How to Value Your Startup Stock Options

Startup equity is one of the most misunderstood parts of a tech worker’s compensation. As a result, its value may be underrated in comparison to cold, hard cash. For founders, it’s critical to attracting talent. For current or prospective employees, it can represent an upside, or an enigma. This depends on how they understand its value.

One approach to bridging this gap is an 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.)

Why Option Valuation Matters

Over the years, founders have pointed to a common challenge:

“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 find difficulty competing with large corporations – be they enterprise technology companies, investment banks, or private equity firms – in terms of cash compensation. However, those institutions are less likely to be able to offer equity compensation with the return potential of a fast-scaling startup. 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.

Defining the Disconnect

Founders are often genuinely excited about giving team members a real stake in the company and can’t wait to tell them about it. In their excitement, it’s easy for founders to forget that employees who aren’t involved in the fundraising cycle may not be as familiar with the company’s cap table or the valuation ranges. Unlike founders, who almost instinctively know what percentage ownership and value a given number of options have, most employees and prospects see an arbitrary number. How could they possibly know whether to get excited about the grant they were just offered? What’s needed is a resource to guide founders in providing this missing context and put option grants into perspective.

An options value calculator can help contextualize option grants in concrete, comparable terms. 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. From an employee attraction and retention perspective, it’s also useful for hiring managers along with current and prospective employees to contextualize the valuation – and the full compensation package – for themselves.

A Quick Sidebar on Company Valuations…

Before going through all 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 (Note: 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 ownership percentage.
• 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 percentage of total compensation.

Founders can use these outputs as a framework to communicate the value of the options to their current and prospective employees. For prospects who want to use the tool for themselves and don’t have access to all this data, you can use assumptions or ask the company. Many startups are open to sharing estimates, especially for key hires.

Why Dilution Matters

As companies grow, they typically raise additional rounds of funding with each one resulting in the issuing of new shares. This increases the total number of shares outstanding and reduces, or “dilutes”, the relative ownership percentage of early option holders.

• 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 an option holder’s 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, but a way to ground expectations and provides a framework for founders that equips their prospects with a way to 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.