There's one nuance that I've been thinking about lately that I haven't seen anyone ever point out before, which is that high volatility will make options worth more than they are on paper.
Here's a thought experiment: imagine that there are two employers on the market. One will always pay 200k/yr guaranteed and you can choose to work for them at any time for this wage. The other pays 100k/yr plus one Coconut per year, and Coconuts are currently worth 100k each. So far these are equivalent monetarily. But now let's add the stipulation that after one year, the price of coconuts has a 50% chance of going to 0 and a 50% chance of going to 200k each. Which would you choose?
The expected value of each of these job offers is still equivalent (after 4 years of working at each, you'll have 800k in expectation). But you should definitely take the second one. Why? Because after one year, if coconuts drop to 0, you can just quit and join the first company. Then you have a 50% chance of 100 + 200 + 200 + 200 (coconuts to 0) and a 50% chance of 300 + 300 + 300 + 300 (coconuts to 200) which comes out to 950k, which is better than sticking with either company alone.
This thought experiment fascinates me because it clearly shows the extra value that up-front stock grants have. The point is that you have some protection from downsides in the form of switching jobs, but no similar cap on the upsides, and the higher the volatility of the stock the more value this provides.
I'm not sure what the numbers look like when you view them through this lens, but it does mean that an equity grant of 2% of a 6M company should trade off for more than 30k/yr.
The 90-day exercise clause and options instead of shares effectively forces you to buy the coconut, meaning that instead of a 50/50 chance of 0/200, if you plan on leaving before the event that resolves 0/200, then if your strike price on a coconut is $50, it's more like 50/50 chance of -50/250 because you expect to have to exercise when you leave. You can play with the exercise cost, but it does change your math quite a bit regardless. Now if startups gave actual stock instead of options or if they don't place a 90-day time limit on exercising vested options, this wouldn't be an issue. But almost all startups do it this way.
The second point is that the company often doesn't look dead until much later. You're just not going to be able to tell one year in, or two years in, or three years in. So you won't be in a good position to capitalize on volatility like you would on the public markets.
Then you have things like liquidation preferences that will skew your EV calculation, except they might happen after you join, but you may or may not ever find out that those gotchas are there.
As it stands, all of this just creates an incredibly inefficient market that requires employees to take badly informed, high risk bets, where they often don't have deep enough pockets to absorb the risk.
The limited information is also a good point. Some level of saviness and understanding of your company and market can help with some parts of this but certainly not all.
If anything this may be a good argument for working at late stage private or smaller more volatile public companies. Then if you get lucky and get, say, Square from two years ago, whose stock has gone up 7x, you capture this upside (and if they do poorly, roll the dice again after a year, perhaps). This is quite mercenary and might not be the route that makes one happiest, though.
Funnily enough, the fact that equity grants are "options" to purchase stock at a strike price less than the real share price is much less valuable than the optionality you describe of continuing working to earn the rest of a stock grant after more information is known.
Unfortunately I think it's very hard to pin a value on the optionality to continue working, and I haven't seen anyone mention it when considering joining a startup over a larger company.
Perhaps more reasonable is 1-2% per for the first 5-10 hires, then 0.5-1% for the next batch, etc.
Also I really think these should be RSUs, not options. Employees are already invested in the startup by paying a premium in the form of reduced salary and opportunity cost.
You can give them a signing bonus to cover the tax, but at this point it's easier and actually better for the employee to give them the cash separately and say "you can use it to exercise if you like".
Really the difference between options and Restricted Stock is measurable in dollars, so might as well just give people the dollars.
(Note that Restricted Stock is not quite the same thing as Restricted Stock Units (RSUs)... RSUs are for later stage companies. But the principles are similar.)
Maybe YC could lobby for a sane way to grant equity to early employees without penalizing the employee?
That's the joke! Nobody comes remotely close to offering enough equity that their total comp is equivalent!
Imagine a company that just raised a $1M seed round on convertibles at a $6M valuation cap. Now say they offer an "extremely generous" 2% equity package to their first employee. What is that 2% worth?
Well, the investors think that preferred shares in that quantity would be worth $120k. Of course, equity vests over four years. So your equity comp is... $30k/year. If it were preferred shares. But it's not, it's common shares. So it's worth even less.
You'd need to offer more like 10% to claim you are matching the RSUs people are getting at Google or Facebook. But at that point, you might as well call the person a co-founder. And maybe that's in fact the answer: add co-founders, not employees.
But this isn't what people are doing today. Instead they're convincing employees to take sub-market pay and sub-market equity to take a stressful job with almost no benefits.