Fintech Beat Recap: Why Startup Employees Don’t Exercise their Stock Options

The Fintech Beat podcast went up to bat for the entry-level startup employee, addressing a big disparity in Silicon Valley between those who exercise their stock options and those who do not. The world of startups is high-risk, high-reward because workers have the opportunity to join a company on the ground floor. This can pay huge dividends: employees may take a reduced salary, but do so with stock options as part of their compensation as a bet, in part, on the future of the company.  Down the line, should their company go public, or, better yet, be sold to Google, those early investments could reap serious dividends.  However, access to information on how a given company’s stock options work and even basic education in private investment is limited; and even with that knowledge, the information relating to how and when one should exercise those options can make or break the very ability of an employee to exercise them.  In fact, many employees never exercise their options, creating major distributional wealth effects. 

Dr. Chris Brummer, the host of the podcast, discussed the issue with the episode’s guest, Frederik Mijnhardt.  Mr. Mijnhard is the CEO of Secfi, a company founded in 2017 and dedicated to solving that information deficit and helping startup employees understand, maximize and unlock the value of their stock options and shares.

The conversation was fitting given Dr. Brummer’s work in making information about finance more accessible to the public.  A resident of Washington, D.C., where he lives with his wife Rachel Loko, herself a securities law expert, he’s dedicated his career to making information more accessible. A professor and faculty director of Georgetown’s Institute of International Economic Law, Dr. Brummer has dedicated his career to breaking down and explaining complex subjects, and exploring the potential, and risks of frontier technologies. Alongside his podcast, where Dr. Brummer interviews experts and insiders in financial technology to explore the “intersection of policy, finance, and tech” he is also the founder and host of the DC Fintech Week Conference, a week of global panels and discussions in the nation’s capital with the goal of democratizing information about the future of financial technology. His paper, “What Do the Data Reveal About (the absence of Black) Financial Regulators?” was published by Brookings last year and is a testament to his intersectional approach to financial technology and regulation; incorporating race, class, and demographics, and concerns about representation into his body of work. He has had the distinction of serving on the Biden-Harris transition team and was recently added to Fannie Mae’s board of directors in February of 2021. 

In highlighting companies like Secfi, Dr. Brummer underscores and encourages the opportunity for financial technology to actually work as so many advocates claim: as an economic equalizer. When information on something as crucial as stock options is difficult to access, it privileges a select few. Dr. Brummer observes that these deficits can be bridged with the right tools, and Mijnhardt’s company appears to have an interesting answer. 

Unlike most of the interviews Dr. Brummer does on the Fintech Beat, this one by and large only has one question: if the stock options are one of the largest incentives for a career at a startup business, why do reportedly over 80% of startup employees never exercise them, and essentially forget about them after starting with their companies? As it turns out, there’s a few reasons this is the case and the multifaceted answer given by Frederik Mijnhardt winds up being the bulk of the episode. According to Mijnhardt, many employees who don’t exercise their stock options are uninformed, but that doesn’t explain the data entirely; others simply can’t afford to pay the “strike price” for the options, or the taxes they would come with exercising their options.  Indeed, an unfortunate few – in Mijnhardt’s words this is “the worst-case scenario” – exercise the options only to find themselves in a difficult tax situation further on down the line. The gamble an employee takes accepting options in effect reappears when exercising them, with employees unaware as to the ultimate up- or downside. “Options are a lot like a lottery ticket,” Dr. Brummer summarizes. 

Mijnhardt frames the ubiquity of options among startups as an ultimately positive thing – after all, options create opportunities for employees to participate in the fortunes of the company through stock ownership, and in the end for employees of successful companies to receive potentially enormous payouts.  That said, it’s a gamble. As a result, it’s critical that employees be able to make informed decision.s That is where Secfi comes in, and not only do they have multiple options for advising, but for financing the exercising of options as well. Employees are thus able to learn not only when they should be exercising their options, but also have access to the resources for doing so.

That said, not every company can become a “unicorn,” a term used for any privately owned startup that is valued over 1 Billion USD.  And not all unicorns are even profitable.  Perhaps for that reason Dr. Brummer poses, in part rhetorically, an important question: are stock options, given all the uncertainty, worth it?  For Mr. Mijnhardt, it’s the only reason to join a startup in the first place: “You gave up a lot. Most people give up a lot to work for a startup company. If it then pays off and you end up losing it all or making 30% less… it is definitely worth it.” Whether someone at a startup can recoup the lost income in accepting a position and/or make significantly more in the long run is dependent on their knowledge. As Brummer puts it, “It really puts pressure on employees to not only know their own value, but their company’s as well.” With more and more paths available to companies to grow and go public, the odds are better than they were, but with the market as crowded as it is with fierce competition, they are still rough odds nonetheless. 

“In the end, we’re in a global world.”

Whatever the challenges, Mr. Mijnhardt is optimistic, at least from a macroeconomic perspective.  “It’s an amazing way to spread wealth, in a way… Th[e] wealth [from options] will start disseminating itself because those employees [who make money from their options will have the capital to] start [their own] companies. It puts money back into the economy.”

To learn more about Dr. Chris Brummer’s research, click here. Listen to the episode on Apple Podcasts or Spotify