| Disagree and agree at the same time. It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example. That being said, you're right - the problem here is that startups in general are only willing to pay "market" for base salary, ignoring that good engineers can get completely liquid equity at major companies worth as much as, if not more than, the level of equity being offered to startup employees. In your typical "$X base + $Y equity" startup offer, only $X is competitive. You can likely get $Y (or more) from an established post-IPO company where the comp is (almost) as good as cash. $Y in pre-IPO, illiquid, risky early-stage equity is not worth the same thing as $Y cash in hand. |
Most early-stage startup employees can't get liquidity on secondary markets, either because there's no demand for their company's stock or they are subject to transfer restrictions.
When looking at the big picture, proponents of equity as an effective bonus/retention tool will have to explain why most vested options go unexercised.