To value stock options in a private company, subtract your strike price from the current 409A fair market value per share and multiply by your vested share count. That gives you a headline number, but it almost always overstates what you’d actually collect. The 409A price isn’t what investors paid, your share of the company shrinks every funding round, liquidation preferences route the first dollars of any sale to preferred investors, and taxes take 30% to 50% of whatever reaches you. A useful valuation walks each of those adjustments.
Start With the 409A Price, Not the Last Round Price
Every private company that grants stock options commissions an independent appraisal of its common stock. That appraisal is called a 409A valuation, after the section of the Internal Revenue Code governing deferred compensation. Companies must update it at least annually or after any event that could change the company’s value, like a new funding round or a major contract.1Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans The resulting per-share price is the strike price on new grants and the fair market value you plug into any valuation of your options.
If your company just raised a Series B at $20 per share, you might expect the 409A fair market value to sit near $20. It almost never does. Investors bought preferred stock, which carries economic rights that common stock lacks: liquidation preferences, anti-dilution protections, and sometimes dividend accrual. Your options convert into common stock, which sits at the bottom of the payout hierarchy. For companies with standard preferred terms, the common stock price typically lands at roughly 30% to 50% of the preferred share price. More investor-friendly terms, like participation rights or liquidation multipliers, push the discount further.
Appraisers also apply a discount for lack of marketability, often abbreviated DLOM, because private shares can’t be sold on an exchange. Most valuation studies put this discount in the 25% to 35% range for a company roughly two years from a potential liquidity event. Companies further from an exit see larger discounts.
The Three Variables That Move Your Real Number
Dilution Shrinks Your Share of the Pie
Every time the company issues new shares, your percentage of ownership drops. This happens during funding rounds, when new hires receive grants, and when the equity incentive pool expands. Options that represented 0.1% of the company at grant can fall to 0.06% or less after a Series C adds millions of new preferred shares, even though the headline valuation went up. The share count matters as much as the share price.
You can track this through the company’s capitalization table, which lists every class of stock, every holder, and the total number of shares outstanding on a fully diluted basis. Equity platforms like Carta or Shareworks often show employees a simplified view. The fully diluted count is the denominator you want.
Liquidation Preferences Route the First Dollars to Investors
This is where most employees get surprised. In a sale, proceeds don’t split evenly across shareholders. Preferred investors get paid first, up to at least the amount they invested. If a company raised $50 million across all rounds and sells for $60 million, the first $50 million goes to preferred holders. Common stockholders, including employees who exercised their options, split what’s left.
The math gets worse with non-standard terms. A 2x liquidation multiplier means investors collect double their investment before common sees anything. Participating preferred lets investors take their preference and then share in the remainder alongside common. In a modest exit, these structures can leave common with little or nothing. None of this appears in a standard option grant letter. It lives in the certificate of incorporation and investor term sheets, and it’s worth asking about before you spend money exercising.
Only Vested Options Count
The industry-standard schedule is four years with a one-year cliff: nothing vests for twelve months, then 25% vests at the one-year mark, and the remaining 75% vests in equal monthly installments over the next three years. Leave before the cliff and you walk away with zero. After the cliff, each additional month adds roughly 1/48th of the grant.
Your option agreement spells out the exact schedule. Some companies use performance-based vesting tied to revenue or product milestones; others backload so more shares vest in years three and four. Unvested options disappear when you leave, so any valuation you run should only count what’s vested as of the date you care about.
Running the Calculation
The basic formula is straightforward. Current 409A fair market value, minus your strike price, times your vested share count. Strike price $2, current 409A $8, 10,000 vested options: pre-tax intrinsic value is $60,000.
That number works as a rough gauge, but it overstates reality in three ways. It ignores taxes. It assumes the 409A price reflects what a buyer would actually pay for the whole company, which it may not. And it ignores liquidation preferences, which can gut the per-share payout to common stockholders even in a sale at or above the 409A-implied value.
A more realistic estimate works backward from an assumed exit price. Take a plausible acquisition number, subtract total liquidation preferences, divide the remainder by the fully diluted share count. That gives you an estimated per-share payout for common. Subtract your strike price, multiply by your vested count, and you have a better approximation of your pre-tax profit. Still a guess, but one that accounts for the waterfall that makes most modest exits disappointing for employees.
Taxes Decide What You Actually Keep
How much of the value survives depends heavily on whether your options are incentive stock options (ISOs) or non-qualified stock options (NSOs).
NSOs: Ordinary Income at Exercise
With NSOs, the spread between fair market value and strike price counts as ordinary income the moment you exercise, whether or not you sell. Your employer withholds federal income tax on the spread at a flat 22% supplemental wage rate, and 37% on any amount above $1 million in supplemental wages during the calendar year.2Internal Revenue Service. Publication 15 (2026), Circular E, Employers Tax Guide State income tax and payroll taxes apply on top of that. If you hold the shares after exercising and later sell at a higher price, the additional gain is a capital gain, taxed at the long-term rate if you held more than a year after exercise.
ISOs: Better Treatment, With an AMT Trap
ISOs get more favorable regular-tax treatment. You owe no federal income tax at exercise, and if you hold the shares at least two years from the grant date and one year from the exercise date, the entire gain at sale is a long-term capital gain.3Internal Revenue Service. Topic No 427, Stock Options For 2026, the long-term capital gains rate is 0% for lower incomes, 15% for most filers, and 20% once taxable income exceeds $545,500 for single filers or $613,700 for married couples filing jointly.4Internal Revenue Service. Topic No 409, Capital Gains and Losses
The catch is the alternative minimum tax. When you exercise ISOs, the spread between fair market value and strike price gets added back as an adjustment for AMT purposes, even though it doesn’t count as regular income.5Office of the Law Revision Counsel. 26 USC 56 – Adjustments in Computing Alternative Minimum Taxable Income If that adjustment pushes your alternative minimum taxable income above the AMT exemption, you owe the difference. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, with phaseouts beginning at $500,000 and $1,000,000 respectively.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Exercising a large block of ISOs in a single year with a significant spread can generate an AMT bill of tens of thousands of dollars on income you haven’t received in cash.
The 83(b) Election
If your company allows early exercise, meaning you can buy shares before they vest, filing an 83(b) election can cut your tax burden sharply. The election tells the IRS to recognize income at the time of the stock transfer rather than at vesting.7Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services Exercise early when the spread is small or zero, pay little or no tax at that point, and all future appreciation gets taxed as capital gain when you eventually sell.
The deadline is unforgiving. You must file within 30 days of the stock transfer.8Internal Revenue Service. Form 15620 Instructions, Section 83(b) Election Miss it by a day and the election is gone for that grant. The risk is that if you leave before vesting, you forfeit the unvested shares and get no deduction for tax you already paid. The strategy makes the most sense early in a company’s life, when the 409A price is low and the upside is largest.
Qualified Small Business Stock
If your company is a domestic C corporation with aggregate gross assets of $75 million or less when your shares were issued, your stock may qualify for a federal capital gains exclusion under Section 1202. Shares held for five years or more can qualify for a 100% federal exclusion on the gain, with partial exclusions for shorter holding periods starting at three years.9Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock The company must also use at least 80% of its assets in an active trade or business during your holding period. Consulting, financial services, and hospitality businesses are excluded, so not every startup qualifies. For employees at eligible early-stage technology or biotech companies, the exclusion can be worth more than the option grant itself. Ask whether your company has confirmed QSBS eligibility with its tax advisors.
What Your Options Are Worth If You Leave
Most option agreements give you a narrow window to exercise vested options after your employment ends. For ISOs, the tax code requires exercise within three months of termination for the options to keep ISO tax treatment.10Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Many companies set the post-termination exercise period at exactly three months. Some are shorter. A growing number of later-stage startups extend the window to anywhere from six months to ten years, though extending past three months converts ISOs to NSOs for tax purposes.
The practical dilemma is real. If you leave with a large spread, exercising within the window means finding the cash for both the strike price and the resulting tax bill, all for shares you still can’t sell. If you don’t exercise, you lose the vested options entirely. For employees with significant paper gains, the exercise cost can run into six figures. A tax advisor who understands equity compensation can model the AMT exposure for ISOs or the ordinary income hit for NSOs before you give notice.
Selling Before an Exit
A number of platforms facilitate sales of private company shares before an IPO or acquisition. Forge Global, EquityZen, Hiive, and Nasdaq Private Market are among the established venues. The general process involves verifying you own shares (unexercised options typically can’t be sold, so you’d need to exercise first), listing them, and waiting for a bid.
Two constraints limit this option. Most option agreements include a right of first refusal, giving the company 30 days to buy the shares at the agreed price before any third-party sale closes. And private shares routinely trade at a 10% to 30% discount to the last funding round price, because buyers demand compensation for illiquidity and limited information. Some companies prohibit secondary sales outright in their shareholder agreements, so check before going through the process.
Even with these limits, secondary sales offer something no other path does: actual cash in exchange for paper wealth. For employees who already hold shares and need liquidity before an uncertain exit timeline, the discount may be worth accepting.
Documents You Need to Run the Math
You can’t value your options without specific data only the company can provide. Ask for:
- Your option agreement, which contains your strike price, total share count, vesting schedule, post-termination exercise period, and any transfer restrictions.
- The current 409A fair market value per share. Some companies post this on equity platforms; others require a direct request to HR or finance.
- The fully diluted capitalization table, or at minimum your share count relative to total shares outstanding including all option pools and convertible instruments.
- A liquidation preference summary covering total preferences across all preferred rounds and whether any carry participation rights or multipliers. This is the item most employees never request and most regret not having.
- Recent financial statements. The balance sheet and income statement tell you whether the company has enough cash to reach its next milestone or whether another dilutive round is likely.
Companies aren’t always eager to share all of this, particularly the full cap table or detailed preference terms. You’re being asked to make financial decisions about exercising, and you can’t make good ones without the inputs. A reasonable company will provide enough information for you to understand what your equity is actually worth.