> It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example.

Most early-stage startup employees can't get liquidity on secondary markets, either because there's no demand for their company's stock or they are subject to transfer restrictions.

When looking at the big picture, proponents of equity as an effective bonus/retention tool will have to explain why most vested options go unexercised.