Let's say I'm asking for X salary. If the company offers me Y salary and W equity such that Y + W = X, then what they have done is gotten me to spend W of my salary investing in their company. If this pays off as an investment, that's great, but it isn't due to their generosity, but rather my investment. In fact, since I'm limited to investing in only their company (instead of being free to invest it in whatever I want), it is a large burden.
If they offer me Equity, W, such that Y + W > X, then (Y + W) - X is compensation (and X - Y is my investment in the company).
To sum up, if a company says, "We will pay you X salary, as long as you invest W in equity in our company" this is not in any way as valuable as X salary. W is a burden on me, not compensation. It is money I am giving them, not the other way around!
For this reason, I always negotiate salary independent of equity.
That is exactly right and I think what people are missing here. I mean even legally if you look at options purchases, you are literally investing. Even with stock grants, unless the company defers the strike tax through a loan mechanism, you will pay taxes as though it were real income.
There's two ways to look at this. Yes, you're locked into investing in just the company, but you're also being given the chance to invest in something that's not available to the general public. These investments are risky, but often very good.
I'm currently coming to the end of my 4-year vest in a company that was acquired 9 months after I started. I gave back some salary in exchange for more options when I started since the company looked very likely to exit. That investment, over the past 4 years, has quadrupled. Even in a bull market, there aren't many stocks that have ~40% annual returns over that time. And that's not even accounting for the fact that these kinds of investments are better from a tax standpoint (flexibility to avoid AMT, long-term cap gains, etc).
As others have said, it's not a simple decision. You're being given an investment opportunity that is normally only available to VCs. But unlike VCs, you can't diversify across a portfolio. But, also unlike VCs, you can directly influence the success of the company...I learned after our acquisition that in the few short months I was there, some of my actions played a significant part in us getting acquired. It's a really unique investment opportunity that's available to very few people. It doesn't make stock options as a class of investment good or bad bets, the exact details of every situation determine that, which makes it very hard to make blanket statements like many people are doing here.
This is the way I look at it:
A 50% chance to make $100K in 5 years with an interest rate of 5% is worth:
($100K * 0.5) / (1.05 ^ 5) = $39K
And if you have credit card debt then you should be discounting at something closer to 15%.
If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.
Options are not how you pay people. Options are how, along with good raises, you keep them from leaving as the good parts of working for a small, nimble company leach out.
Anyone who makes decisions based on the prospective value of options is a sucker. They are a nice bonus when they work out.
You're right that options in a reasonably well-established company can have some value, but such companies can also afford to pay a decent salary, and should.
It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive.
If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless.
But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice.
It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.