Startup Windfalls Reward Positions, Not Contributions

Recently, something has been nagging at me.

An acquaintance of mine was an early member of a startup. He was a complete rookie, only about two years into his career, but he worked hard. Back when the company had only a handful of people, he was one of the precious few running day-to-day operations at the expense of sleep and meals. The company grew steadily and eventually reached IPO.

Fortunately, securities reports are public information anyone can check. The stock options he received amounted to a sum that, from an ordinary employee’s perspective, was far from small. But compared to the return the CEO-level people received, the difference was on the order of three digits.

Of course, the CEO was talented. My acquaintance himself respected the CEO wholeheartedly. Most of the management decisions moved forward with the CEO’s approval or initiative. That much is certainly true.

But even so, I find myself thinking: what is this difference in amount?

A four-layer structure

Let me try to sort out this sense of unease.

Surface layer: institutional rigidity. The cap on the SO pool, pushback from existing shareholders, salary regulations at listed companies — the system is rigid, as a matter of fact. But it isn’t rigid by accident. It’s rigid precisely because it’s designed so that excess returns concentrate in equity positions. The large profits (excess returns) generated when a company succeeds are structured to flow to whoever holds equity, and the various institutions are built rigidly precisely to keep that mechanism from breaking down.

Information asymmetry. At the time of joining, the company’s valuation is undetermined, and there’s no fair benchmark for comparison. What percentage stake will one end up with? How much has been granted to other members? What does the design of the pool as a whole look like? A new hire rarely has access to any of this. There’s no material available to even judge whether a given grant is fair.

Mismatch in risk type. The risk borne by early members is years of career, health, and opportunity cost. The risk borne by founders includes all of that plus personal guarantees, assets, and reputation. The types of risk are indeed different. But the distribution of success follows an equity system based on “capital invested.” The contribution of labor is never built into the design as a variable in return allocation.

Attribution to position, or attribution to contribution. Excess returns at the time of listing are attributed not to “the contribution that moved the organization” but to “the position called equity.” Distribution is determined not by talent or the magnitude of one’s contribution but by who held the shares. This is the basic design of corporate law and the securities market itself.

Why it becomes a spiral

There’s a mechanism by which this structure reproduces itself.

Successful founders become VCs or angels in the next cycle. They rationally reproduce, as-is, the structure they themselves experienced. SO pool ratios, valuation design, dilution design — all of the “industry common sense” gets calibrated in a direction that skews excess returns toward founders and investors, and this becomes the norm for the next generation.

Once a structure is established, it reinforces itself recursively. This is the spiral.

Labor capital is not recognized as risk

Simply put, under the design of the system, the investment of labor capital is not recognized as “taking risk.”

Monetary capital has an explicit invested amount, and its impairment upon failure is made visible. So it is recognized as risk, and the right to claim excess returns (equity) is granted accordingly.

Labor capital, on the other hand, has an invested amount that stays invisible. The counterargument “but you were getting paid, weren’t you?” is always available, and impairment upon failure gets waved off with “you can just find another job.” So it is not recognized as risk, and no right to claim excess returns is granted.

But in reality, the labor invested by early startup members carries the non-substitutability of time (a few years in your twenties never come back), invisible impairment of opportunity cost, and the risk of being labeled “someone who was at a company that went under” if it fails. These are, economically, risks equivalent to the impairment of monetary capital. But because they aren’t measured, the institutional structure treats them as if they don’t exist.

Accounting treatment conceals the transfer

Digging one level deeper, this is a case where a difference in accounting treatment is reflected directly in capital structure.

Low salaries, unpaid overtime, no bonuses, working on holidays — these get processed on the P/L as “cost reduction.” They leave no trace whatsoever on the balance sheet.

Monetary investment, convertible bonds, and SO grants, on the other hand, are converted into equity claims via the B/S.

In other words, what is absorbed into the P/L leaves no trace in the capital structure; only what passes through the B/S remains.

Everything the labor side endured gets processed on the P/L side as “cost reduction.” And where does that reduction go? It’s booked as shareholders’ equity, in the form of a rise in enterprise value. The wages workers gave up quietly transfer into shareholders’ equity. A transfer is occurring, yet on the books it looks as though nothing happened.

I think it’s fair to call this exploitation. It’s a bit different from classical Marxist exploitation, the extraction of surplus value through wages. More precisely, it is a design in which the right to receive the large profits of success gets distributed regardless of how much one contributed through labor. And in terms of the sums involved, this is by far the larger of the two.

How to keep one’s distance as an individual

I have no power to change the prevailing tide of the world. I have no political power to change the system. So how does one, as an individual, keep some distance from this spiral?

On the founder’s side, there’s the option of never selling and never going public. If a business can fund its growth through retained earnings and borrowing, this is viable. If a sale or IPO is going to happen anyway, one should design, properly and in advance, how the excess returns shareholders receive will be distributed to employees. Going public or doing a buyout without this design in place is, in the sense of understanding the structure and still neglecting to design the allocation, deliberate exploitation.

On the employed side, joining a company that’s already publicly listed and simply drawing an ordinary salary is, if anything, the position farthest from the spiral. This is especially true at a company with a strong labor union that pushes for base pay increases rather than dividends. In a country with a European-style codetermination system, one can gain even more structural distance.

For freelancers or those working under contract, the strongest defense is not compromising on price. “In exchange, you’ll get such-and-such in the future” is an invitation into an excess-return claim, and in substance it produces the same structure as labor invested without receiving SOs. Taking everything in cash up front maximizes one’s distance from the spiral.

The “difficult person” problem

There is, however, an unwritten rule here. A person who doesn’t compromise on price risks being labeled a “difficult person,” and work stops coming their way.

I think this is a self-defense function of the exploitative structure. The structure reproduces itself by favoring people who accept exploitation and excluding those who refuse it. The label “difficult person” is a marker the structure issues to protect itself.

Countermeasures include: lowering one’s own substitutability, diversifying one’s client portfolio, having grounds to say “this isn’t me being greedy, this is just the going rate” (using externally referenceable benchmarks — overseas rates, published consulting fees, rates among peers, and so on), and filtering out clients who find this difficult. The clients who remain are the ones who can accept those terms — counterparts with whom equal-footing dealings are possible.

The good that is within reach

As I’ve written above, I have neither the power to move the prevailing tide of the world nor the political power to redesign the system itself. This structure is, after all, tied to human possessiveness, so it can’t be changed at the root. I once watched, from the sidelines, a buyout from existing shareholders at a company I was deeply involved with. The toll it took on the president was severe, and he lost a great deal financially as well. Both sides came to dislike each other, and no good landing point was ever found.

Within the hands of a few people, the size of the sums gets decided. Outside of that, respect, effort, even gratitude, hold no power to move the numbers. A relationship that began in good faith turns, before you know it, into an uneasy estrangement. If it’s possible to never hold such a thing in the first place, that is best.

What I can do is only to make the handful of companies I’m involved with somewhat better. If ten founders of the next generation build their companies with employee-distribution design built in from the start, the lives of the 100 or 1,000 employees who follow will change. Even without changing the system itself, one can change how the system is operated. All that’s left is to concentrate one’s resources on the good that is within reach.

This piece was drafted and directed by Kuzuryu, and written with AI.

Originally published in Japanese at https://clazytech.com/2026/04/1588/. Translated with LLM assistance and reviewed before publication.