Options-v-cash #

Cynical reasons #

One possible answer, perhaps the simplest possible answer, is that options aren’t worth what startups claim they’re worth and startups prefer options because their lack of value is less obvious than it would be with cash. However, if the share price stays at $10 for the lifetime of the option, the options will end up being worth $0 because an option with a $10 strike price is an option to buy the stock at $10, which is not the same as a grant of actual shares worth $10 a piece. By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

Options are often free to the company #

A large fraction of options get returned to the employee option pool when employees leave, either voluntarily or involuntarily.

Tax benefit of ISOs #

In the U.S., Incentive stock options (ISOs) have the property that, if held for one year after the exercise date and two years after the grant date, the owner of the option pays long-term capital gains tax instead of ordinary income tax on the difference between the exercise price and the strike price. For nonstatutory options without a readily determinable fair market value, there’s no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. Conversely, the vast majority of startup option packages end up being worth little to nothing, but nearly none of the employees whose options end up being worthless were instrumental in causing their options to become worthless.