How to Evaluate Startup Equity: RSUs, Options, and What They Are Really Worth

Why Startup Equity Is Hard to Value

When a recruiter tells you the equity package is worth $200,000, that number is almost certainly optimistic. Equity at a private company is illiquid, depends on a future liquidity event you cannot predict, and may be subject to terms that reduce its value further (liquidation preferences, dilution, clawbacks).

This guide explains how to evaluate equity at each company stage and make a rational comparison against cash compensation.

The Four Types of Equity Compensation

1. Restricted Stock Units (RSUs) at a public company

The simplest case. RSUs at a public company vest on a schedule (typically 4 years with a 1-year cliff) and convert to shares you can immediately sell. You owe ordinary income tax when shares vest.

How to value them: Current stock price × number of shares. This is close to face value, though the stock price will change over your vesting period.

2. RSUs at a late-stage private company (Series C+, unicorn)

More complicated. The shares are real, but you cannot sell them until a liquidity event (IPO, acquisition, or secondary sale). Key risks:

• The IPO may be delayed or cancelled
• The company may be acquired at below the valuation that gave you your grant price
• You owe taxes when shares vest even if you cannot sell them (unless the company allows a Section 83(b) election)

Suggested discount: 40–60%. A $200,000 RSU grant at a late-stage unicorn is realistically worth $80,000–$120,000 in expected value.

3. Incentive Stock Options (ISOs) at an early-stage startup

Options give you the right to buy shares at a predetermined price (the strike price) in the future. They are only valuable if the company's valuation increases above the strike price before you exercise — and only if a liquidity event occurs.

Empirically: ~50–60% of venture-backed startups fail entirely. Of those that succeed, most acquisitions are at prices that only minimally reward early employees after preferred stockholder liquidation preferences are satisfied.

Suggested discount: 80–90%. A $400,000 option grant at an early-stage startup is realistically worth $40,000–$80,000 in expected value for a median outcome. The distribution is extremely wide — it could be worth nothing, or it could be worth millions.

4. Stock options at a late-stage startup (Series B, pre-IPO)

Falls between cases 2 and 3. Suggested discount: 50–70%.

The Liquidation Preference Problem

Most venture-backed companies have preferred stock outstanding with liquidation preferences. This means investors get paid first (often 1x their investment, sometimes more) before common stockholders — which includes employees — receive anything in an acquisition.

Example:

• Company raises $100M in Series B at a $500M valuation
• Company is acquired for $300M (a 40% discount to the last valuation)
• Investors with 1x liquidation preference get $100M first
• Remaining $200M is distributed pro-rata among all stockholders
• An employee with 0.1% of the company would receive 0.1% × $200M = $200,000 — not 0.1% × $300M = $300,000

In a down-round acquisition, employees may receive nothing at all.

How to Ask the Right Questions About Equity

When evaluating an offer with equity, ask the recruiter or hiring manager:

1. What is the fully diluted share count? (Needed to calculate your ownership percentage)
2. What is the most recent 409A valuation? (The IRS-approved fair market value for options)
3. What is the current preferred stock liquidation preference? (Total amount investors need to recoup before common shareholders receive anything)
4. Is there an early exercise option? (Can you buy shares before they vest to start the clock on long-term capital gains treatment?)
5. What is the post-termination exercise window? (Most companies give 90 days to exercise options after leaving — some give 10 years. 90 days is dangerous for anyone who cannot afford the tax bill.)

When Equity Actually Matters

Equity is most worth prioritizing when:

• You are joining as an early employee (< 100 employees) with significant ownership (> 0.1%)
• The company has strong fundamentals and a realistic path to a $500M+ outcome
• You have financial security to absorb the risk of the equity being worthless
• You receive options with a low strike price relative to current 409A valuation

Equity is least worth prioritizing when:

• You are a mid-to-late hire at a large startup where your ownership is 0.01–0.05%
• The company has multiple rounds of preferred stock with large liquidation preferences
• You are trading significant cash compensation for the equity (the expected value math usually does not favor this)
• You have near-term financial obligations (mortgage, family, debt)

RSUs vs. Options: Which Is Better?

General rule: RSUs at public or late-stage companies. Options at early-stage startups where you have high conviction in the outcome.

The Honest Expected Value Calculation

Here is how to run the numbers for any equity grant:

1. Get the grant value at current 409A or share price
2. Apply a risk discount based on stage (see above)
3. Divide by vesting period to get annual expected value
4. Compare to the cash compensation gap between this offer and alternatives

Example:

• Offer A (public company): $150k salary + $160k RSUs (4yr vest) = $40k/yr equity
• Offer B (Series B startup): $120k salary + $300k options (4yr vest)
  • Risk-adjusted value: $300k × 0.35 = $105k → $26.25k/yr
  • Cash gap: $30k/year lower salary
  • Net difference: Offer A is worth ~$44k/year more in expected value

Offer B needs a ~4x outcome just to match Offer A's expected total compensation — and that ignores the lack of liquidity and tax complications.

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Summary: The Equity Discount Guide

These are expected value discounts for median outcomes. With high conviction and early-employee ownership, the upside can absolutely justify taking the lower cash offer. But go in clear-eyed — not on the basis of the recruiter's best-case scenario.