Navigating Stock Options: Challenges and Strategies for Employees with Scott Chou, Co-Founder ESO

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[00:01:09] Scott Chou, would you do us a favor and introduce yourself and ESO?

[00:01:14] Sure. My name is Scott Chou and I've been doing venture capital since 1997. Most of that time was

[00:01:21] spent doing traditional venture capital. I started my first firm was out on Sand Hill Road and I joined

[00:01:26] this other firm for a bunch of years. Along the way, doing traditional investments, sitting on board

[00:01:32] of directors of companies, I noticed a significantly underserved value proposition and that was

[00:01:38] assisting employees at these venture-backed companies with exercising their stock options. Because I noticed

[00:01:45] in numerous occasions, a lot of people didn't exercise their stock even in companies that were in

[00:01:51] pretty good shape. And there's all sorts of reasons for doing that, mainly because of the high taxes

[00:01:56] involved with exercising. It's just a big number. It doesn't matter that they worked at the company,

[00:02:01] they know that the company is in pretty good shape and the stock was in the money, if you will.

[00:02:06] They couldn't afford it. And even if they could afford it, they couldn't necessarily afford the

[00:02:11] five to eight years of illiquidity, the time, holding time on investment like that. And of course,

[00:02:18] there was some probability of complete failure as well, too. I mean, it's significant.

[00:02:23] You know, I wouldn't be surprised if half the companies failed to some degree at some point

[00:02:27] along the way. And of course, that was intolerable for a lot of people, too. Because, you know, when

[00:02:32] people join companies, they try to negotiate significant packages. If you join early and you

[00:02:39] could exercise for, you know, 10 grand, that sounds like a good deal until you realize the AMT bill is

[00:02:44] like 300 grand when you exercise. If you join late, the exercise might be 150 grand. You know,

[00:02:49] the AMT bill may only be 50 or 60, but it's still, it's a big check. You know, it's no matter what,

[00:02:54] early or late. So, you know, that I've noticed that many, many times over and you can see the

[00:03:01] stats or papers published by Carta and there's other people who keep track of stock options,

[00:03:06] tons of options and perhaps more than half of all the options granted, well more than half are never

[00:03:11] exercised. And this includes the companies that are in good shape, the companies that ultimately have

[00:03:17] good IPOs or M&A events, you know, half of those options aren't exercised either. So that's

[00:03:21] basically money down the drain. So for people who don't have the cash, they can come to me

[00:03:26] and we can craft a deal where, I mean, this is definitely better than you just losing it.

[00:03:31] I could pay for everything. You have nothing but upside and there's no downside risk to you. In fact,

[00:03:37] there's guaranteed profit because since I invest and the stock is in your name, if you end up writing

[00:03:43] them off, you get a tax tax loss write-off. So at least you have that benefit. Right. Yeah.

[00:03:48] So there's a, when I explain all these things to them, then suddenly, you know, we have a business

[00:03:53] and it's easy to understand and, you know, refer your friends. And, and so we've been doing that

[00:03:58] for 12 years now. So, you know, I did it ad hoc as a traditional venture capitalist along the way.

[00:04:04] In fact, the most common reason was from your line of work, you know, and the, the recruiters

[00:04:10] would come and say, Hey, I got this guy. He's got golden handcuffs because it's like $500,000 tax

[00:04:17] and exercise bill. And, uh, he really wants to join this new hot, whatever company, but you know,

[00:04:23] he can't pay that. He wants us to bonus that to him in order for him to go. But for the new company

[00:04:29] to bonus somebody that much, they have to gross it up by like two X just to cover the taxes. I mean,

[00:04:35] spending a million dollars of the highly diluted series A or B capital to hire one person so they

[00:04:41] can actually, that's just like crazy. I mean, the board of directors would never approve that.

[00:04:45] Right. Okay. So they can come to me, you know, and, uh, you know, I would break that problem. You

[00:04:50] know, it's all that problem for them. And, uh, and there's lots of advantages to have a, having a

[00:04:54] third party do it because like, uh, like if the company were to, uh, assist you with exercising your

[00:05:00] options, you don't even get long-term capital gains because it's actually considered like a,

[00:05:04] a compensation benefit in disguise, you know, and those are, um, and then also there's tax

[00:05:11] advantages that we could do when we, we, we craft a vehicle so that ultimately I could craft a deal.

[00:05:17] That's, uh, from the perspective of the employee, it's, uh, it's just as good. There's no risk.

[00:05:23] Everything's covered. You have all the upside and, um, so Scott, a question that I have here is where,

[00:05:31] where's the disconnect. So let's use an example of an employee or somebody goes to an early stage

[00:05:38] startup and they negotiate a deal for, or they negotiate a lot of options and, you know,

[00:05:44] things like that, a really good package for themselves at the time. Okay.

[00:05:47] Where's the disconnect for when it comes time that they didn't understand in the beginning?

[00:05:52] Oh yeah. That's a really good question. The most fundamental thing is that a lot of people,

[00:05:57] people, because there's always young people joining, joining these companies for the very first time,

[00:06:00] but they don't know the difference between stock options and stock. Right. Okay. So if a company

[00:06:06] were to give you stock, you would get taxed right there on the spot. Okay. And, uh, that's not a good

[00:06:12] thing because it's illiquid. The IRS expects real cash, you know, uh, and, uh, and that's not liquid.

[00:06:19] Okay. So you can't like sell it and actually pay that. So they give you stock options instead. That's now,

[00:06:24] this was, uh, invented a long time ago by some clever person. And, but the, uh, people, when they,

[00:06:30] uh, think about stock options, it's almost use synonymous with equity and ownership and having,

[00:06:34] having stock. But the fact is, uh, it's not really anything until you exercise it or you stay there all

[00:06:40] the way until the exit. But if you look at the turnover here in the Valley, it's pretty high. It's not

[00:06:46] necessarily because you got laid off or whatever. It's just, uh, there's always new things. I mean,

[00:06:50] you know, uh, a typical company has to go like 10, 10 or so years to, to get the exit. And the average

[00:06:56] tenure for employee is not 10 years. Okay. You could make a significant contribution and get fully

[00:07:01] vested. And, uh, there's still, you know, five, six, seven years left for the company, but you know,

[00:07:06] something else comes along, you know, or a lifestyle change or whatever, or even if you get laid off

[00:07:11] and next thing you know, you have to exercise. And that's something they did not think about

[00:07:16] when they started. They just think, I get all this stock. That's great. You know,

[00:07:20] the more sophisticated people, like I said, they do think about the cost of exercise and they say,

[00:07:25] okay, 25 K maybe I could handle that. If it, if it comes to it, I can handle that.

[00:07:29] But they don't think about taxes and, and the company did well, like I said, that, that AMT bill

[00:07:35] is massive. And the other thing that people, uh, companies have been doing is that in order to,

[00:07:41] to grant, uh, exercise extensions is more than 90 days, which, uh, employees often ask for that

[00:07:47] causes ISO grants to flip to NSOs. Okay. And that's cool. You get more than 90 days, but when

[00:07:53] you do exercise and so the taxes are due right there on the spot, it's not even AMT. It's, I mean,

[00:08:00] just to cut the initial check to the company, they're going to do mandatory withholding.

[00:08:04] And it won't be at the AMT rate, which is like 28% plus the state it's at the full federal

[00:08:09] bonus rate, which is 37, you know, plus Medicare, plus all that stuff.

[00:08:13] But say capital gains, what was, what's capital gains at right now?

[00:08:17] It said, well, the high rates at 20. So, uh, typically, you know, that's where it's going

[00:08:22] to impact you. You have, um, you know, if you have a meaningful thing and your high federal is at,

[00:08:27] uh, ordinary is at 37. Yeah. I use the 20, 40 in my mind just to kind of keep track of it.

[00:08:33] Yeah. Yeah. The old numbers were like 39.6 or something like that. It was 20, 40. Um,

[00:08:38] yeah. And, um, so it's pretty, it's a pretty good savings.

[00:08:43] Go ahead. Is there something to do for employees to think about in terms of strike price

[00:08:49] and setting that as a part? I mean, they're going to get X number of shares or options.

[00:08:54] Well, they don't have control over that. I mean, the company's obligated to

[00:08:58] issue you grant prices at the market. Okay. If they give you a grant that's below market,

[00:09:03] they have to tax you on that spread right there on the spot at the ordinary income rate.

[00:09:09] Right. Okay. Uh, well, in fact, it's worse than that. It's as you vest. Okay. So one year from now,

[00:09:14] you vest 25%. So they ding you 25%, not on the spread when you were hired, but on the, the day

[00:09:21] invest. Okay. So if the stock doubled in price in that time, then the tax bill becomes massive. Okay.

[00:09:27] So, um, you know, all those are, all those are bad things.

[00:09:31] A quick question, uh, for the audience audience, uh, edification is, uh, is this a benefit that the

[00:09:39] company offers its employees or do you work directly with employees? Um, outside of the

[00:09:47] company, but you know what I'm saying? Just, do you work direct with employees or do you work through?

[00:09:51] We, we, we do them both. We do them both. The most common reason for a company to, uh,

[00:09:57] to ask us is one is sometimes they just have a free for all, uh, tender offer purchasing their stuff.

[00:10:02] Right. Okay. So we could jump in there. If it's a company we like, though, we're happy to purchase

[00:10:06] some of that stock as well. The more common reason is a one-off. Okay. So they, they raise a fresh

[00:10:11] round of capital and the new investors want to upgrade the CFO or the VPS sales to somebody that can

[00:10:18] scale the company to the next level. So the person's being let go without cause. Okay. So

[00:10:23] they make a big ruckus about it. All right. So we go back to that original issue. It's very similar

[00:10:27] to the recruiter issue, trying to break the golden handcuffs. This person doesn't want to go unless

[00:10:31] the company pays, you know, for all that. It says, Hey, I wasn't prepared to cut a $300,000 check.

[00:10:37] You guys let me go and you expect me to write you a check. You know, that's, you know,

[00:10:41] I just don't want to do it. So I want to take a break real quick, just to let you know about a new

[00:10:46] show. We've just added to the network up next at work hosted by Gene and Kate Akil of the Devin

[00:10:54] group. Fantastic show. If you're looking for something that pushes the norm, pushes the boundaries,

[00:11:00] has some really spirited conversations, Google up next at work, Gene and Kate Akil from the Devin

[00:11:09] group. So they contact me and then, you know, I handle it for them. You know, I pay and it has the

[00:11:17] advantages of tax and keeps the company out of the, you know, the mess. They don't have to use

[00:11:21] dilutive venture capital dollars to solve a compensation matter, especially for an employee

[00:11:25] that's on their way out because you want to save all that money for the current employees.

[00:11:30] So it's a, it's a win-win all the way around. So we get that, you know, every day of the week,

[00:11:35] we, we get an inquiry of that nature, you know, either recruiter or a company or an individual

[00:11:40] calling us direct. Curious on this, on this one, Scott, around recruiters, how much of,

[00:11:46] of the business that you're getting, how much of that's coming directly from the recruiter?

[00:11:51] Like, does a recruiter have you in the role of that? In the beginning, it was most of it. Okay.

[00:11:56] Since then we've become a full-on e-commerce shop doing our own direct marketing and things like this.

[00:12:02] And there's a lot of content out there that can find us. The most common content I think we do is

[00:12:07] we create a lot of tax information articles, how about how to deal with stock option taxes. And

[00:12:11] people stumble across those on the internet and we, you know, we show them how to calculate taxes and,

[00:12:16] you know, in there somewhere, say, oh, by the way, if you can't afford to write this check,

[00:12:20] we'll do it, we'll do it for you. So that has become a bigger portion of the business than,

[00:12:26] and then of course the existing clients, once they go through, now we have, we have several

[00:12:31] thousand in the rearview mirror that have gone, you know, fully processed with us. And just a word of mouth

[00:12:39] to, you know, that, you know, that's pretty big too. That's way bigger than all the recruiters combined.

[00:12:45] But in the beginning, we had no name, we had no, no internet presence, no Google rank. You know,

[00:12:49] we depended entirely on former companies that I was related to and the VCs I was related to to do direct referrals.

[00:12:57] So stock options on the, uh, uh, balance sheet, are they, are they, they're treated as a liability,

[00:13:05] right? Uh, as an expense, as an expense. Oh, it's treated as expense. Thanks.

[00:13:10] Um, so it's an expense. It moves around. So that's why, yeah, that's what I'm trying to figure out is

[00:13:15] if, if, uh, if an employee doesn't exercise their options, where is that? Does that money?

[00:13:23] It goes back in the pool. Yeah. And yeah, the, when you, when you do a, um, an equity incentive plan,

[00:13:29] you file it with the government, you set aside shares and you can add to those shares, you know,

[00:13:33] along the way. Uh, so you grant some of those shares and they're kind of marked as, uh, allocated to

[00:13:39] somebody else. But when they don't exercise, they go right back in the pool. So is it, uh, this is a dumb

[00:13:45] question. Is it, is it in their best interest that they don't get exercised? It's a perverse incentive.

[00:13:52] Yeah. All right. So that's the other thing, uh, the, the company's I went dark. I went, I went,

[00:13:58] I went dark fast. Sorry. Yeah, you're right. So if you let somebody go, I mean, the, the golden

[00:14:06] handcuffs, uh, were originally designed, I think for the benefit of the person issuing them, that's

[00:14:11] the company founders because they want the employees to not quit. Okay. Right. So they actually want to

[00:14:17] make it a little bit difficult to exercise. All right. But the document is, is full of, uh,

[00:14:23] you know, waivers to, you know, so they had kind of have their cake and eat it too. It says that, uh,

[00:14:28] you exercise at your own risk and you know what you're doing, but they don't really, because they

[00:14:32] don't want to make it that easy for you. You know, they don't want to, they don't want to tell you,

[00:14:36] they actually want you to, uh, to be scared and then put them back. Right. Because when you put them

[00:14:41] back, they don't have to regrant them at your price. They get to regrant them at the current

[00:14:45] price. That's right. So that, that's that, uh, that in between number, that's immediate sort of

[00:14:50] like paper profit for the company. Huh? So the company generally is not going to have the resources

[00:14:56] for me as the employee to help me through this. This is like, go find it on your own. Go find Scott.

[00:15:02] Yeah. Yeah. They, they can't, when they do it, when they do, uh, uh, in-house loans, uh,

[00:15:08] everyone kind of knows that's, that's kind of baloney. In other words, when, when they give you

[00:15:12] a loan, it's not really a loan like that to go to the Wells Fargo account and get some money on

[00:15:16] give it to you as exercise because it sounds dirty, it goes right back into their own pocket.

[00:15:20] So they just kind of do it on paper. And they say that, uh, I have a loan and it's,

[00:15:25] and it's, uh, those are mostly focused because they're not accruing and they're,

[00:15:28] and they're non-recourse and some means they're not eligible for capital gains. Uh, it's not clean.

[00:15:33] So you could do a little bit of this when you're really early stage and blow the radar,

[00:15:38] but you're going to accompany that scaling going public. You don't want to hold balance

[00:15:41] sheet full of this weird stuff. Uh, no, no, no, no, no. That's what Goldman Sachs comes in and

[00:15:46] cleans all that stuff up, uh, or other people like that. Um, I want to ask you a quick question

[00:15:52] about vesting schedules I've seen. Okay. So they're like after.com bus, I saw kind of a rush to,

[00:16:00] and you're in the center of the universe on a lot of this. I saw kind of more of a four-year

[00:16:05] vest, like a longer vesting schedule. And the four-year vest is, uh, is kind of standard. It's

[00:16:11] been around for all my career. So the most typical vesting schedule is a one-year cliff. Yes.

[00:16:18] 25% of it, uh, is available after one year, zero if you leave before the year. Right. And then

[00:16:23] after that it's one 48th per month for the last 36 months until you're fully vested at four years.

[00:16:30] Right. Okay. Because I, but in, in 18 and 19 for whatever reason, and I think it was just because

[00:16:35] the funding that was floating around, I saw people doing a lot of two-year vesting. Same thing,

[00:16:41] kind of a similar concept. You're probably thinking about, uh, board advisors and consultants,

[00:16:45] and those guys are different. Okay. Yeah. Employees are, are, are four years, but the, uh,

[00:16:50] usually people you invite to be on the board or, or have special relationships with the company get,

[00:16:55] uh, two year or one year. Got it. Okay. That's what, that's what is very common.

[00:17:00] That's what I've seen. Okay. Fair enough. And no cliff too. Those guys are usually no cliff two

[00:17:04] years. Oh yeah. Oh yeah. Yeah. We, we do a lot of advising work. So I'm looking at it through that

[00:17:10] lens, not the employee lens. Yeah. I gotcha. Are you saying we should keep Scott on, uh,

[00:17:15] Oh, a hundred percent. A hundred percent. Are you kidding me? Now we found an expert. All right.

[00:17:20] There we go. There we go. Scott got a question. No. So, so Scott, I want to, I want to go back and talk

[00:17:24] about, cause I think there's a lot of conversation here to be had to help the employee through this

[00:17:30] process when they're going into an organization and they're, you're at the negotiation stage and

[00:17:35] negotiating salaries and they have the option for options. And it's part of that process.

[00:17:41] What is your recommendation to them? Were you, what would you teach them on how to negotiate that

[00:17:47] salary versus, salary versus options versus whatever, you know, they, they have on the table?

[00:17:52] I'm actually not a, uh, a great, uh, I think the recruiters are much more skillful.

[00:17:58] Yeah. Okay. A lot of that comes from comps. In other words, uh, what did other people like you

[00:18:03] get? Okay. What could you reasonably ask for and get away with? Okay. So, but people do ask me whether,

[00:18:09] how I compare, right. And, uh, uh, I say a rule of thumb is, uh, your annual salary. Okay. So if

[00:18:16] you get the number of shares times the strike price, so that should, uh, be like your annual salary,

[00:18:24] right? So that means as the company, the company becomes worth 10 times as much, that's like you,

[00:18:28] you made nine, nine times your annual salary. You made 10 times, uh, you minus the strike. That's

[00:18:34] you got nine extra years of salary you get. So you have a, in your brain, you can sort of, uh, easily

[00:18:39] monitor your, your progress. Okay. So anyways, if the company does anything at all, it will accomplish

[00:18:45] it in multiples of your annual salary. All right. And so grants above, above that are, are really

[00:18:50] good. You know, grants below that aren't necessarily bad, but they're, you know, they're, they're,

[00:18:55] they're just okay. All right. So that's, that's, uh, we actually have a tool on our website that gives

[00:19:00] you a specific percentile calculation. In other words, if you, it tries to estimate based on the

[00:19:06] number of employees you have and how much capital you raise, what your stage is, you know? So we,

[00:19:10] we have a loosely defined bucket for similar companies, although they may not be truly

[00:19:16] similar. And then, uh, and your job title, you know, basically, you know, executive, individual

[00:19:21] contributor, manager, and then you type in your grant information and it'll give you a percentile.

[00:19:26] And it's still, it's not that meaningful because, you know, 0.01% of Airbnb or something like that is,

[00:19:32] is, is, uh, is still way better than, you know, you know, 2% of, uh, of another company that isn't

[00:19:37] likely to make it. So that's right. That's right. So,

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[00:20:37] So, the, uh, I'm sure that people listening to the show, they're going to wonder at one point,

[00:20:44] where do you get, where does ESO get paid? Like, where do you make your money? Because you're in

[00:20:49] business. This isn't a charity. So, where do you?

[00:20:52] Yeah. Nothing happens. So, there's no, we don't have any current pay. In other words, uh, it's not a,

[00:20:58] it's not a loan in the traditional sense where every month you send in some, you know, principal

[00:21:02] interest like that. So, we make an investment and it gets settled at, uh, at the IPO or the M&A event.

[00:21:10] And it's just a percentage of, uh, it's a percentage of that or something like that?

[00:21:14] Yeah. Yeah. Okay. It's a fixed percentage. It doesn't grow over time.

[00:21:17] Right. Or, or based on the valuation of the exit or any of those types of things.

[00:21:23] But we do have, it does have, uh, some interesting technical elements that were added over the years

[00:21:27] and, uh, you know, the option of, of cash or, or stock and share settlements. So, in other words,

[00:21:32] by accomplishing what we call a variable prepaid forward contract, there's a deferred,

[00:21:37] a deferred tax position that they are, IRS allows, you know, for that type of thing. And, uh,

[00:21:42] you know, which is, which is really good. Yeah. Cause I mean, like one of the alternatives that people,

[00:21:47] uh, consider when, uh, when looking for competition for us is how about I sell some of this stuff?

[00:21:54] Okay. Use the profits from that to exercise. Okay. What happens is that, uh, the profits get taxed.

[00:22:02] Okay. First of all, you got to find somebody that's not that easy. There's broker fees and the,

[00:22:06] and the price isn't a fully big. So you're going to lose a big chunk of your shares selling. Okay.

[00:22:11] You have, maybe you'll have enough profit. Maybe you won't, you'll be, you'll be paying tax on it and

[00:22:15] then you'll exercise and exercise triggered more taxes. So if you look at all that bleeding,

[00:22:20] okay, that, the number of shares that disappeared in the course of accomplishing that is way more

[00:22:25] than what I would have charged to do the deal. Okay. Not to mention the brain damage of locating that

[00:22:31] and negotiating that. That's the first time a vendor, a partner has said brain damage on one of our shows.

[00:22:38] And I absolutely love it because it's exactly what it is. Like, why would you do this? Um,

[00:22:44] in pre-show you mentioned sometimes, um, employees think of us like an insurance policy.

[00:22:51] Like this is like, or, or insurance, maybe not policy, but like insurance.

[00:22:55] That's right. Yeah. Sometimes people get all caught up. This is, you know, uh, you're getting this

[00:22:59] percentage. Okay. And is it, is it, is it worth it? Okay. Right. So another way to think about this

[00:23:06] is like, uh, like, would you self-insure your car? Everyone knows that, um, that the cost of, uh,

[00:23:13] of all your lifetime repairs is supposed to be on average, you know, less, you know, less than the

[00:23:20] cost of all those insurance premiums you pay through your whole life. But the reason you pay those

[00:23:23] insurance premiums is because there's always some probability that tomorrow you, you hit a pregnant

[00:23:28] woman at an intersection and you get nailed for just a massive, massive bill. Okay. Right.

[00:23:33] Way more than you could possibly handle just, just, just to deal with that probability. Very

[00:23:37] specific, Scott, by the way, she's very, very, very, okay. Sliding on family of six. Yeah. And, uh,

[00:23:46] so we, we give you a peace, peace of mind. All right. Right. And, uh, so that's part of the value

[00:23:51] proposition. And then on top of that, we trigger tax benefits, long-term capital gains. And there's

[00:23:55] also something called QSPS. If you do this early enough, uh, the IRS is a full on waiver on taxes.

[00:24:02] Okay. So our piece of the action is typically less, I mean, always less than the QSPS savings is,

[00:24:10] uh, you know, is, is, is pretty huge. Okay. It's, I mean, it's a total waiver up to 10 million bucks.

[00:24:15] And, um, since most people, non-executives are going to make less than that, you know, they might

[00:24:18] make a couple of million, but there'll be a complete tax-free event. So that's a, that's a good reason.

[00:24:23] And then of course the, the, the, um, the deferral natures, you know, have a, uh, costs, costs,

[00:24:29] um, you know, time value benefit. And the, another big thing that people, um, don't fully appreciate

[00:24:35] until I explain it to them is, uh, um, total return. In other words, okay. So they're contemplating

[00:24:43] exercising themselves. Okay. Let's say they have the money. They have, you know, 250 grand ready to go

[00:24:48] and they don't mind waiting for that many years. So they're already kind of rare in that sense,

[00:24:53] but let's say that they want to do that. So if they do that, what's going to happen is they get

[00:24:57] 100% of the benefit of, uh, this stock. They also have 100% of the benefit of the loss,

[00:25:04] but if they let me write the check for 250 K instead, they still have, let's say 70% of the

[00:25:10] benefit of the stock. Right. And, and then they start obsessing with the fact that I'm going to get 30,

[00:25:15] but I said, Hey, you, you totally forgot the 250 K. You didn't write a check for that. You're

[00:25:20] supposed to invest that in something else. Okay. Something else that's much safer.

[00:25:25] It could be a diversified portfolio of things that, uh, or if you want to be really aggressive,

[00:25:30] you could do Bitcoin, you could, you could do derivatives, you could make something that's

[00:25:33] even more profitable than your company. The point is you have a total return of two things.

[00:25:38] When you add them together, that is often better than just having a hundred percent of this.

[00:25:43] In addition to the fact that you're liquid because when, you know, whatever you buy with

[00:25:47] the other stuff, it could be, I mean, it could be treasury money markets. You could be completely

[00:25:53] liquid and there's almost no risk at all. And there's a lot of stuff you can do.

[00:25:57] In these conversations that you're having with people just in this very, it's very same scenario

[00:26:02] that you're describing. Do you get a lot of confusion? Do they look at you like, why,

[00:26:07] like, why am I actually doing this? Cause it makes complete sense. Right. So I, you know,

[00:26:12] it makes sense to me, but do you get a lot of confusion from, from these people?

[00:26:17] Um, Hey, this is William Tinkup work to find. Hey, listen, I'd like to talk to you a little

[00:26:22] bit about inside the C-suite, the podcast. It's a look into the journey of how one goes from high

[00:26:29] school, college, whatever, all the way to the C-suite, all the ups and downs, failure,

[00:26:33] success and all that stuff. Give it a listen, subscribe wherever you get your podcast.

[00:26:38] Yeah. I can see the literacy.

[00:26:40] We do. Uh, yeah. I spend a lot of time doing a tax education on the phone and it takes a bit

[00:26:47] of effort to calm people down. All right. So closing transactions is, uh, is a, an additional art,

[00:26:53] you know, that the team has developed over time is to, uh, build confidence. The biggest thing

[00:26:58] is, uh, just the word of mouth referrals. And with the people who've already gone through the process,

[00:27:02] when they say, uh, it's a good idea, then it becomes super easy to close it. We don't have

[00:27:08] to go through all of this and, you know, they're kind of good to go. And over time, it's going

[00:27:12] to be a snowball effect. It's getting easier and easier for us because the number of prior

[00:27:15] transactions that have been, uh, either, either at the front end. Also we have, of the 2,100 plus

[00:27:22] deals that we've done, I think nearly a thousand of them have gone full circle and they already

[00:27:26] cashed out at the other end. So those are all solid referrals. I could say that, Hey, at both ends,

[00:27:31] you know, whether they, you know, they, it happened, you know, as, as expected or whether

[00:27:36] there's a, any gotchas, because that's one of the biggest things is that they don't know what

[00:27:40] they don't know. The contract has got a bunch of fine print in it that makes them nervous.

[00:27:45] You know, we're an entity that they found. We're not like bank of America or something they found

[00:27:49] on the internet, you know, and they're transacting with somebody over the internet. So that's always,

[00:27:53] that's always an issue. It gets easier and easier over time. You know, the more deals we've done,

[00:27:58] you know, the longer we've been around, it gets easier and easier, but we're still not

[00:28:02] bank of America. Yeah. So, right. Right. Right. Is there, uh, just again for the audience,

[00:28:07] is there different, is it taxed differently for them to do it versus you to do it? Um,

[00:28:15] yes. Well, it depends, it depends on the scenario. There's one scenario called the disqualifying

[00:28:20] disposition of AMT. Okay. And that is definitely taxed differently. So if they exercise,

[00:28:26] they have to pay the AMT, no choice. Okay. Just send it into the government, which is like a free

[00:28:31] loan to the government. You know, they'll get it back and, you know, reduce taxes down,

[00:28:35] down the road, but it doesn't change the fact that they have to send it to the government now.

[00:28:39] Okay. All right. Now, if I do it, they, as a choice, they could write it up as a disqualifying

[00:28:45] disposition, which they could declare as a, as a sale. Okay. So they don't have to pay AMT at all.

[00:28:51] All right. They can take, uh, in other words, the money that I gave them that would have been big

[00:28:56] enough for the AMT, they could just put it straight in their pocket as an installment sale

[00:29:02] instantly. And they just pay tax on that. So, so the installments being the initial installment

[00:29:07] being my deal, then the final installments being the, uh, the final, the final liquidity,

[00:29:12] or it could be secondary sales in between. But that tax position is popular, especially for the

[00:29:17] people who have a gigantic AMT bills. All right. And, uh, and, uh, yeah, the installment sale basis

[00:29:23] says you have to pay tax on it, but you pay tax as you go. Okay. And so you, since you, you can

[00:29:30] throttle how fast you sell the stock, you're kind of, you're kind of delaying your, uh, your tax bill.

[00:29:36] You're still going to pay taxes. Eventually all the profit that you get between now and the end,

[00:29:40] you can pay, but it's a lot better to, to actually get the pay taxes on real profit,

[00:29:44] as opposed to pay taxes on paper gains. Cause AMT is taxes on paper gains. Nobody really likes to pay that.

[00:29:50] I feel like there's a lot of misunderstanding or lack of education in this space. Right. And I'm looking

[00:29:59] at it from, so, so Scott, my, I grew up as a recruiter and I haven't recruited in a very long time.

[00:30:05] I've never recruited in the Valley, but part of the converse, and I was not educated on this.

[00:30:11] So part of my job as a recruiter negotiating salary, then you get into options. And I,

[00:30:17] I didn't know what that was. I was just told, here's what, here's what you need to offer.

[00:30:21] And so from the recruiter's perspective, it was fantastic. Look, look at what you're getting.

[00:30:25] And we kept pushing and pushing, not knowing any of these implications that you're talking about.

[00:30:30] Right. This wasn't part of our knowledge base. What can we do better from, and maybe,

[00:30:35] maybe if we're extending that, this question outside of the Valley, cause I'm sure these recruiters here

[00:30:41] are well-added to this. They're pretty skilled. Right. Yeah.

[00:30:43] But outside of this, in Dallas, in New York, in Chicago, and all these other places,

[00:30:50] how do we educate talent acquisition? How do we educate the recruiters so they can properly

[00:30:55] guide people through this process? Okay.

[00:30:59] And not that they're financial advisors, but they are first-time.

[00:31:02] So if you, you know, tax strategies and this and that, you're really getting kind of getting into the weeds.

[00:31:06] I would think that as a recruiter, your primary value position is conveying how strong,

[00:31:12] how promising the company is. In other words, you could, if you're able to describe it adequately,

[00:31:18] you could do simple math to explain how much the stock could be worth.

[00:31:22] Right.

[00:31:22] Okay. That's the main story. Okay. If they're already sold on that, you know,

[00:31:26] working out the tax, you're really kind of in the weeds.

[00:31:30] That's usually not the closing.

[00:31:32] No. Yeah. They shouldn't be part of that.

[00:31:35] But yeah, but if they are sophisticated and they know those issues are on the table and says,

[00:31:40] hey, listen, I might, you know, if it doesn't work out, they're going to let me go and I'm going to have to exercise.

[00:31:44] And what am I going to do about it then?

[00:31:45] Then you could have in your bag of tricks the fact that we exist.

[00:31:49] Right.

[00:31:50] You know, these guys could probably, I mean, assuming your company is in good shape, you know, could go right.

[00:31:55] A piggybacking off of that is the types of folks that you work with.

[00:32:01] My initially, I think in pre-call, pre-show, I was thinking about executives.

[00:32:07] I don't know why, but I was thinking more about Heinrich struggles like VPs and C-suite.

[00:32:14] Right. But since you've been talking, I've also been thinking about even directors and all the way down to anybody.

[00:32:22] Yeah, anybody that has options.

[00:32:24] Oh, yeah. Anybody that has options.

[00:32:26] The pain is the same.

[00:32:27] In other words, even if you're the receptionist and your exercise is $1,500, it's just a big check.

[00:32:32] That's right.

[00:32:32] If you're a CEO that checks $1 million, it's a pain.

[00:32:37] It's proportionate at that point.

[00:32:38] It's proportionally painful.

[00:32:39] Yeah.

[00:32:41] So financially, it's not as productive for us to do the receptions, but we do them all the time.

[00:32:46] Right.

[00:32:47] Because the word-of-mouth benefit, you know, you handle one person and they immediately tell, you know, as you kind of work.

[00:32:53] Because once you decide that a company is in good shape, you just want to do it over and over again for as many people at that company as possible.

[00:33:00] So it's got to start somewhere.

[00:33:01] I mean, ideally, the first person through is an executive of some type because we can ask the most questions.

[00:33:08] You know, a lot of companies are well-known, so it's kind of transparent.

[00:33:12] All I need is Google to figure out whether the company is in good shape or not.

[00:33:17] Other companies are – I mean, they're literally – I mean, there's thousands of deals being done every year.

[00:33:21] I mean, the vast majority of them are not household names, so I need to be brought up to speed.

[00:33:25] So if it's a, you know, a VP or whatever of the company, I'm able to ask questions as if I was in a traditional venture capital pitch session.

[00:33:35] Ask basic questions about what the company is up to, who it competes against, and, you know, how they're doing.

[00:33:40] What are the traction merits, you know, PKIs they have.

[00:33:45] And then I could, you know, greenlight the deal for funding.

[00:33:49] Because once I sign off on executive, then all the little people – because if the first person through is the receptionist, one of the challenges is that if it's not a famous company,

[00:33:58] the person literally knows almost nothing about what they're doing and what's up.

[00:34:03] And I have to figure it all out on my own.

[00:34:05] It's just more challenging.

[00:34:06] It can still be done.

[00:34:07] Yeah.

[00:34:08] Yeah.

[00:34:09] I could see that.

[00:34:10] Does – we mentioned IR.

[00:34:12] I mentioned hiring struggles.

[00:34:14] Could they be – are they partners of yours in a way?

[00:34:18] Because they're placing people –

[00:34:21] You mean the recruiters?

[00:34:23] Yeah, yeah, yeah.

[00:34:23] Well, I'm thinking of executive search in particular.

[00:34:26] Oh, the research – the – well, we don't like to – partners suggest that we have a financial connection.

[00:34:32] That's going to create some additional liability for both of us.

[00:34:34] Yeah, yeah, no, no.

[00:34:35] So we're really a tool, okay?

[00:34:38] Yeah.

[00:34:39] You know, just like if you need an attorney to negotiate severance, blah, blah, blah, you should have in your bag of tricks a bunch of attorneys that you trust, you know,

[00:34:49] that the person could talk to and interview and get, you know, gets up and taken care of.

[00:34:55] Even if it's just a moving company, you probably have those in your bag of tricks too, you know.

[00:34:59] Right.

[00:34:59] You can handle that and give you the best deal.

[00:35:01] And we're just another one of those, you know – it's a big one.

[00:35:05] Because the goalie handcuffs do need to be broken.

[00:35:09] So – but to say that we have a connected – like, for example, one of our referral sources, people often need tax accountants to, you know, to handle all this stuff that results from our transactions.

[00:35:21] Okay?

[00:35:21] You usually make a lot of money and they've got complicated taxes and stuff.

[00:35:24] So we do a lot of tax referrals.

[00:35:26] But it's really important, you know, my own in-house counsel has reminded me as many times that those people are arm's length,

[00:35:32] that we do not have any type of financial connection, no referrals or anything like that.

[00:35:38] Right.

[00:35:38] Because, you know, we're the counterparty in this transaction.

[00:35:41] Right.

[00:35:41] So whoever handles their taxes, I mean, that's got to be your decision.

[00:35:46] I'm happy to provide a list of people that other people have been happy with.

[00:35:50] But you have to interview them yourselves, okay?

[00:35:53] And you sign them up and you pay them yourselves.

[00:35:55] You know, if they're being paid indirectly through us, you always wonder whether they're doing something that's mainly in our interest as opposed to theirs.

[00:36:04] What's your favorite customer story without names of things, but just like you got a lot of pleasure out of your team,

[00:36:12] got a lot of pleasure of helping a person navigate these murky waters?

[00:36:18] Well, the big scores are always a big deal.

[00:36:20] But a lot of the quick, you know, happy faces I get are the quick turnarounds, okay?

[00:36:26] I think we've transacted maybe 18 times within 24 hours, okay?

[00:36:31] Wow.

[00:36:31] Wow.

[00:36:31] So every once in a while, somebody just, they're up against the wall and say, hey, I never knew you guys existed.

[00:36:39] They're about to expire, okay?

[00:36:41] And then if it happens to be a company that we've processed before, you know, I kind of put on this face as, you know, like,

[00:36:49] well, that's really challenging, you know, 24 hours.

[00:36:52] I mean, I got to do this and that.

[00:36:53] But I'm thinking to myself, okay, yeah, yeah, we got this.

[00:36:57] Let's just service this guy.

[00:36:58] They're going to be really happy that we made that accommodation.

[00:37:04] Yeah.

[00:37:05] Yeah.

[00:37:06] Yeah.

[00:37:07] I think a common scenario is the easiest things for us are the IPOs and the person expires.

[00:37:14] Their 90-day expiration is actually during that 180-day lockup.

[00:37:18] Yep.

[00:37:18] And that's a corner case.

[00:37:19] But that happens a few times a year.

[00:37:22] And those people, and the stock's not liquid, so they can't go to Wells Fargo and other places to do it yet.

[00:37:27] But that's like a zero-risk, you know, low, very low-risk situation for us.

[00:37:34] They just don't have the $200,000 necessary to do it.

[00:37:37] I said, yeah, I'll write you up in, you know, literally 24, 48 hours and get those things exercised.

[00:37:43] And you just wait out the last four months and then you sell just enough to pay off the note.

[00:37:48] We have a simple interest note.

[00:37:50] Right on it?

[00:37:51] There's no equity on that.

[00:37:52] There's no percentage, you know.

[00:37:54] Yeah.

[00:37:54] Let me just give you a simple interest transaction.

[00:37:55] Ryan, I don't know about you, but I've learned a lot, both in pre-show and doing the show.

[00:38:02] It's like, I didn't know this existed.

[00:38:04] Yeah, this isn't a strong suit of mine, Scott.

[00:38:06] So this is actually educational and therapeutic at the same time.

[00:38:11] It was, yeah.

[00:38:12] This is absolutely fantastic.

[00:38:14] Some of those questions might have been because I need to know.

[00:38:17] Yeah, yeah, yeah.

[00:38:19] 100%.

[00:38:20] Some of those shows you have have an exercise.

[00:38:23] Yeah.

[00:38:23] So thank you so much for coming on the show, brother.

[00:38:26] This has been absolutely educational and just wonderful to talk to you.