Evaluating worth of ESPP (Startup)
You have a lot of different questions in your post - I am only responding to the request for how to value the ESPP. When valuing an ESPP, don't think about what you might sell the shares for in the future, think about what the market would charge you for that option today. In general, an option is worth much less than the underlying share itself. For the simplest example, assume you work at a public company, and your exercise price for your options is $.30, and you can only exercise those options until the end of today, and the cost of the shares on the public stock exchange is also $.30. You have the same 'strike price' as everyone else in the market, making your option worth nothing. In truth, holding that right to a specific strike price into the future does give you value, because it means you can realize the upside in share price gains, without risking any money on share losses. So, how do you value the options? If it's a public company with an active options market, you can easily compare your $.30 strike price with the value of call options in the market that have a $.30 strike price. That becomes the value to you of the option (caveat: it is unlikely you can find an exact match for the terms of your vesting period, but you should be able to find a good starting point). If it's a public company without an active options market, you will have to do a bit of estimation. If a current share is worth $.25 (so, close to your strike price), then your option is worth a little bit, but not much. Compare other shares in your industry / company size to get examples of the relative value between an option and a share. If the current share price is worth $.35, then your option is worth about $.05 [the $.05 profit you could get by immediately exercising and selling, plus a bit more for an option on a share that you can't buy in the open market]. If it's a private company, then you need to be very clear on how shares are to be valued, and what methods you have available to sell back to the company / other individuals. You can then consider as per above, how to value the option for a share, vs the share itself. Without a clear way to sell your shares of a private company [ideally through a sale directly back to the company that you are able to force them to agree on; ie: the company will buyback shares at 5x Net income for the previous year, or something like that], then the value of a small number of shares is very nebulous. There is an extremely limited market for shares of private companies, if you don't own enough to exert control. In your case, because the valuation appears to be $2/share [be sure that these are the same share classes you have the option to buy], your option would be worth a little more than $1.70, if you didn't have to wait 4 years to exercise it. This would be total compensation of about $10k, if you were able to exercise today. Many people don't end up working for an early job in their career for 4 years, so you need to consider whether how much that will reduce the value of the ESPP for you personally. Compared with salary of 90k, 10k worth of stock in 4 years may not be a heavy motivating compensation consideration. Note also that because the company is not public, the valuation of $2/share should be taken with a grain of salt.
I have a hard time giving them a P/E higher than 25 on the absolute top end. Given current numbers, that takes another ~60% off their share price putting them right around $10. Now... that's my top end estimate, I'd probably be willing to buy right around $8.  In order to support the IPO price, the models I've seen come in at projecting an average growth rate of 40% YoY for the next 5 years. If FB pulled that off, they'd be growing ~5X over the next 5 years (once compounded). As it stands, they've got 900B+ users. Doubling that would require a significant number of new people to start coming on line - 5x that would be impossible.  So... next option... They figure out how to monetize existing users/traffic better. It's possible - they don't do a very good job with this as it stands, but they've got a fine line to walk. They need to pull it off without driving users, or advertisers, away.  Suppose they were able to double their user base. They'd still need to do ~2.5x better per user to make the numbers. This doesn't take into account that the next billion users are significantly less valuable as an audience than the first billion. (Not in human terms, but in financial/marketing terms.)  I'm willing to give them a 20% growth rate for the next 5 years. That'd put them at a bit better than 2.5x over that time. It's still a stretch. That should put them in the same P/E range as GOOG (currently trading at a P/E of 17ish).  Any price higher than $10/share at this point is gambling on their ability to crack monetization. The higher you go, the higher you think the odds are.  One last thing I'd keep in mind. Most of the early employees with options are locked out of selling for the first 6 months after the IPO. There's a fairly large number of shares that will become available when that time is up. I'm curious to see how many of the early employees call in rich and go start new companies. (Think about what happened to paypal after being sold to ebay - yelp, youtube, and others all came out of the early employees.) I'd be watching the quarterly reports through the quarter ending 12/31. The numbers at that point will give a better gauge of a proper valuation. I absolutely wouldn't hold shares of FB during the period when employees first have their chance to cash their lottery tickets. Aswath Damodaran's [Investment Valuation 3rd edition](http://www.amazon.com/Investment-Valuation-Techniques-Determining-University/dp/1118130731/ref=sr_1_12?ie=UTF8&amp;qid=1339995852&amp;sr=8-12&amp;keywords=aswath+damodaran) (or save money and go with a used copy of the [2nd edition](http://www.amazon.com/gp/offer-listing/0471414905/ref=dp_olp_used?ie=UTF8&amp;condition=used))  He's a professor at Stern School of Business. His [website](http://pages.stern.nyu.edu/~adamodar/) and [blog](http://aswathdamodaran.blogspot.com/) are good resources as well. [Here is his support page](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/Inv3ed.htm) for his Investment Valuation text. It includes chapter summaries, slides, ect. If you're interested in buying the text you can get an idea of what's in it by checking that site out. I believe @Dilip addressed your question alread, I am going to focus on your second question: What are the criteria one should use for estimating the worth of the   situation? The criteria are:  I hope this helps. "Think about the implications if the world worked as your question implies that it ""should"":  A $15 share of stock would return you (at least) $15 after 3 months, plus another $15 after 6 months, plus another after 9 and 12 months.  This would have returned to you $60 over the year that you owned it (plus you still own the share).  Only then would the stock be worth buying?  Anything less than $60 would be too little to be worth bothering about for $15? Such a thing would indeed be worth buying, but you won't find golden-egg laying stocks like that on the stock market.  Why?  Because other people would outbid your measly $15 in order to get this $60-a-year producing stock (in fact, they would bid many hundreds of dollars).  Since other people bid more, you can't find such a deal available. (Of course, there are the points others have brought up: the earnings per share are yearly, not quarterly, unless otherwise noted.  The earnings may not be sent to you at all, or only a small part, but you would gain much of their value because the company should be worth about that much more by keeping the earnings.)" Employee Stock Purchase Plans (ESPPs) were heavily neutered by U.S. tax laws a few years ago, and many companies have cut them way back. While discounts of 15% were common a decade ago, now a company can only offer negligible discounts of 5% or less (tax free), and you can just as easily get that from fluctuations in the market. These are the features to look for to determine if the ESPP is even worth the effort: As for a cash value, if a plan has at least one of those features, (and you believe the stock has real long term value), you still have to determine how much of your money you can afford to divert into stock. If the discount is 5%, the company is paying you an extra 5% on the money you put into the plan. "An answer can be found in my book, ""A Modern Approach to Graham and Dodd Investing,"" p. 89 http://www.amazon.com/Modern-Approach-Graham-Investing-Finance/dp/0471584150/ref=sr_1_1?s=books&ie=UTF8&qid=1321628992&sr=1-1 ""If a company has no sustained cash flow over time, it has no value...If a company has positive cash flow but economic earnings are zero or less, it has a value less than book value and is a wasting asset. There is enough cash to pay interim dividends, bu the net present value of the dividend stream is less than book value."" A company with a stock trading below book value is believed to be ""impaired,"" perhaps because assets are overstated. Depending on the situation, it may or may not be a bankruptcy candidate." Yep, a lot of startup funding these days is called equity, which makes for nice valuation, but there are often so many extra stipulations (I've even read of caps on upside; wish I could find the Matt Levine column on it now) that it really is effectively debt. "The key to evaluating book value is return on equity (ROE). That's net profit divided by book value.  The ""value"" of book value is measured by the company's ROE (the higher the better). If the stock is selling below book value, the company's assets aren't earning enough to satisfy most investors. Would you buy a CD that was paying, say two percentage points below the going rate for 100 cents on the dollar? Probably not. You might be willing to buy it only by paying 2% less per year, say 98 cents on the dollar for a one year CD. The two cent discount from ""book value"" is your compensation for a low ""interest"" rate." It seems like you want to compare the company's values not necessarily the stock price.  Why not get the total outstanding shares and the stock price, generate the market cap.  Then you could compare changes to market cap rather than just share price. "(Value of shares+Dividends received)/(Initial investment) would be the typical formula though this is more of a percentage where 1 would indicate that you broke even, assuming no inflation to be factored. No, you don't have to estimate the share price based on revenues as I would question how well did anyone estimate what kind of revenues Facebook, Apple, or Google have had and will have. To estimate the value of shares, I'd likely consider what does my investment strategy use as metrics: Is it discounted cash flow, is it based on earnings, is it something else? There are many ways to determine what a stock ""should be worth"" that depending on what you want to believe there are more than a few ways one could go." "Here is how I would approach that problem: 1) Find the average ratios of the competitors: 2) Find the earnings and book value per share of Hawaiian 3) Multiply the EPB and BVPS by the average ratios. Note that you get two very different numbers.  This illustrates why pricing from ratios is inexact.  How you use those answers to estimate a ""price"" is up to you.  You can take the higher of the two, the average, the P/E result since you have more data points, or whatever other method you feel you can justify.   There is no ""right"" answer since no one can accurately predict the future price of any stock." I think you're not applying the right time scale here. ESPP (Employee Stock Purchase Plan) is usually vesting every 6 months. So every half a year you receive a chunk of stocks based on your salary deduction, with the 15% discount. Every half a year you have a chunk of money from the sale of these stocks that you're going to put into your long term investment portfolio. That is dollar cost averaging. You're investing periodically (every 6 months in this case), same (based on your salary deferral) amount of money, regardless of the stock market behavior. That is precisely what dollar cost averaging is. "The major pros tend to be: The major cons tend to be: Being in California, you've got state income tax to worry about as well.  It might be worth using some of that extra cash to hire someone who knows what they're doing to handle your taxes the first year, at least.  I've always maxed mine out, because it's always seemed like a solid way to make a few extra dollars.  If you can live without the money in your regular paycheck, it's always seemed that the rewards outweighed the risks.   I've also always immediately sold the stock, since I usually feel like being employed at the company is enough ""eggs in that basket"" without holding investments in the same company. (NB: I've participated in several of these ESPP programs at large international US-based software companies, so this is from my personal experience.  You should carefully review the terms of your ESPP before signing up, and I'm a software engineer and not a financial advisor.)" Are you implying that Amazon is a better investment than GE because Amazon's P/E is 175 while GE's is only 27?  Or that GE is a better investment than Apple because Apple's P/E is just 13.  There are a lot of other ratios to consider than P/E.  I personally view high P/E numbers as a red flag.  One way to think of a P/E ratio is the number of years it's expected for the company to earn its market cap.  (Share price divided by annual earnings per share)  It will take Amazon 175 years to earn $353 billion. If I was going to buy a dry cleaners, I would not pay the owner 175 years of earnings to take control of it, I'd never see my investment back. To your point.  There is so much future growth seemingly built in to today's stock market that even when a company posts higher than expected earnings, the company's stock may take a hit because maybe future prospects are a little less bright than everyone thought yesterday. The point of fundamental analysis is that you want to look at a company's management style and financial strategies.  How is it paying its debt?  How is it accumulating the debt?  How is it's return on assets?  How is the return on assets trending?  This way when you look at a few companies in the same market segment you may have a better shot at picking the winner over time.  The company that piles on new debt for every new project is likely to continue that path in to oblivion, regardless of the P/E ratio. (or some other equally less forward thinking management practice that you uncover in your fundamental analysis efforts). And I'll add... No amount of historical good decision making from a company's management can prepare for a total market downturn, or lack of investor confidence in general.  The market is the market; sometimes it's up irrationally, sometimes it's down irrationally. Usually the amount of the ESPP stocks is very small compared to the overall volume of the trading, so it shouldn't matter. But check if for your company it not so (look at the stock history for the previous ESPP dates, and volumes).