How can I assess the true value of equity compensation from a private company?
The Question
I recently received a job offer where equity makes up a significant portion of the total compensation package. Because the company is privately held and its shares are not publicly traded, I am finding it difficult to determine the actual monetary value of this offer. The recruiter mentioned a valuation from a recent funding round, but I am unsure how that translates into real value for me. What specific questions should I ask regarding strike prices, vesting schedules, and potential liquidity events to accurately evaluate this equity grant?
Answer
Receiving an offer where equity is a large share of pay is exciting and also hard to size when the company is private. You are right not to treat the latest funding valuation as the dollar value of your grant. Fundraising prices preferred shares with rights that common stock usually does not have. The number that matters for option pricing is typically the 409A fair market value of common stock, which private companies obtain through an independent appraisal before granting options. That 409A figure sets a legal floor for the strike price and is generally valid for up to twelve months unless a material event such as a new funding round or acquisition offer makes it outdated.
Ask for the grant type (incentive stock options, nonqualified options, restricted stock, or RSUs), number of shares or units, percentage of fully diluted shares if they will disclose it, and the strike price versus the current 409A common-stock fair market value. Confirm the vesting schedule (cliff length, monthly or quarterly vesting, total period) and whether vesting accelerates on a change of control or involuntary termination. Request a plain-language summary of liquidation preferences and how many preferred share classes sit above common stock, because those terms affect what common holders receive in a sale.
On liquidity, ask what path the company expects for a secondary sale, tender offer, or IPO, and whether any repurchase or transfer restrictions apply after you leave. Tax treatment depends on grant type. Nonqualified options usually create ordinary income at exercise on the spread between fair market value and the strike. Incentive stock options can receive more favorable capital-gains treatment if holding periods are met, but the bargain element may affect alternative minimum tax. Restricted stock is generally taxed when it substantially vests unless a timely Section 83(b) election is made. Some private-company plans may allow limited tax deferral under Section 83(i). Treat this as general information only and review the grant documents with a tax professional before you exercise or elect.
A practical next step is to list cash salary and benefits as your floor, then model equity as a range from zero to a few optimistic scenarios rather than as guaranteed money. Compare total packages on that basis, and keep questions focused on strike, 409A date, vesting, preferences, and realistic liquidity timing so you can decide with clearer eyes.