In my experience, employees place much more emphasis on salary than options during negotiation. And that is find, it is the CEO's job to sell the vision of the business and acquire the resources necessary to execute. Just don't be disappointed if that means the company raises additional investment to pay your salary instead of granting more options.
I agree that if you can't entice on options then you should raise for salary, whatever makes the most sense. From my personal experience, if the startup feels very promising to me I'll lean more towards options, and if it feels more risky I'll lean towards salary.
Except those investors got preferred stock whereas you are getting common stock which has less value. Thus, they are offering you the option to pay 750k for stock that is actually worth more like 600k losing you money. Now those options do have some value because of the expiration time and the fact that the price can rise but option pricing is complicated.
I highly recommend everyone considering startups to read up on the options greeks and go look at prices for deep out of the money (OTM) calls on public companies because that is effectively what startups are offering you and you can see what the public markets value options like that as.
I don't think that the option greeks are very relevant, especially not in public companies as they have very different dynamics.
I say small risk, because the worst case scenario is that we fail in a year or two and then that person will likely have no trouble going back to the crazy high comp at FAANG. So the biggest downside is some opportunity cost and a few years of yes lower financial cost but without a devastating lifestyle change if we're paying decent base salary.
The idea that the stock is undervalued is ridiculous, if it really was it would mean you as the founder made a mistake raising money. Are you really suggesting your employees should pay more for the stock than your investors? Why?
Also realize that your employees are taking a bigger risk than the investors, as employees can only spend their salary once. There's only a 1/20 chance their stock will be worth anything, maybe even smaller. Investors invest in more than 20 companies so they have a smaller risk on their total portfolio.
This sounds a bit dodgy. I don't endorse paying someone with less than 5 years 250k/year but if you're looking at someone then the amount of options you give them should be worth at least the salary cut over the vesting period. So say you're looking at some VP potential that could get 400k per year working at Netflix or something and you're going to pay them $150k. Then you should offer them (imo) $750k in options vesting over 3 years. That's in now money, as in that should be whatever the investors in your last round paid for that same stock.
Not an exact art of course but if you do it that way, and you explain your logic in the offer, and they still don't agree, then they just don't want to work for you. If this calculation comes out to something that's untenable for you, then you're looking at too expensive engineers and imo you should move your company out of the valley.