How should I value startup stock (equity)?

A conversation I’ve had with several friends lately goes like this:

I’m considering job offers at a private (pre-IPO) company. How should I assign a value to their equity grant (options or restricted stock)?

The simple answer I give is

$0

Yes, there are valuations to consider, and financial models, and clearly the Venture Capitalists think the equity is worth something or they wouldn’t be in this game. But to you, a non-founding employee, the number to use in your financial plan is:

$0

What does that mean for compensation negotiations? First, get as much cash as you need to comfortably live your life. This usually doesn’t mean maximizing your salary and taking no equity (and if it does, maybe startup life isn’t for you). Then get as much equity as they’ll give away.

Equity is like lottery tickets: probably worth nothing, but get as many tickets as possible to increase your odds.

Is this a pessimistic view? Absolutely.

Will ignoring this advice allow some lucky people to become spectacularly rich? Yup!

But for the vast majority of startups that never have a mind-boggling IPO, this is the right plan.

You can’t pay your rent or book a nice vacation with stock options.

If you want to read more on this topic (probably with less sarcastic commentary) try https://www.holloway.com/g/equity-compensation (might have a registration wall :-( )

Kara wrote a nice article on negotiating compensation in general.