Paper Money vs. Real Money
Private company equity — whether stock options or RSUs at a pre-IPO startup — is illiquid. You cannot sell it to pay rent. You cannot convert it to cash until a liquidity event occurs: an IPO, an acquisition, or a secondary sale. Most startups never reach a meaningful liquidity event. This is not pessimism; it is the base rate.
The three variables that determine option value:
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Strike Price (Exercise Price): The price you pay per share to convert your option into actual stock. Lower is better. An option with a $0.10 strike price on a $10 share is worth $9.90. An option with a $9.00 strike price on a $10 share is worth $0.10.
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409A Valuation (Fair Market Value): The IRS-required independent appraisal of the company's common stock value. This is what sets your strike price. It is always lower than the preferred share price investors paid — often by 3–10x.
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Percentage Ownership: The only metric that scales with outcome. Calculate it as:
your shares ÷ total fully diluted shares outstanding.
The "number of shares" trap:
Startups frequently present equity as a raw share count because large numbers sound impressive. This is meaningless without the denominator.
10,000 shares / 100,000 total shares = 10.0% (life-changing at any exit)
10,000 shares / 100,000,000 total shares = 0.01% (nearly worthless at most exits)
Questions you must ask before accepting startup equity:
- What is the total number of fully diluted shares outstanding?
- What was the most recent 409A valuation (strike price)?
- What was the most recent preferred share price (what investors paid)?
- What is the liquidation preference structure? (Do investors get paid before employees?)
- Is there a secondary market or any liquidity program?
If a recruiter refuses to answer these questions, treat the equity as having zero value in your calculations.
The liquidation preference trap:
Many startups have 1x or 2x liquidation preferences for investors. This means in an acquisition, investors get their money back (or double) before common shareholders (employees) see a cent. A $200M acquisition sounds great until you learn investors put in $150M with a 2x preference — leaving $0 for common stock.
If asked "How do you evaluate a startup offer?" in a system design or behavioral interview, walking through the five equity questions above demonstrates financial sophistication that most candidates lack. It signals you think in systems, not just in surface-level numbers.