[fardo]

Actual equity is hard cash, options are a potentiality of cash.

As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook.

Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.

[tomp]

I think you're confusing a few things.

First of all, we're talking about pre-IPO startups, so you can't just sell the stock.

Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors".

You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).

[fardo]

>First of all, we're talking about pre-IPO startups, so you can't just sell the stock

This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1]

>company loses money because it gave equity to employees is nonsensical

You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans.

> You're not giving away equity

I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants

[1] See page 8 footer of https://www.gsb.stanford.edu/sites/default/files/publication...