This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair ma

This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair market value of the company on the day I join. When I exercise that option, the value will be the appreciation in the value of the company up to that point (ie the value I have had a role in creating). So options (when the plan is set up well) incentivise employees to maximise the value of the company for shareholders. More broadly you could say that options tend to incentivise long-term value creation ("dividend-seeking") over short-term value extraction ("rent-seeking") behaviours. Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash. Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).