ESOPs Are Not Remuneration

Equity in startups gets marketed as ownership, alignment, and -critically- as part of your remuneration. The pitch is always the same: “You’ll own part of this. When we win, you win.” It sounds generous because it borrows the language of partnership and long-term reward. But the structure beneath that promise rarely matches the story being told, especially when people are encouraged to think of options as a meaningful part of their “package.”

Most ESOPs don’t behave like remuneration. They don’t function like salary, bonus, or even a genuine profit share. They exist to create motivation, not guaranteed value. And if you look at the mechanics instead of the narrative, that becomes obvious very quickly.

What an ESOP actually is

People hear “equity” and assume they’ve been given a piece of the company. They haven’t. An ESOP grant is not equity. It’s not shares. It’s not ownership. It’s an option to buy shares later at a fixed strike price. Nothing more.

Before an employee becomes a shareholder, they have to wait for the options to vest, pay the strike price, exercise the options, actually receive shares, handle the tax position (usually funded by the sale itself), and then hope there is any liquidity at all.

Until all of this happens, the employee owns nothing except the right to participate in a future transaction that may never occur.

The gap between the story and the mechanics is where most of the damage begins.

Liquidity defines value

Modern ESOP contracts do a decent job avoiding catastrophic tax traps. That’s the one area where things have improved. But the real barrier isn’t tax. It’s liquidity.

You can exercise options, but if you cannot sell the resulting shares, you haven’t realised value; you’ve simply swapped one illiquid obligation for another. In most startups, there is no internal market. Buybacks are discretionary. Secondary sales are restricted. Transfers require board approval. Exits are hypothetical. Valuations are opaque.

Without liquidity, equity is theoretical. Employees can work for years under the assumption that their options represent meaningful upside, only to discover that their “ownership” can’t be converted into anything. Not because the company failed, but because the structure was never designed for employees to access value.

ESOPs shift risk without transferring power

Real ownership comes with voting rights, decision rights, transparency, and influence. ESOPs come with none of these. They grant risk without granting authority.

Employees are encouraged to “think like owners,” but they’re not treated like owners. They don’t get governance rights. They don’t receive information in a way that allows them to evaluate their position. They don’t have any mechanism to influence strategy or protect themselves from dilution.

The company inherits their labour. The employee inherits the risk profile of early-stage equity without the protections that make risk rational.

Why ESOPs are not remuneration

The most common misuse of ESOPs is as remuneration itself. You see offers like:

“$110k salary + $50k ESOP.”

But that $50k is not compensation in any meaningful sense. It’s not salary. It’s not guaranteed. It’s not liquid. And critically, it’s fully discretionary. Every ESOP contract gives the board power to grant, delay, modify, accelerate, or cancel grants, to redefine “cause,” and to approve or block any sale.

Accepting ESOP as part of your compensation is equivalent to accepting a salary that can be revoked years later at the board’s discretion. No other form of remuneration operates like this. Only equity gets treated as both a reward and a liability the company can distance itself from when convenient.

Founders use ESOPs to close salary gaps because it’s cheaper than paying people properly. Investors encourage it because it reduces burn. Both groups know that the real-world likelihood of employees realising meaningful value is low.

This isn’t alignment. It’s a cost-saving mechanism wrapped in the language of partnership and the aesthetics of remuneration.

The psychological mechanics that make ESOPs feel like pay

ESOPs presented as remuneration work because they tap into predictable human biases. The structure doesn’t deliver value like salary does, but the story delivers motivation.

The illusion of ownership

People behave as if potential ownership is real ownership. The idea of “owning a piece of the company” triggers pride, loyalty, and effort, even when the ownership is conditional and inaccessible.

Deferred reward bias

Humans tolerate current discomfort for future gain. A four-year vesting schedule is a behavioural tool: it locks people in. Even when they suspect the upside won’t materialise, the fear of missing potential gains keeps them pinned in place.

Identity fusion

Startups encourage employees to blend their identity with the mission. Once that happens, equity feels like recognition, not a contract. People stay long after rational incentives disappear because leaving feels like abandoning something they built.

Narrative over mechanism

A compelling story lands harder than a contract written to protect the company. People respond emotionally to “you’re an owner” and only later realise the contract never supported that claim.

Status anchoring

Being offered equity feels like being invited into the “inner circle.” The emotional value overwhelms the structural reality.

Sunk cost

By the time someone understands the ESOP’s limitations, they’ve already sacrificed: time, salary, weekends, stress, and personal opportunities. Admitting the upside isn’t real means admitting the sacrifice won’t be repaid. People cling to the narrative because the alternative is too unpleasant.

These mechanisms don’t require manipulation. They are simply the default way humans interpret incentives. The “equity as pay” story relies on that.

The cultural cost

Symbolic ownership works until someone looks behind the curtain. When they do, trust erodes quickly. An employee who realises their “equity” is discretionary and illiquid isn’t just disappointed; they feel misled. The company’s credibility shifts from narrative-driven to contract-driven overnight, and contract-driven cultures are not pleasant places to work.

People disengage quietly. They hit vesting cliffs and leave. They stop treating leadership’s promises as meaningful. They stop volunteering effort beyond what’s required. And they stop believing the company will honour the spirit of what it says.

The damage is done long before the equity ever vests.

What a functional ESOP would require

There’s nothing wrong with equity as a tool. But a functional ESOP that can be counted as remuneration must match the story: low strike prices, real liquidity pathways, predictable non-discretionary mechanisms, transparent dilution reporting, some form of transfer rights or regular internal buyback, governance rights proportional to risk, and clear definitions of “cause” that cannot be weaponised.

Without these, the ESOP remains symbolic -an incentive story rather than real remuneration- regardless of how compelling the narrative is.

If the equity isn’t real, don’t pretend that it is

Startups don’t have to stop offering ESOPs. They just need to stop presenting symbolic ownership as compensation. Most employees would rather have an honest salary and a realistic understanding of their role than a story that collapses under scrutiny.

If equity is presented as part of remuneration, it has to be part of the structure. If it isn’t part of the structure, it shouldn’t be counted as compensation.

Most ESOPs don’t fail technically. They fail because they are designed to motivate rather than to reward. That’s why they’re not remuneration.