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Startup employees in Silicon Valley and other startup ecosystems often agree to accept lower cash salaries in return for stock options and other stock-based incentives that tie employee’s pay to the performance of the company. Equity-based compensation at privately held firms is, however, problematic from a securities law perspective for two reasons: employee recipients of equity compensation are generally not sophisticated investors, and the price of these securities is not determined by an active market. This situation leaves room for misinformation and false expectations. My research investigates employees’ financial literacy with regard to equity-based compensation, the kind of information that employees rely on, and the type of fallacies they fall prey to.
