Startups Reward Position, Not Contribution

Recently there was a story that left me thinking.

An acquaintance had been involved in a startup as one of its earliest members. He was a total rookie, only about two years into his working life, but he worked hard. In the phase when the company had only a handful of people, he was one of the precious few who cut into sleep and meals to keep operations running. The company grew steadily and eventually reached an IPO.

Fortunately, securities reports are public and anyone can check them. The stock options he received amounted to a sum that, from an ordinary salaried worker’s perspective, was by no means 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. He himself respected the CEO from the bottom of his heart. Most management decisions moved forward with the CEO’s approval or push. That much is fair.

Still, I find myself wondering: what accounts for this gap in amount?

A four-layer structure

Let me try to lay out this sense of unease.

Surface layer: institutional rigidity. The cap on the SO pool, pushback from existing shareholders, the salary regulations of a listed company — these institutions really are rigid. But the rigidity isn’t accidental. It’s rigid precisely because it’s designed so that excess returns concentrate in equity positions. In other words, the large gains created when a company succeeds (excess returns) are structured to flow to those holding equity, and various institutions are built rigid so that this mechanism doesn’t break down.

Information asymmetry. At the time of joining, the company’s value is undetermined, and there’s no fair basis for comparison. What percentage one’s own equity stake will end up being, how much other members have been granted, how the pool as a whole is designed — a new hire rarely has access to any of this. There is no material given in the first place to judge whether a given grant is fair.

A mismatch of risk types. The initial members’ risk is several years of career, health, opportunity cost. The founder’s risk is all of that plus personal guarantees, personal assets, reputation. The types of risk are genuinely different. But the distribution upon success follows an equity system based on “capital invested.” The design simply doesn’t include labor’s contribution as a variable in the return allocation.

Attribution to position, or attribution to contribution. The excess return at the time of listing is attributed not to “the contribution that moved the organization” but to “the equity position.” Distribution is decided not by talent or the volume of contribution but by who held the shares. This is the basic design of corporate law and securities markets itself.

Why it becomes a spiral

There is a mechanism by which this structure reproduces itself.

A successful founder becomes a VC or an angel in the next cycle. He rationally reproduces the very structure he himself experienced, unchanged. The SO pool ratio, valuation design, dilution design — all the “industry common sense” gets calibrated to pull excess returns toward founders and investors, and becomes the norm for the next generation.

A structure that has once taken hold gets recursively reinforced. This is the spiral.

Labor capital is not recognized as risk

Put simply, by institutional design, the investment of labor capital is not treated as “having taken on risk.”

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

Labor capital, on the other hand, has an invisible invested amount. The rebuttal “but you were getting paid, weren’t you?” is always available, and impairment upon failure gets waved away with “you can just change jobs.” So it’s not recognized as risk, and no claim on excess returns is granted.

But in reality, the labor invested by a startup’s early members carries the non-substitutability of time (a few years in your twenties never come back), the invisible impairment of opportunity cost, and the risk of being labeled “someone who was at a company that folded” if things fail. These are, economically speaking, risks equivalent to the impairment of monetary capital. But the institution is structured so that because they aren’t measured, they are treated as if they don’t exist.

Accounting treatment conceals the transfer

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

Low salaries, unpaid overtime, no bonus, working on holidays: these get processed on the P/L as “cost reduction.” No trace whatsoever remains on the balance sheet.

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

In other words, what gets absorbed on the P/L leaves no trace in the capital structure, and 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 gets recorded as a rise in enterprise value, credited to shareholders’ equity. The portion of wages that workers gave up quietly transfers into shareholders’ equity. The transfer is happening, yet on the books it looks as though nothing happened.

It’s fair to call this exploitation. It’s a little different from classical Marxist exploitation, the extraction of surplus value in wages. More precisely, it’s a design in which the right to receive the large gains upon success is distributed without regard to how much one contributed through labor. And in terms of the sums involved, this one is overwhelmingly larger.

How to keep one’s distance, as an individual

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

On the founder’s side, there’s the option of never selling and never doing an IPO. 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, design in advance, properly, how the excess return the shareholders receive will be allocated to employees. Going public or being bought out without this design in place is, in the sense that one understood the structure and neglected to design the allocation, deliberate exploitation.

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

For freelancers or those on contract work, refusing to compromise on price is the strongest defense. “Instead of that, in exchange for some future such-and-such” is an invitation into a claim on excess returns, and in substance produces the same structure as labor invested without receiving any SO. Taking everything in cash up front maximizes one’s distance from the spiral.

The “difficult person” problem

There is, however, an unwritten rule at play here. Someone who won’t compromise on price risks being labeled a “difficult person,” and work may stop coming their way.

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

Countermeasures: lower your substitutability, diversify your client portfolio, keep grounds you can point to for saying “this isn’t me being greedy, this is the going rate” (using externally referenceable benchmarks such as overseas rates, published consulting fees, peer rates in the industry), and filter out clients who find you difficult. The clients who remain are the ones who can accept those terms: the ones you can deal with on equal footing.

An attainable good

As I’ve written above, I don’t possess the power to move the trend of the world, nor the political power to redesign institutions. To begin with, this is a structure tied to human possessiveness, so at bottom it can’t be changed. I once watched, from the sidelines, a company I was deeply involved with go through a buyout of existing shareholders. The president was utterly worn down, and lost a great deal financially too. Both sides came to dislike each other, and there was no good landing point to be found.

Among a handful of hands, the size of the sum gets decided. Outside of that circle, respect, effort, even gratitude, carry no power to move the numbers. A relationship that started in good faith turns, before you know it, into a hazy estrangement. If you can avoid ever holding something like that in the first place, nothing beats that.

All I can do is make the few companies I’m involved with a little better. If ten founders of the next generation build their companies with employee allocation design built in from the start, the lives of the 100 or 1,000 employees who follow will change. Even without changing the institution, one can change how the institution is operated. There’s nothing to do but concentrate one’s resources on the attainable good.

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.