if startups are going to be able to attract and retain top talent. For founders, successfully communicating the value of the options is key.
Identifying & Bridging the Disconnect
In my experience, communication failures can often be traced to not properly setting context. The founders I know are often genuinely excited about giving team members a real stake in the company and can't wait to tell them about it. In this excitement, it's easy to forget that most employees aren’t involved in the fundraising cycle and, therefore, are not as familiar with the company's cap table or valuation ranges. Unlike the co-founders, who almost instinctively know what % ownership and value a given number of options have, most employees just see a borderline arbitrary number; how could they possibly know whether to get excited about the grant they were just offered?! What's needed is something to help founders provide this missing context and put option grants into perspective.
Below, you'll find a tool I've created in an attempt to give founders an easy way to provide this perspective: an Options Value Calculator. It gives both sides a way to put option grants in concrete, comparable terms around which they can have a more grounded conversation. It’s not a valuation tool in the financial modeling sense—it’s a communication tool designed to help people reason about equity more clearly and consistently.
A Quick Sidebar on Company Valuations...
Before I take you through all of the variables involved in calculating the value of a stock option, let's get one thing clear: the key input is the Estimated Company Exit Valuation. If this value is low, it doesn't really matter how large of an implied ownership stake the options represent...
This post does not go into how to calculate or estimate the value of your startup, except to say:
There are many methods investors and acquirers go about setting a valuation, and there's no such thing as the "correct one".
If you don't already have some aspirational exit value scenarios in your head, you should do your own digging on realistic ways of coming up with them. This could include:
Authoritative blogs (remember that valuations are a function of the market and change over time; check the date on any blog post you reference).
Asking your investors or investors you know.
Asking your company counsel if they can refer you to any resources.
Asking your startup founder peers what they've been hearing/seeing.
Don't go overboard: you're looking for an MVP-level estimate here.
What You Need to Know to Value Options
Before you can run the numbers, you need a few key inputs:
Number of Options: What’s in the offer letter.
Strike Price: What it will cost to exercise each option.
Total Shares Outstanding: Used to calculate your ownership %
Current Company Valuation: What the company’s been valued at as part of its most recent funding round.
Estimated Company Exit Valuation: What you think the company could be worth in the future.
Assumed Dilution Before Exit (Optional): Reflects the effect of future fundraising rounds.
Tax Rate (Optional): To estimate the post-tax value.
Salary (Optional): To calculate % of total comp.
If you don’t have access to all of this data, you can use assumptions or ask the company. Many startups are open to sharing at least rough figures, especially for key hires.
Why Dilution Matters
As companies grow, they typically raise additional rounds of funding—each one issuing new shares. This increases the total number of shares outstanding and reduces the relative ownership percentage of early option holders. That’s called dilution.
The calculator includes an optional field for assumed dilution before exit. A typical range might be:
10–20% for companies already in late Series B or C
30–50% for early-stage companies that still need to raise Series A and beyond
This is a rough way to factor in how your slice of the pie might shrink over time. It’s not exact, but it’s directionally useful when modeling future outcomes.
How the Calculator Works
The calculator below estimates the future net value of an option grant under a specific exit scenario. It’s not a guarantee of return—just a way to ground expectations and compare offers on a more level playing field.
It calculates:
Implied Ownership = (Options ÷ Total Shares Outstanding) × (1 – Dilution %)
Gross Value = Implied Ownership × Exit Valuation
Cost to Exercise = Strike Price × Options
Estimated Net Value = Gross – Strike Cost – Taxes
% of Total Compensation = Net Option Value ÷ (Net Option Value + Salary)
💡 Try modeling three scenarios: conservative, likely, and optimistic exit outcomes. Adjust the dilution field as needed to reflect future fundraising expectations.
The Calculator
This tool doesn’t store any data or require a login. It’s just meant to give you (or your candidate) a quick sense of the numbers behind the options.
Closing Thoughts
Option grants are inherently speculative, but that doesn’t mean they’re impossible to value. Founders owe it to candidates to be transparent, and employees deserve tools that help them understand what’s on the table.
If you’re a founder, feel free to use this calculator when you’re extending offers. If you’re an employee or candidate, I hope it helps you better understand the value—and the risk—of the equity you’re being offered.
If you have questions, spot issues, or want to suggest improvements, I’d love to hear from you.
Disclaimers
This tool is intended for informational purposes only and does not constitute legal, tax, or investment advice. Always consult with a qualified advisor before making compensation decisions.