You give them stock straight out with a 'reverse vesting' buyback schedule and you cover the tax. If that starts becoming 'too expensive' because of taxation / valuation reasons for the company, then you've reached the size where you give 10 year options or RSUs.

US startup stock options push the tax externality to their employees. In somewhere like canada, your tax bill is due at liquidation, not at the purchase of options. It makes a lot more of this problem go away. For most early stage employees that do well in a tax scheme like canada's then paying $20k for stock in a large valuation company isn't nearly as painful as paying $20k + $100k in AMT tax.

I think that would probably be reasonable for most angel investment and stage A teams. It isn't a stretch for the company to pay an extra $10-30k for a stock transaction where %60 of it cycles back to them anyway for a total of $4k-12k of a tax bill.

Also another way to value the stock to give to early employees is to treat them as investors investing the $500k+ or whatever equivalent they are giving up for 4 years and giving them that as their stock where you foot the tax bill. Also giving them the same visibility and protections that those equivalent angel investors would get.

The percentage points you start giving up for that although starts becoming too large for most founder's tastes, and thus we get the current situation we have today. Many engineers tell themselves, why should I join an early stage startup when I can do so much better as a founder with a similar risk profile?

edit:

I realized you want a way to keep the golden handcuffs that are unique with the US tax law and current equity structure to incentivize poor-ish early employees to stick around without creating an incentive to fire them with back loaded options.

You could create a second stock option reward for the early employees with a company performance + time condition vesting condition and pay the tax bills by giving them the stock right away.

Pinterest's long term stock option expiry date is contingent on being with the company 2-3 years, otherwise it goes back to the same 90 expiry window I think.

You could try many structures, and the market will respond to it compared to their other offers. A good way to start is to explicitly state what you actually want, and then engineers could state what their price is for that ask in comparison with what they can get.

Pinterest also didn't enact that until they reached a multi-billion $ valuation and hundreds of employees. They did it when they already knew they could handle turnover. Earlier stage companies might need longer.

But then it's hard to set a definite timeframe. What you want is to incentivize sticking together as an effective team to reach a point of maturity, to maximize the chances of getting there and thus the options being worth anything. It's probably more about size and valuation. That's what was nice about effectively tying it to IPOs (when IPOs happened earlier). Going public was a decision that the board made when they company was "ready".

I think the reason why pinterest did this was as a vanguard of what you see here in the article now. There are still many companies that are in pinterest's position and do not do what they did.

The engineer market in SF right now is very highly heated, and this kind of incentive makes an offer from pinterest far more appealing. That and people are starting to compare notes and make articles on medium and others really spelling it out is probably hurting recruiting and this is coming out as a response.

Why should I care more about the company and "turnover" than the people whom the current system gives an incentive to fire so they get screwed under current equity regulations?

You should care about both, but if the company fails then your options won't be worth anything.

But you're saying that I should care more about the company. I'm asking why.