How to Evaluate Stock Options at a Startup

Learn to assess startup equity offers by understanding vesting, dilution, and the real math behind option packages.

1. Get the basic numbers in writing. Ask for the total number of shares outstanding, your option count, the strike price (what you pay per share), and the current fair market value per share. Most early employees get 0.1% to 2% of total company equity. Calculate your percentage: divide your shares by total shares outstanding.
2. Understand the vesting schedule. Most options vest over 4 years with a 1-year cliff — meaning you get nothing if you leave before year one, then 25% vests immediately and the rest monthly. You can only exercise vested options. If you leave, you typically have 90 days to buy your vested shares or lose them forever.
3. Research the company's exit potential. Options only pay off if the company goes public or gets acquired at a price above your strike price. Look at the company's revenue growth, market size, competition, and funding history. Ask about the most recent valuation and what price per share that implies.
4. Factor in dilution over time. Your ownership percentage will shrink as the company raises more funding rounds and grants more options. A 1% stake today might become 0.3% by the time of an exit. Ask about the company's funding plans and option pool expansions.
5. Calculate different exit scenarios. Run the math on realistic outcomes. If your strike price is $2, you have 10,000 shares, and the company sells for $20 per share, your profit is $180,000 before taxes. Compare this to the cash salary you're giving up and the probability of success.
6. Consider the tax implications. Exercising options creates a taxable event based on the current fair market value minus your strike price. If you exercise early, you might qualify for qualified small business stock treatment, which can reduce capital gains taxes. Consult a tax professional before exercising large option grants.