Equity compensation: a lottery ticket with terrible odds

Photo by Carl Raw

Tech startups routinely promise equity as part of a total compensation package. The pitch is seductive: 'work hard now, reap big rewards later'.

75% of startup workers say equity was an important reason to join their company. But for most, that upside never comes.

Startup equity is sold as a golden ticket to wealth. In truth, it’s a machine that makes a handful of rich people richer and runs on everyone else’s labour.

90 % of all startups fail

The odds are stacked from the start.

Most startups never make it to a rewarding exit. In fact, most VC-backed companies fail outright or sell at a loss.

90% of all startups fail

75% of venture-backed startups fail

20% of new businesses fail in the 1st year

Only 1% of startups become unicorns

Tech startups have the highest failure rate

Exits are low probability events

Most startups that survive don’t reach a meaningful exit and when they do, it’s more likely to be an acquisition than an IPO — meaning less transparency, less liquidity, and less upside for workers.

IPOs have slowed to a crawl.

Many companies continue postponing public listings, and many VC‑backed IPOs trade below earlier valuations.

In 2023, the US saw ~100 IPOs raising ~$19 billion: far below the highs of past years. Meanwhile, 2024 saw ~1,000 M&A deals involving VC-backed firms, confirming that acquisitions remain the dominant exit path.

Most value is now concentrated in a small handful of deals and large exits ($500M+) are now extremely rare.

Down rounds are increasingly common: in 2024, about 30% of global VC deals were flat or down. In Q1 2025, down rounds made up ~14.7% of U.S. venture deals—the highest in a decade.

That means fewer and fewer 'big wins' where employee equity might actually pay off for workers.

Rare wins and frequent disappointments

For most workers, equity never delivers on the promise.

Many don't exercise their options — blocked by high costs, unclear tax treatment, or short exercise windows. Even when they do, gains are often wiped out by dilution, bad terms, or taxes.

Only early, senior workers with strong negotiating leverage tend to benefit. Companies like Airbnb or Dropbox are exceptions — the exits were big, dilution was limited, and employee equity terms were unusually fair.

But most tech startups face down rounds, layoffs, or go bankrupt altogether, slashing any value for workers.

Equity is the promise of upside, without the delivery.

Waterfall payouts: Who gets paid first?

Even when an exit happens, the path to payout for workers is fraught with challenges. The typical order is:

1. Creditors (Banks & Lenders) Debts always get paid first.

2. Preferred Shareholders (VC Investors) Investors with preferred shares get liquidation preferences, meaning they get paid before everyone else.

3. Regular Shareholders (Founders + Early Team) Equity holders without preferences get paid after debts and investors.

4. Options/VSOPs Holders (Workers) Workers are always last in line. Payouts happen if there’s money left over — and that’s rare in anything but high‑value exits.

Each layer eats into the exit value pie, meaning there’s often little or nothing left for workers.

Equity is less reliable than before

Startups increasingly protect capital, not workers.

Investors now get stronger terms: liquidation preferences, participation rights, guaranteed payouts and workers sit at the bottom of the stack.

Rising valuations have increased dilution and raised the bar for meaningful exits. Equity grants may look generous on paper, but rarely survive the path to liquidity and evaporate under market pressures.

With IPO markets stalled, companies stay private longer. And when liquidity appears, it's often through private share sales open only to insiders and workers inevitably find themselves locked out. As flat and down rounds spread, even modest gains are erased.

Equity still exists — but more of the upside flows to investors and founders than to the people doing the work to create that value.

What does this all mean?

Equity can work — but mostly for those who join early, sit high, and get lucky. For workers, it’s a risky bet dressed as salary.

If you're offered equity, treat it like a scratch card. It might pay off, but odds are it won't. Ask the awkward questions, push for clarity, and don’t base your future on paper promises.

The myth is that startup equity makes everyone rich. The reality? It makes a few people rich — and uses the rest of us get there.