The Tech Share Gamble
4min. read
Summary: This briefing analyzes concentration risk and the hidden ‘double jeopardy’ of holding life savings entirely in tech employer share option schemes. Drawing on Daniel Kahneman’s Nudge Theory and the lessons of the Irish banking crash, it outlines a diversification framework for senior tech executives in Ireland. The analysis provides actionable strategies to balance emotional attachment to one’s employer against long-term asset allocation and liquid profit-taking.
If you asked me for advice on the investment of your life savings and I told you to use the whole lot to buy shares in a single technology company, what would you think? Probably that I ate some magic mushrooms with my eggs for breakfast. My Head of Compliance certainly wouldn’t be happy.
Yet I regularly meet senior executives in the tech sector whose entire life savings are held in options in their employer’s shares. If you have worked with one of the global tech firms based in Ireland like Apple, Google, Meta, Microsoft or one of the Irish unicorns like Stripe or Intercom, your share options may have accumulated to hundreds of thousands or even millions of euros over the years.
So, in effect share option schemes amount to the same thing as recommending that you invest all your eggs in one basket full of volatile, appreciating, and rapidly evolving shares in one tech company. The only difference being that it happens to be your employer.
Having all your savings in the shares of one company makes no sense on orthodox financial criteria which favour diversification across a range of companies, sectors, regions and asset classes. Because you work for this tech company, and the option to buy the company shares has been made easy for you or sometimes even hard to refuse, you’ve consciously or unwittingly ignored those golden rules of investment and tied all your fortunes, your job and your life savings to the success or failure of your employer.
This is a classic case of “nudge theory” or prospect theory which is a behavioural economics concept mainly based on the 1979 work of the Nobel prize-winning duo Daniel Kahneman and Amos Tversky. The theory was popularised in the brilliant 2011 book “Thinking, Fast and Slow” and describes how human behaviour can be significantly guided by small but influential “nudges” that incentivise us to take decisions in a certain direction.
If you are a tech executive accumulating more and more share options, and your company maintains its winning streak, you will have landed on black and won the jackpot. On the other hand, if your employer falls behind in the tech arms race, the wheel of fortune might land on red, and you may face the double jeopardy of losing your job and your life savings at the same time. Because when tech companies lose their way, employees tend to lose their jobs, and their shares tend to lose their value with alarming speed.
Despite this obvious risk, if you were to meet me, and I suggested that you sell half of the shares in your employer to spread your eggs, the standard reaction I would expect is that I might as well be telling you to give away one of your children or beloved pet. “Don’t you realise how well these shares have done, how much further wealth I could miss out on if I sell, how much tax I’ll pay if I sell, and how lucky tech workers are compared to employees in the traditional economy?”. Yes, I realise all this and let me humbly propose some remedies for your financial predicament.
Firstly, I empathise. A large proportion of my savings is tied up in the shares of my employer which also bears my family name Clinch because it was founded by my father and mother. So, I understand the feeling that it has been very good to me, that it is like part of my family and that it would be a huge wrench to sell any shares. That is essentially an emotional attachment, but along the way, the logical side of my brain told me it would make sense to sell some shares to my business partners Andrew and Michele in the pursuit of a greater goal. That choice, not to let my heart rule my head, has proven to be hugely beneficial. Gaining this emotional detachment and using that more objective perspective is the first step in developing a rational divestment and reinvestment strategy for your share options.
I also see the huge potential opportunity cost of missing out on further growth by selling now. Over the last 20 years, Clinch has grown 22.5x from a €30M Assets Under Management (AUM) business to a c. €700M AUM business today and the value has grown 60x. Many tech companies achieve much greater exponential growth, but it is very brave to assume that this pace of growth will persist. If that growth rate continued over the next 20 years, Apple, Google or Microsoft could grow in value from $4.5 trillion to $100 trillion. Is that truly possible? Maybe, but we should all be wary of another common behavioural trap: hindsight bias. Past performance really is not a guide to future returns as the Central Bank might say.
There are so many reasons that any given tech company could veer off course: bad management, bad tech design or an unfriendly regulatory environment to name but a few. Never mind the transformational impact of AI. Even the mighty Apple wallowed in the doldrums after Steve Jobs left in 1985 and it only recovered after he returned in 1997. What would happen to Meta if Mark Zuckerberg disappeared into the Metaverse or to Stripe if John Collison retired to become a gentleman farmer in his new stately home in Abbeyleix? The rational thing to do if you have a lot of shares in one company that has already created enough wealth to provide financial security, is to take some profits along the way and invest in other things to reduce your concentration risk while keeping plenty of upside in your Tech Mother Ship. You don’t have to abandon tech altogether; indeed, you could diversify across all the Mag 7. Is that heresy or just hedging? Or diversify further with the S&P 500, the MSCI World Index or just pay off your mortgage, buy a rental property or invest in a tech venture capital fund to try and discover the next Stripe.
What about the tax bill? Have you ever met someone who worked as a senior exec in an Irish bank 20 years ago and held their savings in bank shares? If not, maybe you should take a cold shower by speaking to one of them for half an hour. I met many bankers in the Celtic Tiger years who were reluctant to sell their bank shares because of the latent tax liability. I always considered the tax liability a trap and in early 2007, I circulated a note to our clients, advising them to get out of Irish property and to diversify their Irish shares into a global portfolio (I keep a copy of that letter in a drawer to remind me of how differently things could have worked out). So, with apologies to the sensitivities of my friends and clients who held on to their bank shares and lost their shirts, I would give similar advice to my friends in the tech sector today. Don’t let the tax tail wag the investment dog.
Finally, as well as working in a tech company full of very smart and hard-working people, you are lucky in more ways than you may realise. Fortunate to work with a successful company, fortunate to have reaped the benefits of the rising share price but also fortunate that you can sell those shares for cold, hard cash. If I sold half my shares in Clinch, it would fundamentally alter the nature of the business for our team, our clients and our cultural and community partners. There is no liquid market for my shares so the alternative of private equity investment, or a trade sale would have massive implications for all of us. As a tech worker with share options, you don’t have that problem. Pardon the observation, but despite your significant contribution to its success, selling your shares may be frowned upon by your boss, but it probably won’t move the dial for your company. What’s more, there is a liquid market. You have the freedom to sell at some point. That has a great value which should not be underestimated.
What’s the worst-case scenario? Imagine that you sell half your shares now while they are on a high, and then your job remains secure, and your company share price continues to grow. You will still do very well out of the shares you keep and probably quite well out of the shares you sell assuming you invest the sale proceeds wisely. Any regrets should be minor. Perhaps a little jealousy towards a colleague who didn’t sell any shares but what matter when you will still be exceptionally well placed compared to most people?
What’s the alternative scenario that proves the logic of diversification? You sell half your shares now, reduce your mortgage, invest the balance in a diversified portfolio and then your company hits the buffers, leading to the loss of your job and a crash in your company share price. You’ll be financially secure and thanking your good fortune and smart decision-making.