Quora: Formula for Option Grant Size at a Startup?

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

QUORA QUESTION: Is there a generic formula I can apply to determine fair pre-IPO stock option grants based on the company's size and # of fully diluted shares?

I am a tech worker who has spent all of my career with post-IPO companies and am negotiating an offer with a well-established startup of approximately 250 employees. I am not taking on a senior role.

This is a simplified version of part of the process I follow with my Stock Option Counsel clients who are evaluating private company equity offers. It works best with a mid-stage startup which has had a recent funding round from a well-known VC (a.k.a. someone whose investment decision you would trust).

Recent VC Company Valuation / Fully Diluted Shares = Current "Value" per Share

Current Value per Share - Exercise Price per Option = Intrinsic Value per Option

Intrinsic Value per Option * Number of Options = Intrinsic Value of Equity Offer

Intrinsic Value of Equity Offer / Number of Years of Vesting = Annual Value of Equity Offer

Annual Value of Equity Offer + Value of Benefits + Salary + Bonus/Commission = Total Annual Compensation

Use Total Annual Compensation to evaluate the offer or compare to market opportunities.

Certain legal terms may change the risk and, therefore, the appropriate number of shares. For more on ownership limitations, see Ownership - Can the Company Take Back My Vested Shares? For more on how companies decide the right offer for startup employees, see Bull’s Eye: Negotiating the Right Job Offer.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.