One of the unique aspects of joining a startup is the opportunity to earn equity—it’s an asset class that few have access to, with the potential for large returns. But startup outcomes are highly variable, which means equity value is highly speculative. Since equity is often a large percentage of a startup employee’s salary, it’s important to know how to calculate the value of equity under various scenarios, and how to compare various equity offers.
Use this startup equity valuation tool to estimate the value of your current equity options or compare multiple job offers. You can model how much your equity would be worth in various exit scenarios.
Equity is the overall term used to represent your ownership interest in a company. It also represents your opportunity to grow and scale your own financial future alongside your company's. Companies want to incentivize employees by offering a meaningful stake in the company, which generally works in both parties' favor. Early stage startups often have fewer cash reserves to fund salaries, so they often offer more equity than larger companies. The potential upside of this is huge.
You'll see startup equity most often taking the form of stock options or RSUs (restricted stock units). RSUs actually become stock when they vest, whereas options are literally what they sound like - when they vest, they become the option to buy stock.
To "vest" a stock option or RSU means you"ve worked at a company for a period of time to earn a specific amount of equity. A vesting schedule tells you when and how your equity will vest. A typical startup vesting schedule is a 4 year vest with a 1 year cliff. The cliff is how long it takes to earn your first chunk of equity. Early stage companies benefit greatly from retaining committed, engaged employees, and cliffs are a way to reward long-term employees like that.
As startups grow, employees will often be offered promotions and raises, along with option refreshers. New options and RSUs generally come with their own associated vesting schedules. You can use the calculator to add additional scenarios that model potential raises.
First, you’ll want to get an idea as to what the company’s market value might be. For a private company, this can be based on either a 409A valuation,or the last financing round. Then, you need to know what percentage of the company your options signify and how much it would cost you to exercise those options. That info can be determined using two numbers: the current number of outstanding shares and the strike price of your options (use $0 in our calculator if you have RSUs). Note that the number of outstanding shares will change over time due to dilution.(Every time a startup raises a new round of funding, new shares are created to sell to investors making existing shares a smaller percentage of the new total - that’s dilution. )
The strike price of your options is what it will cost you to exercise them, aka buy shares of the company. You may exercise any vested shares before or during your exercise window (the period of time the company allows you to exercise after your last day of employment). This can range from as little as 90 days up to many years. We’ve written here about why Triplebyte offers our employees a 10 year exercise window.
A startup can start with any number of shares they want. A typical founding allocation is around 10 million shares, and typical startup dilution is around 20-25% for Seed, Series A, and Series B, then about 10% per round after that. Since founding allocation is not standardized, that means that not all option quantities are equal, even at same-stage startups. That means the percentage of equity is far more important than the actual number of options. (Determining the potential monetary value of that percentage is where our equity calculator comes in!)
A startup exit is when the current, private investors decide to sell their shares. This usually happens in one of three ways:
The time it takes to exit can vary widely from a few years to well over a decade. Exits can occur throughout a company’s timeline, which is where growth multiples come in. We’ve kept it simple, so for this tool, you can think of the growth multiple as the exit valuation divided by the current valuation. So the expected exit valuation would be the current valuation, times the growth multiple. You can model various potential exits and growth multiples in the calculator. Keep in mind, growth multiples will vary based on company, industry, funding stage, etc.
Yes - it’s a classic cliche, but true nonetheless... timing is everything. Beyond the numbers we’ve already talked about, the worth of your equity is also dependent on when you exercise your options. Most startups aren't publicly-traded companies, and exercising options is NOT the same as buying regular stock on Wall Street. If you choose to exercise your options, you're spending your own actual cash to buy shares in a private company. This action has a wide range of tax ramifications and we can't advise you on that - this is the part where you should seek professional tax advice.
Use your insider perspective as an employee to think about whether your company is likely to continue growing or liquidate. And then consider your company's 409A valuation. Private companies (which include most startups) must complete this independent assessment of their worth each year. Your main focus for when to exercise should be on the difference between your strike price and the current 409A per share valuation. If your strike price is lower, you'll potentially make money if/when the company exits.
And that’s it! You're ready to dive into the calculator, start comparing offers, and run various scenarios so you can interpret (and then negotiate) your startup equity offers!
(For the extra-curious, check out our glossary to explore more in-depth details about equity.)