How to Value Equity in a Startup: A Step-by-Step Guide for Parents

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

To value equity in a startup, multiply your share count by a realistic price per common share at exit, subtract your exercise cost and taxes, and weight the result by the odds that the exit happens at all. Your ownership percentage is your shares divided by the company’s fully diluted share count, not the shares outstanding. The price on the last funding round is the price investors paid for preferred stock, which usually sits ahead of your common stock, so it is a ceiling, not a value.

This guide is written for a household where one parent is weighing a startup offer against liquid RSUs at a public company such as Apple, Amazon or Genentech, with household income in the $750,000 to $3 million range in California or Washington. It walks through the calculation step by step, with one worked offer and three exit scenarios.

The five numbers you need from the company

A startup offer letter usually shows a share count and sometimes a “current value”. Neither is enough. Ask the recruiter or the finance team for these five numbers before you compare the offer to anything:

1. Fully diluted shares. All common shares, all preferred shares on an as-converted basis, all granted options and warrants, and the unallocated option pool. This is the denominator for your ownership percentage.
2. Strike price and 409A value. The strike price on your options, and the most recent 409A valuation of the common stock. For an incentive stock option (ISO), the strike price may not be less than the fair market value of the stock on the grant date (IRC §422(b)(4)). An independent appraisal is presumed reasonable under the 409A rules if it is dated no more than 12 months before the grant (Treas. Reg. §1.409A-1(b)(5)(iv)(B)).
3. Last preferred price and post-money valuation. What investors paid per share in the most recent round.
4. Total liquidation preference. The dollar amount preferred investors receive before common holders see anything in a sale, and whether it is 1x, higher, or participating.
5. Option type and exercise window. ISO or nonqualified (NSO), the vesting schedule, and how long you have to exercise after you leave.

A company that will not share the fully diluted count or the preference stack is asking you to value the grant blind. That refusal is itself useful information.

What “1 percent equity” actually means

One percent equity means you hold, or have the right to buy, 1% of the fully diluted shares. If the company sold today for $100 million and every share were paid the same, 1% would be $1 million before exercise cost and tax. In practice, three things shrink that number:

• Dilution. Each future funding round issues new shares. Your share count stays the same, but your percentage falls.
• Liquidation preferences. In a modest sale, preferred investors are paid back first. Common stock gets what is left, which can be nothing.
• Exercise cost and tax. Options cost the strike price times the share count to exercise, and the gain is taxed. California taxes all of it at ordinary income rates.

A step-by-step startup equity calculator, with a worked offer

Here is the calculation for one illustrative offer. All company numbers below are assumptions chosen to show the method, not market data.

The family: married, filing jointly, two children aged 4 and 7, living in the Bay Area. One parent is a physician. The other is choosing between staying at a public tech company, with about $120,000 a year of RSUs that vest in liquid shares, and joining a Series B startup at a similar salary plus options. Household taxable income before any equity event: $870,000.

The offer: 40,000 options vesting over four years, strike price $2.00 (the current 409A value), 50,000,000 fully diluted shares, last preferred price $8.00.

Step 1: ownership today

40,000 divided by 50,000,000 = 0.08%.

Step 2: the headline number, and why it overstates value

At the preferred price, the grant looks worth 40,000 x ($8.00 minus $2.00) = $240,000. That is the figure most people repeat at dinner. It assumes common stock is worth what preferred investors paid, which it is not, and that a buyer shows up at that price.

Step 3: apply future dilution

Assume one more round before a sale adds 12,500,000 shares, so the fully diluted count at exit is 62,500,000. Your 40,000 shares are now 0.064%. Assume preferred investors hold 60% of the exit share count (37,500,000 shares) with a combined 1x non-participating liquidation preference of $250 million. Common stock and options hold the other 25,000,000 shares.

Step 4: price common stock at three exit values

With a 1x non-participating preference, investors take the larger of their preference or their as-converted share of the sale.

Step 5: weight by probability

Nobody knows the odds, so pick numbers you can defend and write them down. For illustration only: 10% chance of the $1.5 billion outcome, 20% chance of the $400 million outcome, and 70% chance of the $200 million outcome or a shutdown. The expected pre-tax value is (0.10 x $880,000) + (0.20 x $160,000) = $88,000 + $32,000 = $120,000, earned over four years of vesting.

Compare that with the RSUs the parent would give up: about $120,000 a year, or roughly $480,000 over the same four years, in shares that can be sold at each vest. On these assumptions, the startup has to be meaningfully more likely to reach the large outcome, or pay a higher salary, for the offer to win on money alone. The reason to take it may still be career, ownership or mission. The point of the math is to make that trade-off explicit.

How taxes change the value in California and Washington

Pre-tax value is not what reaches the family’s accounts. The option type decides when and how the gain is taxed.

NSOs: the spread is taxed as wages at exercise

With a nonqualified option, the difference between the stock’s value and the strike price at exercise is compensation income (IRS Publication 525). Take the $880,000 gain from the $1.5 billion scenario, exercised and sold at the sale, on top of the family’s $870,000 of taxable income:

• Federal income tax: the whole gain falls in the 37% bracket, which for 2026 starts at $768,700 of taxable income for joint filers. 37% x $880,000 = $325,600.
• Medicare: 1.45% plus the 0.9% Additional Medicare Tax on wages over $250,000 (joint filers), for 2026. 2.35% x $880,000 = $20,680. The Social Security wage base ($184,500 for 2026) is assumed to be already exceeded by salary.
• California income tax: using the 2025 rate schedules (2026 schedules are not yet published), the gain runs through the 10.3%, 11.3% and 12.3% brackets, plus the 1% Behavioral Health Services Tax on taxable income over $1 million. That is about $109,400.
• California SDI: 1.3% of all wages for 2026, with no cap. 1.3% x $880,000 = $11,440.

Total: about $467,100, leaving roughly $412,900 of the $880,000. The same exercise for a Washington family has no state wage income tax for 2026, so federal income tax and Medicare total $346,280 and roughly $533,700 is left. Washington families should note two things: the state has enacted a 9.9% income tax for individuals and joint filers with adjusted gross income over $1 million, starting January 1, 2028, with details still pending state guidance (WA Department of Revenue), and the 0.58% WA Cares premium may also apply to wage income.

ISOs: the AMT, the holding periods and the California catch

ISOs are not taxed as regular income at exercise, but the spread counts for the alternative minimum tax. For 2026, the joint-filer AMT exemption of $140,200 starts phasing out at $1,000,000 of AMT income, and the phase-out rate is now 50 cents per dollar, so a large early exercise at this income level can create a real AMT bill in a year with no cash from the shares.

To get long-term capital gain treatment on ISO shares, you must hold them more than two years from grant and more than one year from exercise (IRC §422(a)(1)). If you exercise at the moment of an acquisition and sell the same day, that is a disqualifying disposition and the gain is taxed as ordinary income. Even when the holding periods are met, California taxes capital gains as ordinary income (FTB), so the ISO advantage for a California resident is mostly federal. For a Washington resident, long-term gains on stock can be subject to the state’s capital gains tax: 7% on taxable gains above the standard deduction ($278,000 for 2025, the latest published figure), and 9.9% on taxable gains above $1 million.

Two more rules that change value. First, ISOs first exercisable in one calendar year above $100,000 of stock, valued at grant-date fair market value, are treated as NSOs. Second, an option generally keeps ISO status only if exercised within three months after employment ends (IRC §422(a)(2)). If you might leave before a sale, the exercise window matters as much as the share count.

QSBS: a federal benefit California does not follow

Stock in a qualified small business acquired after July 4, 2025 can qualify for a federal exclusion of 50% of the gain after three years, 75% after four and 100% after five, up to $15 million per issuer. Options are not stock, so the clock generally starts at exercise. California does not conform to this expansion, so assume the full gain is taxable in California.

The decision the family actually has to make

For most two-income households at this level, the question is not “what is the equity worth” in the abstract. It is one of these:

• Take the offer or stay? Compare the probability-weighted, after-tax value of the options with the after-tax value of the RSUs you give up, and put the salary difference next to it.
• Exercise early or wait? Early exercise can start the ISO and QSBS clocks and may allow an 83(b) election on unvested shares, but it puts cash at risk in the $200 million scenario above, and it can trigger AMT.
• How much of the family’s net worth should sit in one private company? If the startup equity, the salary and the working parent’s career all depend on the same company, the rest of the portfolio generally should carry less risk, not more.

Common mistakes when valuing startup equity

• Using shares outstanding instead of fully diluted shares, which overstates ownership.
• Treating the preferred price as the value of common stock.
• Ignoring the preference stack, which decides whether common gets anything in a modest sale.
• Forgetting the exercise cost, and the tax due at exercise on NSOs, which can require cash long before any sale.
• Assuming ISO long-term capital gain treatment helps in California the way it helps federally.
• Missing the post-termination exercise window after changing jobs.

What to write down for your kids

Startup equity decisions are some of the largest money decisions a family makes, and the reasoning is usually lost within a few years. Write a one-page Decision Memo: the offer, the five numbers, the scenarios and probabilities you used, what you chose and why, and what you would do differently. When your children are old enough to weigh their own first job offer, that page can teach more than the outcome did. Conversations fade. Documentation compounds.

Frequently asked questions

How do I calculate the value of startup equity quickly?

Divide your shares by the fully diluted share count to get your ownership. Multiply by a plausible exit value, but first subtract the liquidation preference if the exit is small enough that investors would take it. Subtract your strike price times your shares, then estimate tax. Run it at three exit values and weight each by a probability you can explain.

Is the 409A value what my options are worth?

No. The 409A value is an appraisal of the common stock used to set a strike price that meets tax rules. It is typically well below the preferred price. It tells you your cost to exercise and the taxable spread today, not what you will receive in a sale, which depends on exit value, dilution and preferences.

Should I use the post-money valuation to value my options?

Use it only as an upper bound. The post-money valuation multiplies the preferred price by the fully diluted shares, as if every share were preferred. Your common shares rank behind investors in a sale, so their value is lower, sometimes zero in a modest exit.

Next step

Before you sign, ask the company for the fully diluted share count, the latest 409A value, the last preferred price, the total liquidation preference and the post-termination exercise window, and run the five steps above with your own numbers. If you would like a second set of eyes on the after-tax comparison against your current RSUs, our tax management work at the Age Five Family Office™ covers exactly this. Related reading: tax on a cashless exercise, drafting an 83(b) election, how a tender offer works, what happens to your stock when a company sells, and managing concentration risk.

This is general education, and the right move depends on the family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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