Chapter 3: Reading an offer: comparing equity like an adult
Wei's week gets complicated. Alongside the public-company offer from chapter 1 ($140,000 salary plus $200,000 in RSUs over four years), a Series B startup offers him $125,000 in salary plus 60,000 stock options. The recruiter calls the options "potentially worth millions." His friend calls them "probably worth nothing." Both are telling the truth, which is exactly why offers like these cannot be compared by gut feel.
This chapter builds the comparison properly: what public RSUs are worth, what private options are worth, the four questions that force a startup to show its math, and how to negotiate once you can read the board.
Valuing public RSUs: face value, with a seatbelt
Public-company RSUs are the easy half. The shares trade on an exchange, so the grant is worth what it says: $200,000 over four years is about $50,000 a year of stock that becomes sellable as it vests. Apply no optimistic markup and no pessimistic haircut. The price will move, and a volatile stock can make any single year fatter or thinner, but the shares will be worth something real on every vest day, and you can convert them to cash in the next trading window.
The seatbelt is in the planning, not the valuation. Count the equity as pay, then build your fixed expenses (rent, loans, childcare) on salary alone, so a 40% drawdown in the stock dents your savings rate instead of your life. Variance you have planned for is weather. Variance you have built your rent on is a crisis.
Valuing private options: the lottery-adjusted view
The startup's 60,000 options need three numbers before they mean anything, and Wei has to ask for all three. The strike price is $2.40: what he would pay per share to exercise. The 409A valuation is $9: an appraiser's estimate of what one share of common stock is worth today, used to set strikes and tax math. The preferred price is $15: what investors paid in the last round for shares with extra rights, including the right to get paid back first if the company sells low.
The recruiter's favorite arithmetic uses the big number. At the preferred price, the options look like $15 minus $2.40, or $12.60 a share, times 60,000: a $756,000 windfall. Even at the 409A, the spread of $6.60 a share comes to $396,000. Both figures are honest multiplication and dishonest valuation, for three reasons. The shares cannot be sold today. Common stock is not preferred stock, so the $15 carries rights Wei will never have. And reaching any payday requires the company to succeed, which most startups simply do not do.
The adult way to value a lottery-shaped asset is an expected-value table: list the outcomes, weight each by a probability, and add them up. Nobody knows the true probabilities, including the founders, so the point is the shape of the answer, not false precision. Reasonable figures for a decent Series B company look like this:
| Outcome | Chance | Common share value | 60,000 options worth | Contribution to expected value |
|---|---|---|---|---|
| Shutdown, or exit below investor preferences | 60% | $0 | $0 | $0 |
| Modest exit | 25% | $4.00 | $96,000 | $24,000 |
| Strong exit | 10% | $15.00 | $756,000 | $75,600 |
| Big winner | 5% | $50.00 | $2,856,000 | $142,800 |
| Total | 100% | $242,400 |
Each option value is the share value minus the $2.40 strike, times 60,000 shares. In the shutdown row, and in any sale where investors' preferences eat the proceeds, common stock gets nothing; that single row carries more probability than the other three combined, and it deserves to. The honest headline: an expected value of roughly $242,400, before tax, before dilution, before the $144,000 of cash it costs to exercise all 60,000 options, delivered (if ever) six or more years from now.
The two offers, side by side
Spread the expected value over a six-year wait and the startup equity is worth roughly $40,000 a year in expectation. Now the offers can sit in the same table.
Offer A pays $140,000 in salary plus about $50,000 a year in RSUs: roughly $190,000 a year, most of it close to certain. Offer B pays $125,000 in salary plus options with an expected value near $40,000 a year: roughly $165,000 a year in expectation, except the equity portion is a 60% chance of nothing and a 5% chance of a life-changing sum. Notice the quiet third number: Offer B's salary is $15,000 a year lower. Over four years, Wei would pay about $60,000 in forgone salary for his lottery ticket, before spending a dollar on exercise.
Neither offer is "better" in the abstract. The comparison tells Wei what he is buying: Offer B trades $25,000 a year of expected pay and a great deal of certainty for a small chance at millions, plus whatever he believes about the startup's mission and his growth there. That can be a fine trade for a 26-year-old with no dependents and cheap rent. It is a poor trade for anyone whose life depends on the equity arriving.
The four questions for any private company
A startup that wants you to value its equity owes you the inputs. Ask all four; write down the answers.
The four questions
- What is the latest 409A valuation, and when was it done? This anchors what the common stock is worth on paper today, against your strike.
- What did investors pay per preferred share in the last round? The gap between 409A and preferred tells you how much of the headline valuation is rights you do not get.
- How many fully diluted shares are outstanding? Your 60,000 options mean nothing without this. If the startup has 40,000,000 shares, Wei's grant is 0.15% of the company; at 200,000,000 shares, it is 0.03%.
- What is the post-termination exercise window? The standard is 90 days; some companies extend it to years. A short window plus an expensive exercise can trap you in chapter 9's hardest decision.
Wei knows one person inside the startup: Jordan, a senior engineer who joined two years earlier and holds 40,000 ISOs at the same $2.40 strike. Jordan answers the four questions without flinching, which itself is a good sign, and then offers his own accounting. On paper, his options are worth $264,000 against the $9 409A. In his budget, they are worth zero. He maxes his retirement accounts from salary, keeps his emergency fund in cash, and treats the options as a bonus that probably never arrives. "The company already pays me a fair salary," he tells Wei. "The options are a side bet I can afford to lose. The day I needed them to hit, I would be working scared."
Answers matter, and so does the willingness to answer. Which brings up the warning signs.
Walk carefully if you see these
No straight answer on the 409A. Every funded startup has one; refusing to share it means they would rather you imagine a number.
"We can't tell you shares outstanding." Then the option count is decoration. You are being asked to value a fraction with no denominator.
A 90-day exercise window with a high strike. If leaving would cost you six figures in cash to keep what you earned, the handcuffs are not golden, they are just handcuffs.
Negotiating the equity
Equity is usually the most movable part of an offer, because it does not hit this year's payroll budget. Three moves do most of the work. First, get the band: levels-based companies have an equity range for your level, and sites that aggregate offer data, plus direct questions ("what is the range for this level?"), tell you where you landed in it. Second, ask about refresh policy before you join, since chapter 2 showed that the ladder's back side is set by refreshers, not the initial grant. Third, make a specific ask anchored to evidence: a competing offer, the top of the band, or both. "I'm at $200,000 in equity against a band that goes to $280,000, and I have a competing offer at $230,000 total. Can you close the gap on the grant?" works far better than asking for "more." At startups, also consider negotiating the exercise window itself; an extension from 90 days to several years can be worth more than a few thousand extra options.
Value public RSUs at face value and plan around the variance. Value private options at lottery-adjusted expected value, with zero as the most likely outcome. Then pick the offer whose salary alone supports your life, because the equity, in either costume, is never guaranteed.
Where people go wrong
- Multiplying options by the preferred price. That computes a number for shares you do not own, with rights you do not have, at a sale that has not happened.
- Treating the 409A-to-preferred gap as profit. The gap reflects investor rights and an appraiser's discount, not a coiled spring.
- Comparing totals without comparing variance. $190,000 nearly certain and $165,000 in expectation are different species of number. Decide which species your life can hold.
- Forgetting the salary cut is the ticket price. Wei pays about $60,000 over four years for the startup's upside before exercising a single option.
- Negotiating salary and ignoring equity. The equity band usually has more room, and the refresh policy will matter more by year three than the signing salary.
Key takeaways
- Public RSUs are worth face value: count Wei's $200,000 grant as $50,000 a year, plan fixed costs on salary alone, and let variance hit savings, not rent.
- Private options need three inputs (strike, 409A, preferred price) and an expected-value table. Wei's 60,000 options at a $2.40 strike carry about $242,400 of expected value, and a 60% chance of zero.
- The gap between a $9 409A and a $15 preferred price is not profit. Common stock gets paid last.
- Ask every private company four questions: latest 409A, preferred price, fully diluted shares outstanding, and the exercise window. Refusals are answers too.
- Negotiate the grant against the band, ask about refreshers before joining, and choose the offer whose salary alone covers your life.
Sources: IRS: Topic 427, Stock Options · SEC Investor.gov: Employee Stock Plans · Finvest Tax Playbook · Finvest Personal Finance Guide