Research found that people often overestimate the value of stock options when assessing job offers at startups.
September 12, 2023
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The authors research found that people often overestimate the value of stock options when assessing a startup job offers. They incorrectly believe that a higher number of shares translates into superior compensation even when it doesn’t. Five steps can help you avoid this mistake.
Startups frequently compensate employees through a blend of cash and equity, such as stock options or restricted stock units, which may translate into ownership stakes. For prospective employees, assessing job offers with equity components can prove to be a complicated task. In fact, in a recent research study we found a clear and consistent pattern among participants evaluating offers that included equity compensation: They appeared to perceive that a higher number of shares translated into superior compensation. This led them to be more willing to sacrifice cash compensation when offered a larger quantity of shares, even when the underlying value remained the same. Call it the equity illusion.
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Yifat Aran is an assistant professor of law at the University of Haifa and a lecturer in the MBA program at the Technion, Israel Institute of Technology. She is also a research fellow at the Rutgers Institute for the Study of Employee Ownership and Profit Sharing.
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Raviv Murciano-Goroff is an assistant professor in the Strategy & Innovation Department of Boston University’s Questrom School of Business.
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Accelerate your career with Harvard ManageMentor®. HBR Learning’s online leadership training helps you hone your skills with courses like Career Management. Earn badges to share on LinkedIn and your resume. Access more than 40 courses trusted by Fortune 500 companies.
What’s your next career move? Learn how to set yourself up for success.