Should I treat my employee stock options as worthless?

Editor’s note: A version of this question originally appeared on Reddit.

I’ve worked for a couple startups now, and I’ve never exercised stock options because I’ve always found them to be too risky. My rule of thumb has always been that if you’re interviewing at a tech startup, ask for as much base salary as possible, and basically treat any equity in the offer as worthless.

The odds of making any money from equity is very low — unless the founders are superstars with a history of success, super well-connected in the industry, or have an amazing product (which is rare), I’d rather earn cash than equity.

In my experience, pre-IPO equity has virtually no value, because it’s likely that the company:

• Grows slowly and stays private for years
• Gets acquired cheaply, and investors get paid back first
• Won’t succeed and liquidate

What do you think?

- Anonymous

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Dear Anonymous,

Statistically, it’s true — many startups fail. Over the years, industry analysts have estimated that as many as 75 percent of venture-backed startups fail, depending on your definition of failure.

If you’ve worked for a number of struggling startups in a row, it can feel like employee equity is an incredibly risky investment. And for a lot of startup employees, that’s absolutely true.

People working at early-stage startups often earn large numbers of stock options at a low strike price. But when it’s time to move to their next job, people find it can be tough to pull the trigger on investing $10,000 (and in many cases, much more) in stock options in a company that could very well still be searching for product-market fit, with uncertain exit possibilities.

That problem gets flipped for people working at late-stage startups. They’re earning a smaller number of stock options, but often face incredibly high exercise costs on top of the less likely, but still very real, risk of company failure.

All that said, employee equity is an important driver of personal wealth for startup employees. If you take the top 20 largest IPOs of 2021, we estimate that employees working at those companies alone saw $41 billion in personal wealth from their stock options when their companies went public.

Not every startup is built the same, and the risk of startup failure is not evenly distributed. Our challenge as startup employees is to think like investors, and consciously pick companies that we feel have a greater-than-average chance of success.

Ideally, you want to feel excited about the possibility of owning equity in the startup you work for. If you don’t, you should think about joining a company where you do.

- Vieje Piauwasdy, Senior Director of Equity Strategy, Secfi

Do you have a question about your stock options? Email us at ask@secfi.com