There is a standard answer to everything in the last three chapters, and it is a generous one. Give people shares. If the value is made together, let everyone own a piece of the company, and when it succeeds they all succeed.
The instinct is right, and Part Two keeps it. But the tool that companies reach for, shares and options granted as pay, does not do what is hoped of it. This chapter gives five reasons, and then asks what a real share of success would need.
The target here is equity as pay, as startups and listed companies practice it. Companies owned by a trust on behalf of their workforce are a different thing, and FairShare borrows its ownership from them in Chapter 11.
Who holds it
Shares given to employees come out of a pool, and the pool is small. In the typical American startup after its seed round, the founders own a little over half the company, and about 12 percent is set aside for every employee the company has or will ever hire. The pool grows to about 19 percent by a Series D round, several rounds later.1
Inside the pool, grants follow rank. An early executive may hold one or two percent. Someone hired later into an ordinary role may hold a few hundredths of a percent. Each new funding round then shrinks every holding.
So everyone is called an owner, and nearly all of the ownership and the votes sit with founders, investors and a few executives.
When you joined
Two people of equal ability join the same company a year apart. The first is granted options when the company is valued low, so the grant is large and cheap to exercise. The second joins after the valuation has risen and gets a smaller grant at a higher price. If the company does well, the first can make many times what the second makes for the same work.
Nothing separates the two but the date they arrived. And the date can reward exactly the wrong people. If a company struggles for years and is then turned around, those who were there for the struggle hold the cheap shares, and those who did the turning around hold the expensive ones.
Whether it ever pays
Equity pays out when a company is sold or listed, and most never are. A study of American startups backed by venture capital found that the founders’ reward was zero in almost three-quarters of outcomes.2 Employees hold the same class of shares as founders, usually at a higher price, so where founders got nothing, employees did too.
Even a sale may pay employees little. Investors hold preferred shares, which are paid back before anyone else when a company is sold. The valuation reported in the press treats every share as if it were worth what the last investor paid. A study of 135 private companies with reported valuations above $1 billion found those figures were on average 48 percent higher than a fair value that accounted for the investors’ special terms. Ordinary shares, the kind employees hold, stand last in line.3
What it costs to claim
Options are a right to buy. To own the shares an employee has to pay for them, and that is where many grants quietly end.
- The price. Exercising can cost thousands or tens of thousands of dollars, for shares that cannot be sold.
- The tax. In the United States, exercising can create a tax bill on a gain that exists only on paper. If the shares later fall, the tax has still been paid.
- The deadline. Someone who leaves usually has 90 days to find the money or lose the options.
- The cliff. Shares typically vest over four years, with nothing in the first. Someone who leaves or is laid off in month eleven gets nothing for those months.
The result shows in the data. In the first quarter of 2023, employees at startups exercised 28 percent of their vested options, down from 44 percent a year earlier.4 Nearly three-quarters of what people had earned the right to buy was left unclaimed.
Chapter 3 explains who cannot pay. The people with the least to invest are the ones least able to claim what they were granted. Options turn a difference in savings into a difference in ownership.
Vesting deserves a word of its own. It makes pay for work already done depend on staying. Companies describe this as a reward for loyalty. In practice it holds back part of what a person has earned in order to make leaving expensive.
Whether you can understand it
A grant comes with a strike price, a vesting schedule, an exercise window, a tax treatment that depends on the type of option, and a valuation the employee cannot check. Few of us are equipped to weigh all that, and there is no shame in it.
- In a 2024 national survey, 27 percent of American adults answered at least five of seven basic questions about money correctly.5
- In a 2018 survey of people who already held equity from their employer, half said they were confident making decisions about it on their own, and 24 percent had ever exercised an option or sold a share.6
Complexity is not neutral. An executive with a tax adviser and a lawyer knows when to exercise, what to file and how to hold the shares. Someone without advice finds out afterwards what the deadline was. The same grant is worth more to the person who can afford to have it explained.
Notes
- Carta. Real Startup Ownership Data: Founders, Employees and Investors. https://carta.com/data/linkedin-startup-ownership-seed-to-late-stage/ and Employee Option Pool Size. https://carta.com/data/newsletter-employee-option-pool-size/
- Hall, R. E., & Woodward, S. E. (2010). The Burden of the Nondiversifiable Risk of Entrepreneurship. The American Economic Review, 100(3), 1163–1194.
- Gornall, W., & Strebulaev, I. A. (2020). Squaring Venture Capital Valuations with Reality. Journal of Financial Economics, 135(1), 120–143.
- Carta. (2023). Startup Employees Were Less Likely to Exercise Stock Options in Q1. https://carta.com/data/stock-options-exercise-q1-2023/
- FINRA Investor Education Foundation. (2025). National Financial Capability Study, 2024 wave. https://www.finra.org/media-center/newsreleases/2025/finra-foundation-releases-state-state-financial-knowledge-findings
- Schwab Stock Plan Services. (2018). Equity Compensation Plan Participant Study. Survey of 1,000 plan participants, July 2018.