Equity Compensation Value Calculator

Non-Qualified Stock Options (NSOs) are taxed as ordinary income when exercised, on the spread between exercise price and fair market value. Incentive Stock Options (ISOs) receive preferential tax treatment if holding period requirements are met: no ordinary income tax at exercise, only capital gains tax when shares are sold. ISOs have eligibility limits under IRC Section 422.

For private companies, unvested options are typically valued at the grant-date 409A fair market value minus exercise price, discounted for vesting risk and illiquidity. For public companies, you can use the current stock price minus exercise price multiplied by the probability-weighted number of shares expected to vest. This calculator uses a simplified present value approach with a user-supplied discount rate.

A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by IRC Section 409A for setting stock option exercise prices. If option exercise prices are set below 409A FMV, the employee faces immediate ordinary income tax and a 20% penalty tax on the spread. The 409A FMV is the benchmark for your exercise price.

Equity has no value until vested. A 4-year vesting schedule with a 1-year cliff means 0% vests in year 1 (then 25% on the cliff date), then approximately 2.08% per month for months 13 to 48. The present value of unvested equity must be discounted for the probability you remain employed through each vesting date and for time value of money.

A common approach is to use a discount rate that reflects both time value and employment risk. A 15 to 25% discount rate is often used for private company options given illiquidity and uncertainty. For public company RSUs, a 5 to 10% discount rate (reflecting only time value) is more appropriate because the shares have a known market price and liquidity on vesting.