The Surprising Truth about Women and Stock Options

A recent article in Bloomberg revealed some shocking data about women being underpaid relative to men – in the progressive technology sector, of all places. As per a study by Carta, “women hold 47 cents for every dollar of equity men do” (Greenfield, 2018). These results should not be taken lightly; here’s why this imbalance may matter for female executives and what they can do to change it.

What the Imbalance Looks Like in Reality

It’s surprising to think that in an industry known for innovation and transparency such a striking disparity would prevail. But nonetheless, let’s suppose that it’s true; what if women do in fact hold less equity in technology start up firms than men.

So what?

Let’s see how this translates in reality. Think about a man and woman who are equivalently skilled and qualified, performing the same job responsibilities for which both earn a salary. For the sake of discussion, we’ll call them John and Sally.

Throughout the year, John and Sally chug along merrily taking home their paychecks each week. It’s a known fact that women tend to be underpaid relative to men when it comes to salary. But a salary is a set amount and it’s not likely she earns less than 20-30% of what he does even given the “gender discount.”

What does it mean when a woman holds less of a stake in a highly profitable tech firm that, say for example, goes through a $50MM IPO?

Let’s apply the 47 cent ratio mentioned above. Let’s say this applies universally across the company. There is $50MM of equity to be divided up; women get $16MM while men get $34MM. According to these numbers, Sally takes home $1.6MM while John takes home $3.4MM.

It’s massive.

The difference in wealth between John and Sally’s salaries is nothing compared to the fact that men are theoretically taking home in some instances twice the amount of money than women when the company hits jackpot.

What’s unfortunate about this is that many people take stock options in lieu of salary (aka “sweat equity”). They grind it out in hopes of a better day. It doesn’t work out all the time but you would only hope that when it does the contribution that John and Sally have made would pay off equally regardless of their different genders.

Let’s look at what could possibly be driving this.

Probable Causes

There is no one clear factor that can be cited as the cause for women’s smaller equity stakes. Possible reasons may be the following.

It is commonly believed that women are less likely to take financial risk than men. If women are more risk averse than men, they may be less likely to join a startup company before it becomes more established. They would hence miss the chance to “get in on the ground floor” when options abound.

The causes may also be related to personal finance. With an increasing number of women heading up families on their own, the need for financial stability may be greater in some cases. It’s possible that a company offering more robust benefits and perks as well as a larger starting salary would be more attractive than having less provided upfront with the chance to get more if the company succeeds.

It’s likely that educational factors come into play. Perhaps women are not performing as well when negotiating their compensation packages upon entry to the firm. This could be due to a number of factors, from lack of information about personal finance to lower confidence in the salary negotiation process due to lack of knowledge.

It could also have something to do with hiring demographics. According to Tech Crunch, 74% of venture capital firms have no female investors (Clark, 2018). This may be less supportive of women led companies getting the capital they need. Since female run companies tend to hire more female employees, the bottom line is a lower amount of women being given the same opportunities as men.

Redefining Silicon Valley for Women

Regardless of the cause, the end result is the same: women being outearned by men doesn’t bode as well for their finances in the long term. This could have all sorts of ramifications. Women missing the big payouts means that fewer of them will be able to turn around and start companies on their own. They may not be able to enjoy the same degree of financial independence as they would have otherwise, missing the chance to buy a house, send their kids to the college they want (yes, it does cost in the millions nowadays, and rising!), or solidify their own retirement savings.

How can women earn what they’re worth, in Silicon Valley or elsewhere, in any other entrepreneurial environment?

Education is going to be a big part of the solution. It will allow women to come to the table with a higher awareness of how stock options work, what kinds of options exist, and what the different kinds of stock options may mean in the long term. This can only empower them in the decision making process.

There are several ways to find the knowledge you need. You could seek mentorship from an experienced entrepreneur who has worked at a successful startup. It’s also possible to gain formal training in finance and negotiation. Some business coursework may touch upon these subjects.

Lastly, don’t forget that many financial advisors are experts in the areas of stock option compensation. Many offer webinars, blogs, and other educational materials on this subject. Or if your questions go further than the base level, seek a consultation with such as expert. Getting it right from the beginning is the best way to avoid being undervalued in the end; and that’s something for women that is worth fighting for.

Posts are general in nature and do not constitute the rendering of legal, investment, accounting or other professional advice.

Sources

Clark, Kate. (2018, November 4th). Female founders have brought in just 2.2% of US VC this year (yes, again). Tech Crunch. Retrieved from https://techcrunch.com/2018/11/04/female-founders-have-brought-in-just-2-2-of-us-vc-this-year-yes-again/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202018-11-05%20CIO%20Dive%20%5Bissue:17951%5D&utm_term=CIO%20Dive

Greenfield, Rebecca and Huet, Ellen. (2018, September 18th). Women in Silicon Valley Face a Massive Equity Gap. Bloomberg Businessweek. Retrieved from https://www.bloomberg.com/news/articles/2018-09-18/women-in-silicon-valley-have-half-the-stock-options-survey.