If a company offers compensation in the form of stock how would I calculate the offering?

Question

I haven't recieved an offer like this but I've heard of them especially in start-ups. I like the idea of working for a start-up and am applying for software development positions in a few.

So lets say I think a company is going to do well, and they're willing to pay me $10,000 less than market value in salary but speculatively over-compensate for that value with a stock offering they claim will be worth $X more than the $10K I'm missing out on in 3 years. Over those years I'm missing out on $30K though so presumably they'd have to include a comparable stock offerring in each year's salary at least until they can afford to pay market price.

As a young person inexperienced with stocks, what factors can I look at to determine if that claimed future value is even remotely plausible? I know it's very speculative, but how could I make sure we're even in the ballpark?

Answer 1

I know it's very speculative, but how could I make sure we're even in the ballpark?

You probably can't. Venture capital funds do this for a living, but because they are providing investment money to the company, they can demand complete access to the company's business plan and financial records. Even then, they're picking maybe one highly profitable company for ten that completely fail. Unless you are becoming a partner in the company, they are unlikely to share that kind of detailed financial information with you.

What you are left with is your own evaluation of the market the company is entering, and what you think of their proposed strategy. If you are new in the industry be humble about how well you understand it. If you can get information about the background of the founders and the other employees that might help too. You should definitely find out about how much stock is outstanding, who holds it, and under what terms your stock will vest, and when and how you can sell the stock.

This article provides some more information: The Complete Guide to Understanding Equity Compensation at Tech Companies. Contrary to the title it is by no means a complete guide (it's a single page), but it does touch on some of important points.

The bottom line is that taking stock in lieu of salary is a highly speculative. If you are young, you can live on the actual salary, and you believe the company has a good product/strategy, it may be worth a shot. Don't start pricing Porches just yet, and don't run up your credit card while waiting for the IPO.