How do you calculate the value of stock for a start up consulting company for the purpose of stock options?

There's no hard and fast answer for this one, since it is really hard to determine the true value of a startup company in its earliest stages.

Still, you have to do something, so here's some gory detail. One approach is to assume that you might raise $250k for 25% of the company in its earliest stages. Let's assume there are 1m common shares or equivalents (things that can convert into common shares) after this investment. Then each such share might be worth $1. However, likely, the investor's money carries a more senior liquidation preference than common shares, so some kind of discounting factor must be applied to get the true value of the common shares. You can pick whatever you want, unfortunately. I pick 90% discount, meaning that the commons are worth 1/10 of whatever the investor paid per share. In a company with virtually no assets and no (or little) profit, this is a defensible position).

So, this means that the current value of your common stock is $0.10, and therefore a "fair market value" strike price for your stock options is also $0.10 per share.

"But I haven't raised any money yet!". This doesn't really matter. You project forward to the point where you raise money, and then calculate backward to get a current value per common share.

Bottom line: In a new startup with somewhere close to a million shares issued or expected to be issued, $0.10/sh is a value that should not raise too many eyebrows. It's as good as any other number, and is workable from the perspective of getting your employees on board with proper stock option paperwork. If you raise a large amount of money later on and suddenly find yourself with 10 million shares, you may need to issue more stock options, but that's easy to do.

Dan