How to Evaluate a Startup Offer: Back-of-Envelope Method

What should you ask first?

Before you try to value anything, get the basics in writing. Ask for the exact role, base salary, bonus structure, equity type (options or restricted stock), number of shares granted, strike price, and the company valuation or most recent funding round.

Also check vesting terms, cliff length, and whether there is a standard option pool or planned dilution. If the employer hesitates to answer these, that tells you something about transparency.

What does the equity actually mean?

Equity is a share of the company, not a cheque. If you are offered options, you will usually get the right to buy a number of shares at a fixed strike price after they vest. Your ownership percentage is number of your shares divided by total shares outstanding, which changes over time.

Liquidation preference, preferred shares and option pools matter. If investors have a 1x liquidation preference, they get paid before common shareholders. That reduces what is left for option holders. Ask whether your grant is common or preferred, and whether outstanding investor protections could reduce your upside.

Back-of-the-envelope: multiply your ownership percent by a plausible exit value to see gross upside. Example, 0.5 per cent of a 100 million exit is roughly 500,000 before tax and dilution, while 0.1 per cent of a 1 billion exit is about 1 million. Those simple numbers help you compare to your cash needs.

How do you compare salary and equity?

Translate equity into an expected cash equivalent. A simple formula is: expected equity value = ownership percent times plausible exit value times probability of successful exit. The probability is your judgement call, not a precise stat. For a very early startup you might use a low single-digit probability, for a late stage company you might use a much higher number.

Then compare that expected equity value to the salary difference over the period you expect to hold the job. If the equity expected value plus salary is materially less than what you could earn elsewhere and you cannot tolerate the cash shortfall, the offer may not be suitable.

Remember time and liquidity. Equity is often illiquid for years, so discount future value for time and uncertainty. If you need cash now, ask for higher base pay or a signing bonus rather than relying on speculative upside.

Five quick checks before you sign

1. Confirm your ownership percentage. Get the number of shares and total shares outstanding so you can calculate your real percent stake.
2. Clarify share class and preferences. Ask whether your shares are common or protected by investor preferences that could reduce payout.
3. Check vesting and acceleration. Look for a four-year vesting with one-year cliff and ask about acceleration on change of control or termination.
4. Model a few exit scenarios. Run low, medium and high exit values and apply a conservative success probability to estimate expected value.
5. Factor tax and exercise cost. Estimate the cash you must pay to exercise options and the likely tax treatment at sale.
6. Ask about refresh grants and salary path. Find out whether you can expect future equity refreshes or a clear salary progression plan.

How should you negotiate the package?

Start with clarity, not emotion. If you need more cash, ask for a higher base or a signing bonus. If you want more upside, request a larger equity stake, a lower strike price, or faster vesting. Frame requests around market data and the value you will deliver.

Be specific about terms that matter later: ask for anti-dilution details, clarity on option conversion at an exit, and a written promise for refresh grants if that is critical to you. If the company resists, propose a compromise such as a higher salary now and a performance-based equity top-up later.

What if the offer is borderline?

If the numbers are close, be honest with yourself about alternatives. Can you afford a lower salary for a couple of years? Do you have a financial runway or other savings? If not, ask for protections: severance for a set term, a pro rata bonus on early exits, or an early vesting trigger tied to delivery.

Treat startup choices like a portfolio. One successful company can make up for several that fail, but you must consider personal constraints. If this role advances your skills and network even without a big exit, that counts as value too.

One last thing

A quick calculation will not remove all uncertainty, but it forces useful clarity. Put numbers to the offer, test a few scenarios, then decide based on cash needs, upside and your tolerance for risk.

If you need help running the math, ask a mentor or a recruiter for a sanity check; a second pair of eyes often spots assumptions you missed.