As a starting point, it may be helpful to think about the equity stake that would be required in order to offer the potential employee compensation equivalent t

As a starting point, it may be helpful to think about the equity stake that would be required in order to offer the potential employee compensation equivalent to that which he currently receives. To that end, I did a quick back-of-the-envelope-style calculation that you can find here: https://docs.google.com/spreadsheet/ccc?key=0AgLVLMvTOJ8ldDlsUWRucHlsZ3p3WVpmWlhBeERoWGc&hl=en_US https://docs.google.com/spreadsheet/ccc?key=0AgLVLMvTOJ8ldDl... In my model, I assumed that he would receive a 5% raise in salary each year at either job. I assumed an 8% discount rate for his current salary, a 12% discount rate for his salary at your company, and a 25% discount rate for his equity cashout, which I assumed he would receive at the end of year 7. I also assumed that the growth rate for your firm's valuation would be 20% in year 1 and would decrease at a constant rate of 2% per year. Under these assumptions, an equity stake around about 4.5% would yield a $2.56 Million payment when he sells his stake at the end of year 7. The net present value (NPV) of this one-time payment would be equal to $536,302 today. Taken together with his salary payments, the NPV of his total compensation package in this scenario over 7 years would be equal to the $1.13 Million NPV of his salary payments from his current job. You can download the spreadsheet and can play around with the various assumptions that I made. The greater the risk associated with a particular stream of cashflows, the higher the discount rate should be. Adjustments to these assumptions can have a significant impact on the NPV of the payments. For example, if we set the discount rate for his salary payments at your company to 16% and the discount rate for his equity cashout to 30%, then the equivalent equity stake would be more like 6.64%. If you are able to make some reasonably accurate discount rate assumptions and valuation growth assumptions, then you should be able to get a reasonably good % equity stake that would compensate him for the decrease in salary. From there, you might consider adjusting the offered equity stake upward... the spreadsheet will give you the equity stake that would presumably make him indifferent between choosing to stay at his current job or joining your team - In order to persuade him to join you, you want to be able to make him a better offer than that which he currently has.