Is there a generic formula I can apply to determine fair pre-IPO stock option grants based on the company's size and # of fully diluted shares?

Thanks for asking me to answer this. I am an attorney and counsel individuals on their equity compensation offers. This is a simplified version of part of the process I follow with my Stock Option Counsel clients who are evaluating private company equity offers. It works best with a mid-stage startup which has had a recent funding round from a well-known VC (a.k.a. someone whose investment decision you would trust).Recent VC Company Valuation / Fully Diluted Shares = Current "Value" per ShareCurrent Value per Share - Exercise Price per Option = Intrinsic Value per OptionIntrinsic Value per Option * Number of Options = Intrinsic Value of Equity OfferIntrinsic Value of Equity Offer / Number of Years of Vesting = Annual Value of Equity OfferAnnual Value of Equity Offer + Value of Benefits + Salary + Bonus/Commission = Total Annual CompensationUse Total Annual Compensation to evaluate the offer or compare to market opportunities.For more on how companies decide the right offer for startup employees, see http://stockoptioncounsel.com/blog/bulls-eye-negotiating-the-right-job-offer/2013/12/20.

The "rule of thumb" that I often share is that your options are about the size of your annual salary. This is much better than quoting a percentage of the company because that target varies a lot by the company's stage and your position. For example, getting a 1% of the company as a non-executive in a mature startup is probably unrealistic in your case. If you follow the one-year salary rule, then you could very well have 1% if your company is early stage (i.e. $100K salary implies a company valued at $10 million). The one-year rule can apply across a broad range of titles although executives are almost certain to get a lot more than one-year. The beauty of this rule is that you will get enough shares to "move the needle" because a "score" can then be measured in terms of how many years of salary you bagged all at once. In other words, would a score allow you to take a year or two off from working or completely retire?

The short answer is no:  There is no easy formula for determining how many option shares you should get. The formula is driven by the value of the company (nicely covered by Chris Barsness), the compensation philosophy of the company, the proximity to an exit event and several other factors. One question you may want to ask is: What percentage of my base pay and bonus should be represented by my equity award?  This will be a value determined as of the value at the time of the award and most companies with more than 100 employees have at least a rule of thumb for this. You may also want to ask about the expected time-frame to an event that will create liquid value to you. Another good idea is to find out how their stock values have changed over the past 18-24 months. Beyond this the process is very complex.  You would need to know the most likely type of exit events and the prices associated with them.  You would need to know the numbers of shares associated with those prices and then reverse engineer a relative value to your potential award.  Obviously this process cannot be done for or by most people, so I would stick with my ealier suggestions.

That is a common, but complicated question.  The key component is what is the valuation of the company.  With a private company, that can be somewhat subjective since there is no market to see what others are willing to pay for the stock.  If they give you any information about their valuation or what any recent shareholders paid for their stock on a per share basis, that can give you some insight into the value.  The most common stock option valuation methodology is the Black-Scholes option pricing model, but that is beyond what you really need to determine as that is more of an accounting determination for the company.  There are numerous posts about option compensation, so that can give you some information, but it sounds like you have a general knowledge from your prior work. Think about what portion of compensation the options represent.  If the estimated fair market value less exercise price of options times the number of shares in the grant is not much compensation compared to what you expected, you need to ask for more.  Don't think about the number of shares as a percentage of the company as that can change significantly and it doesn't really represent the value to you.  Also realize that there is a certain opportunity cost lost for your time in exchange for the value of the options if you never get to exercise the options (i.e. company stays private or other events).  In terms of your curiosity from the company's standpoint, once they hit certain amounts of option grants, there can be added reporting obligations from a securities law perspective and they have to account for the value of the option grant as compensation expense.  In a private start-up, those non-cash expense amounts are not necessarily that big of a deal, but management still needs to report to the board and shareholders, so they can't just give away the company in stock options.  Plus, if they grant one employee a significantly different amount, they may face some upset employees as well.This answer is not a substitute for professional legal advice....