Somewhere on your laptop there is a spreadsheet with a number in it. Shares, times the last price you heard, minus your strike. The result is a little over two million dollars. You have never said that number out loud to anyone outside your household. You have looked at it more than once this month.
That number is not a lie. It is also not a valuation of what you own. It is the product of two figures that do not belong in the same sentence, and the distance between it and what would actually land in your account is where most of the private company equity anxiety in the Bay Area lives.
Nobody at your company is going to walk you through this. The people who could explain it sit in legal and finance, and their job is not to help you plan your household. So the number stays in the spreadsheet, unexamined, shaping every decision you make around it. How much house you stretch for. Whether you take the other offer. How much risk you think you can afford elsewhere.
There are at least two prices, and one of them is not yours
A private, venture-backed company carries more than one price at any moment.
The first is the preferred price, what an investor paid per share in the most recent round. It is the number in the funding announcement, the number the press divides into the share count to produce a headline valuation, and the number your coworkers use in the kitchen when they talk about what the company is worth.
The second is the 409A valuation, an independent appraisal of the common stock that the company obtains for tax purposes, and it is what sets the strike price on new grants. It is a different number for a defensible reason. The investor did not buy the same thing you hold. They bought preferred shares carrying rights that common shares do not have, and an appraiser has to account for that difference.
If you hold options or RSUs at a private company, you are on the common side of that line. Almost every mental valuation employees perform uses the preferred price, because that is the number in the air. The 409A is the price attached to your actual security, and in most cases it is materially lower. That gap is not a discount for being an employee. It is the price of not holding the rights the investors negotiated.
Do not take my characterization as fact for your company. Ask your equity administrator for the current 409A price per share and the date it was set, and read your own plan document and grant agreement for what you actually hold.
The stack that sits in front of you
Here is the mechanism most employees have never had named for them.
When investors put money into your company, they generally negotiated the right to get their money back before common shareholders receive anything in a sale. That right is a liquidation preference. It is usually expressed as a multiple of what was invested, it stacks across rounds, and later investors often sit ahead of earlier ones.
Your options are not in that stack. They sit behind all of it. In a sale, the preference is satisfied first, and common shareholders divide what is left.
That is why two companies with identical headline valuations can produce completely different outcomes for the people who work there. The headline is the top of the waterfall and your position is at the bottom. What matters to your household is not the size of the number at the top. It is the size of what remains after everything senior to you has been paid.
None of this appears in your grant agreement. Preference terms live in the company’s certificate of incorporation and its financing documents, and that is what you have to ask about.
The word “participating” changes the arithmetic
A second term determines whether the preference is a floor or a head start.
Under a non-participating preference, an investor chooses. They take their preference amount, or they convert to common and take their ownership percentage of the whole sale price, whichever is greater. Not both.
Under a participating preference, they take the preference first and then also share in what is left alongside common. Sometimes that participation is capped at a multiple, sometimes it is not. The same sale price produces a very different result for you depending on which structure your company carries, and you cannot tell which one it is from a headline. I do not know which one yours is, and neither does anyone who has not read the documents.
An illustration, and it is only an illustration
The numbers below are invented to show the shape of the math. They are not any real company’s capital structure, they are not a prediction, and they are not yours.
Imagine a company that has raised three hundred million dollars in total, all of it carrying a one times non-participating preference, and imagine it sells for four hundred million. Imagine preferred shareholders own sixty percent of the company on a fully diluted basis and common holders own the other forty percent.
The investors compare. Converting to common gives them sixty percent of four hundred million, or two hundred forty million. Taking the preference gives them three hundred million, so they take the preference. One hundred million is left for the common side.
Now take an employee holding two tenths of one percent of the company on a fully diluted basis. The kitchen math says two tenths of one percent of four hundred million, or eight hundred thousand dollars. The actual math says that employee holds half a percent of the common stock, and common is dividing one hundred million, so the figure is five hundred thousand. Before the cost of exercising. Before tax.
Same sale, same shares, and the two numbers are far apart. Change the structure or the sale price and the gap moves in either direction. In a sale below the total preference, common can receive very little no matter how many shares you hold.
What the headline number is actually measuring
Once you see the waterfall, your spreadsheet becomes easier to read for what it is. It measures one specific scenario: a sale at or above the last round’s price, with all your shares vested, with nothing senior consuming the proceeds, ignoring the cost of exercising, and ignoring tax.
The tax layer alone is significant here. Exercising nonqualified options generates ordinary income on the spread. Incentive stock options carry their own alternative minimum tax exposure. California taxes the income as well, and at these levels the marginal rates are not gentle, which we covered in the piece on why the Bay Area high earner’s tax situation is different. If you are not certain which type you hold, settle that first, as we walked through in the article on which kind of options you actually have.
The questions that replace the spreadsheet
Better arithmetic does not fix this. Getting the inputs does, and the inputs come from your company and your documents rather than from me.
- Your plan document and grant agreement: what you hold, your strike price, your vesting schedule, your expiration date, and your post-termination exercise window.
- Your equity administrator or finance team: the current 409A price per share and the date it was set.
- The same source for the capital structure: total liquidation preference across all rounds, the multiple on each, whether any round participates, and whether participation is capped.
- Your own records: what share of your household’s net worth this position would be if it were liquid, which is the question we worked through in the piece on how much of your net worth belongs in your employer’s stock.
Some companies answer the capital structure questions readily and some will not. Either response is information. A company that declines to describe the preference stack has told you something about how much certainty to attach to your spreadsheet.
What to do with the number in the meantime
The number is not worthless. It tells you a good outcome exists and roughly what shape it has, and that matters.
What it cannot do is carry weight in a plan. It should not be the reason you stretch on a house, skip funding the accounts you can actually reach, or treat diversification as a problem for later. Those decisions need money that exists, and this is a claim on a residual, junior to a stack you have not read, priced off a security you do not own.
The households that handle this well are not the ones with the best outcome. They are the ones who stopped treating the headline as a balance and started treating it as a scenario.
Your options may well be worth two million dollars someday. Today that number is a hypothesis about a sale price, resting on a price that was never yours, standing behind everyone who invested before you.