I'm considering an offer with generous options. I have pretty high risk tolerance, so I'm just trying to estimate the expected value of the options.

To the extent possible, I want to base this on the valuations of professionals rather than my own judgement, since I don't know the company's financial details, and I'm not an experienced investor anyway.

The company is private, but they told me the total amount of stock issued, and they gave me a couple measures of the value of one share of stock:

  1. A higher value based on the last funding round, where a VC firm purchased some preferred stock.
  2. A (3-4x) lower value based on a third party 409a valuation of the common stock. This would be the exercise price of the options.

The higher value makes the options look very interesting, but I'm hesitant to focus on this number since the VC firm received preferred stock. I don't know exactly what liquidation preferences they have.

So I've been trying to value the options based on the (lower) 409a valuation. This makes the options seem much less interesting -- even if I could immediately exercise the options for free, the estimated value of the stock doesn't seem that high.

The company says that I shouldn't focus on this number, because the 409a valuation wasn't really a valuation of the company... that it didn't account for growth projections, or something like that.

Which value should I focus on? Is there a large spread between the two values because the preferred stock is much more attractive than the common stock, or because the 409a valuation was somehow too conservative? I know it's impossible to say without more details, but any guidance would be helpful.

2 Answers 2


Okay, I'm going to give you my opinion based on experience; not any technical understanding.

The options - by themselves - are pretty meaningless in terms of determining their value. The business plan going forward, their growth expectations, the additional options to be authorized, the additional preferred stock offers they anticipate, even current estimated value of the company are some of the pieces of data you will be needing.

I also want to say something cynical, like "to hell with the stock options give me cold hard" but that's just me. (My experience two-times so far has shown stock options to be worth very very little.)

  • And yet, with pre-IPO companies, there's a greater chance that one gets in with a 'regular' salary but potential windfall from the options. Commented May 8, 2012 at 16:41

It is difficult to value a private company. Most of the valuations is based on how one feels the idea would translate into revenue in some future time.
The VC firms take into account various factors to determine the price, but more often then not, its their hunch.
Even VC don't make money on all picks, very few picks turn out to be stars, most picks lose money they have invested. Few picks just return their money.

So if you feel that the idea/product/brand/people are great and would someday make good money, invest into it. Else stay away.

  • invest in it? the OP is an potential employee here
    – Pepone
    Commented Nov 15, 2014 at 18:10

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