Why Stock Options are Terrible for Employees
Not everyone's ready for it.
Imagine you’re joining a startup, excited by the potential to share in its future success. You’ve just been offered stock options. What do they actually mean for you?
You’re not sure if you need to negotiate these terms, or even what they imply. Once you’re in, someone mentions them during a coffee break, and you’re confused all over again. Whatever—you decide to see how it plays out. Maybe you’ll get filthy rich without understanding why. Maybe you’ll get screwed over. Who knows?
As a tech employee, tech entrepreneur, and investor, I’ve had my share of discussions with fellows about stock options over the last decade.
Stock options are a great leverage for founders to share future value with their (early) employees. The intention behind it is noble, but using them has terrible drawbacks.
Understanding What You Get
When I joined Datadog a few years ago, they offered different packages that you had to choose from:
Option 1: a small salary, a large number of stock options;
Option 2: a medium salary, a medium number of stock options;
Option 3: a large salary and a small number of stock options.
I believe many tech companies use the same template.
A few months after I joined, the company IPO’ed. I went to a coffee break and chatted with one of my colleagues. The recent IPO and the rising stock values sparked the conversation. They asked me, “Which option did you pick when you joined?” I replied that I was looking for a venture back then, focusing on wealth creation, so I picked option 1—the salary was enough for me to live.
They replied that they now regretted picking option 3.
I suspect that most employees were more attracted to larger salaries than stock options. I wish somebody from HR could confirm the stats about what I observed, but I doubt they would. The truth is, even HR did not understand what they were doing.
When I got offered the 3 packages above, I asked what the value of the stock options was. Stock options are options (no shit), meaning they offer you the right to buy shares of a company. My natural question was: what was the price of this option, what was the company's value back then, and what was the total number of outstanding prices?
The recruiter’s answer was: 😳
Nonetheless, I insisted, and they escalated my question to an HR director. The director ended up reaching out to the US side of the company. They finally showed me a spreadsheet with the number I was asking, easing my final decision.
The lesson? Always ask for clarity on the value of your options before deciding. If even the recruiter is unsure, push until you understand what you’re getting.
Not Everyone is an Investor
If you ask people what investing is all about, they’ll reply with “finance and maths.” That’s true, but it’s only one part of the equation. Investing is also a very psychological discipline; not everyone’s ready for that.
When I was working at Red Hat, the company used to distribute RSU (Restricted Stock Units) to its employess. RSUs are basically free stocks. You’d get a bunch of those every year and could keep them, therefore becoming a shareholder, or sell them on the market and get cash in exchange.
As the company was on a growth trajectory back then, the stock would keep climbing every month or so.
Most people I worked with were young engineers and not investors. They had no clue why the stock would fluctuate.
One day, I was chatting with a colleague over a beer, and they seemed worried. I asked what was wrong, and they explained that they had lost thousands of dollars over the last month because Red Hat stocks had plunged. They had received RSUs over the last years and were so happy with their growth that they never sold them and didn’t think they could crash. Now, they were upset and did not know what to do.
Of course, they did not know what to do.
They had no way to know if the stock was overvalued or undervalued.
They had no idea if the market would continue its bull run or if a bear market was upcoming.
They were no investors. They had no plan, and the uncertainty left them feeling lost.
How to Approach Stock Options as an Employee
Owning stock options (or RSUs) means one thing: you are becoming an investor. It means that you now own (potentially, in the case of options) a part of a company with a market value and an intrinsic value. If you cannot assess the value or form an opinion on your company’s stock, you probably shouldn’t be a shareholder.
I know. It’s not your fault. You didn’t ask for it, but this is what happens if you stick to your stock. You are transformed.
→ Once you vest your RSUs, if don’t sell them immediately in exchange for cash, you’re effectively becoming an investor.
→ When a liquidity event occurs, and you choose not to exercise your stock options, you are deciding to become an investor.
It’s great to be an investor, for sure. But that comes with many questions: what’s my allocation policy? What’s my exit strategy? What is my risk tolerance? What is my investment horizon? What are the tax implications? How well do I understand the business model? Do I trust the leadership team? What’s my plan if things go wrong? How does this investment fit into my overall financial plan?
Investing isn’t just about understanding finances; you also need to handle fear, greed, and uncertainty. Most people aren’t ready for the psychological strain of watching their savings plummet overnight.
Stock options can be a powerful motivator, but they aren’t for everyone. Next time you’re offered stock options, think like an investor—ask the tough questions, seek clarity, and ensure you’re prepared for both the financial and emotional aspects of investing.
If you then plan to stick to your stock, decide whether you truly want to become an investor and learn the trade. If you don’t, it’s fine; just get your money and enjoy it. ✌️