I feel like there are some misconceptions in some of the other comments on this page.
- The expected value of stock is not zero. The median value might be zero, but certainly not the expected value. Check out this study of angel investment returns: [1]. Estimating from the chart on slide 5: 35% of investments went to $0, 17% were worth less than the last investment valuation, 33% were were 1x-5x, 7% were worth 5x-10x, 8% were worth 10x+.
- The study mentioned above covers angel investments, which are generally higher variance than late stage investments. For later stage companies with real revenues, your chances of going to zero are lower, but your chances of going to 6x or 30x are also lower.
- It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value, your options will be worth approximately $2m. It doesn't matter if $200k represents 0.2% or 20% because 10 times $200k is still $2m.
- If the company does so-so and exits below its current value, there's a chance that your options will be worth less than you expected. This is because investors usually have a right to get paid off first during an exit. Let's say the company is currently worth $200m and investors put in $70m so far and own 50% of the company. If the company exits for $100m, you would think non-investors would split 50% of the $100m, but actually they only split the remainder after the $70m investment is paid off (which is 30% instead of 50%).
- Don't bank on follow-on option grants in the future. You might get these, but you might not.
- If you're getting options, there's a good chance you have to pay the strike price to keep the options if you leave the company. Or you have to stay at the company until it IPOs or gets acquired.
As a rough guide, the main thing you need to know is the % of the company you would own and the last valuation. The expected value might be something like 2x or 3x over time, but with a huge variance.
The salary + equity offer is basically a measure of how risk averse you are. Would you rather have $600k in salary over 4 years, or $450k in salary and a lottery ticket that is worth $0 50% of the time, worth $100k 25% of the time, worth $400k 15% of the time, and worth $2m 10% of the time? The latter offer has a higher expected value, but also comes with a higher chance of walking away with $450k instead of $600k.
[1] - http://www.angelcapitalassociation.org/data/Documents/Resour...