I was experiencing the same issue of the watch showing the BT tether box and when selected would appear to try and tether and then stay grayed out. I am using the essential phone which is a pure android 10 variant much like the Pixel. To use BT tether it must first be allowed globally which is located under settings: Network and internet: Hotspot and Tethering: Bluetooth tethering. Once selected it allowed use of the phones internet through the watch. I’m sure most people have this selected but it is not intuitively obvious if you are only in the BT menu.