Converting from options to cash at current valuation seems like it should work but it actually doesn't. That's because options are precisely what they say they

Converting from options to cash at current valuation seems like it should work but it actually doesn't. That's because options are precisely what they say they are: options. Basic finance states that an option on a purchase is more valuable than the purchase itself and the value of the option is dependent on the volatility of the underlying asset. Let's use a simple example to illustrate the point: Assume you have a market worth of $100K per year and you're offered a job at a $5M valuation startup for $50K per year + 2% vesting over 4 years. Using the naive math, 0.5% of $5M = $25K so your total compensation is $75K which does not make this a financially preferable deal. However, let's say you estimate the startup to have a 90% probability of being worth $0 in 1 year and a 10% probability of being worth $50M in 1 year. We can draw out 3 scenarios: You don't work for the startup: You earn $400K in 4 years You work for the startup and it fails: You earn 50K + 0.5% equity in your first year, then $100K the next 3 years at another job, for a total of $350K + 0.5% of nothing. You work for the startup and it succeeds: You earn 200K of salary + 2% of $50M = $1.2M. Your total expected value is 90% * $350K + 10% * $1.2M which is $435K or $108,750 a year, aka: slightly financially preferable. Using option pricing instead of valuation pricing makes this deal seem 45% more valuable. Note: I've deliberately ignored issues like dilution, preferences, non-linear utility of money and a bunch of other things in order to simplify the example. These also need to be taken into account if you're debating an actual offer.