The Equity Tell

There’s a question about startup equity that almost nobody asks, even though it reveals everything: If equity is so valuable, why does it only flow one direction?

Think about it. You see countless arrangements where people trade labor for equity. Deferred salary for equity. Services for equity. Months or years of time for equity.

But when was the last time you saw the inverse?

When did you see a startup offering to trade cash for someone else’s equity stake? When did you see an ad reading: “Will pay $50,000 for 5% of your pre-revenue company”?

You don’t see that. Ever. And that tells you everything about what early-stage equity is actually worth.

How Real Economies Work

In any genuine economy, exchanges have inverses.

You trade dollars for groceries. The grocery store trades groceries for dollars. Money converts to food, and food converts to money. That bidirectional flow is what makes something an economy—value moving in both directions based on what people actually want.

Currency that only flows one direction isn’t really currency. It’s something else.

Now look at startup equity. It flows constantly toward labor. People accept equity for their work, their services, their time, their expertise. The exchange happens every day.

But it never flows the other direction. Cash doesn’t chase early-stage equity. Nobody’s buying.

This isn’t complicated. The market is telling you something obvious: that equity, at the stage when it’s being offered for labor, isn’t worth what the mythology claims.

The Math Nobody Does Out Loud

Here’s something interesting about how founders treat their own equity.

At the napkin stage—when someone has an idea but nothing built—founders will readily give away 20%, 30%, even 50% of their company. “I’ll give you half the business if you build this thing.” The equity flows freely because, at this stage, it costs the founder nothing. They’re dividing up something that doesn’t exist yet.

Fast forward. Now there are customers. Revenue. Traction. The company is real.

That same founder, faced with bringing on someone of equivalent skill, wouldn’t dream of offering more than 5%. Maybe less. Suddenly they’re protective. Suddenly equity is precious. Suddenly every percentage point matters.

What changed?

The equity became real. When it was worthless paper, they gave it away like confetti. When it started representing actual value, they guarded it carefully.

The exchange rate between napkin equity and real-business equity is at least 10-to-1. Often worse. Everyone involved understands this intuitively, even if nobody says it out loud.

Lottery Tickets Aren’t Money

Here’s a useful reframe: equity in a pre-revenue startup isn’t compensation. It’s a lottery ticket.

Lottery tickets are real things with real value. Some of them pay out, occasionally spectacularly. But nobody confuses a lottery ticket with money. You can’t pay rent with lottery tickets. You can’t buy groceries with them. Their value is speculative and probabilistic, not practical and immediate.

Startup equity works the same way. Some equity does become valuable—occasionally life-changingly so. But most doesn’t. The expected value, for most early-stage equity, is very close to zero.

Unlike actual lottery tickets, you can’t even sell early-stage equity easily. There’s no liquid market. You’re holding something that might be worth something someday, but that you can’t convert to anything useful now.

When someone offers you equity instead of money, they’re offering you lottery tickets instead of a paycheck. That might be a fine trade under certain circumstances. But you should be clear about what’s actually happening.

Why People Accept It Anyway

The mythology around startup equity is powerful:

“You’re getting in on the ground floor.”

Ground floors collapse all the time. Most buildings never get built.

“The upside justifies the risk.”

Upside is multiplicative. A large multiple of nearly zero is still nearly zero. The expected value calculation rarely favors the person accepting equity instead of cash.

“This is how wealth gets created.”

Wealth gets created through profit and ownership. Owning a percentage of something that never generates profit creates no wealth. The equity stories you hear about—the early employees who became millionaires—are survivorship bias. You don’t hear about the thousands who worked for equity in companies that went nowhere.

People accept equity anyway because the dream is compelling. Because saying “I’m a cofounder” or “I have equity in a startup” feels like forward progress. Because the mythology is everywhere, and questioning it feels like lacking ambition.

The Dreamer’s Currency

Here’s what equity really is in most early-stage situations: it’s the currency of people who don’t have money.

A founder who can’t pay you cash will happily pay you equity. Why? Because it costs them nothing in the moment. They’re paying you with something that doesn’t exist yet, something they can create infinitely just by adjusting percentages on a cap table.

This is the dreamer’s favorite currency. It lets them recruit people, build teams, and create the feeling of a real company—all without having to generate any actual revenue or raise any actual money. The equity promises are free.

To a builder, this is immediately transparent. “You’re offering me something that costs you nothing, in exchange for my labor that costs me everything. And you’re framing this as a generous opportunity?”

Builders see through this. That’s why dreamers rarely attract real builders. The pitch only works on people who can’t do the math.

When Equity Makes Sense

This isn’t a blanket condemnation of all equity arrangements. Sometimes equity is appropriate:

The key in all these cases is agency. Are you choosing this as a calculated bet with full information? Or are you being recruited into someone else’s bet with mythology substituted for math?

The Practical Test

Before accepting equity instead of cash, ask yourself:

Would they pay cash if they had it? If the answer is yes, then why don’t they have it? If the answer is no, then they’re telling you how much they value your work.

Would anyone else pay cash for this equity? If you offered to sell your equity stake to an outside investor right now, would anyone buy it? If not, what does that tell you about its value?

What’s my expected value? Do the math honestly. What percentage of companies at this stage succeed? What’s a realistic outcome if it does succeed? What would you earn at market rate instead? How does the expected value compare?

Am I being paid, or am I paying? When you accept below-market compensation for equity, you’re subsidizing the company. You’re investing your labor. Make sure you’re thinking of it that way—as an investment you’re choosing to make, not as compensation you’re receiving.

The Direction of Flow

The reason equity only flows one direction is simple: the people offering it know what it’s worth.

They know that napkin equity is essentially free to create. They know that most startups fail. They know that even successful startups often don’t generate returns for early equity holders. They know all of this, and they offer equity anyway—because it’s the only currency they have.

The mythology exists to obscure this reality. The stories of early employees becoming millionaires, the “ground floor” language, the celebration of startup culture—it all serves to make equity seem more valuable than the market actually prices it.

This connects to the larger pattern of how the startup ecosystem extracts value from participants. The equity game is just one piece of a larger machine that profits from dreams rather than businesses.

Take that for what it’s worth.