080: Equity Compensation Strategy by Christopher Nelson

00:14 - 28:53 | Christopher Nelson: Hello, welcome to episode eighty of Tech Equity and Money Talk. I am your host, Christopher Nelson. I've been in the tech industry for 20 plus years, and after climbing my way to the C-suite, working for three companies that have been through IPO, and investing my way to financial independence, I'm here to share everything with you. And I'm very excited about today's episode because I get to share some of the strategies that I dug out. People were practicing these for years, but I had to tease them out and put them on paper. They're going to be in my book that I'm going to be publishing in the fall. And it's two key strategies that shift your mindset for how to work for equity as a wealth building strategy. Now I know saying this out loud could be controversial to some, because some people have had a great experience working for equity. And I'm not talking about just, you know, Jeff Bezos, Elon Musk, you know, or Larry Ellison, Bill Gates, these guys who have made billions of dollars. I'm saying that there's people that we know in our lives, for those of us working in tech, who've had a good experience working for equity. That's why many of us go and try and do it. We've also known people that haven't had a great experience, that have gone to work for equity, worked for years and nothing has happened. Well, what's the difference? Well, if you listen to my origin story in episode three, you'll realize that after my first failed startup, when I still believe that working for equity as a wealth strategy was a viable option for me, I went and I started calling a lot of people, sliding into DMs on LinkedIn and finding out how they did it. And that's what I've compiled, that's what I put into this process. So what I'm gonna share today is two key strategies, the way that I like to learn things, the way that I'm sharing information with yourselves, and especially in these solo episodes where I'm gonna be breaking down fundamental concepts, there's gonna be two types. There's gonna be strategies, it's going to be playbooks. Strategies are these large level concepts that you have to get your head around, that you have to understand, that drive fundamental shifts in the way that we think. We have to do that first because once we understand it, then we can go and the playbooks make sense in how we execute. So today, the two fundamental concepts that we're going to cover off on is the concept of always working for equity, and you are the asset. So first, let's always work for equity. If you're going to work for equity as a wealth strategy, you should always be working for equity in the sense that if you're going to be working a W-2 job, You want to make sure there's an equity component to it. I'm going to take a few steps back for everybody who's listening, because I know a lot of people are listening, trying to understand how to get into this at all. So let's talk about the history. Technology companies, technology companies for many years, I know starting in the eighties, possibly earlier than that have provided equity or fractional ownership shares in the company as part of their compensation package. Well, why did they do this? They did this because a lot of them starting out didn't have a lot of cash to invest. So they wanted to secure great talent. So they would give them fractional ownership because if the business succeeded, if they executed the business plan, there'd be a tremendous amount of upside for those involved. And that has continued to this day. And the reason behind it, why do they continue to do it? The same reason as before, they can attract great talent to early stage companies where there's more risk. In larger companies, you think about Google, Microsoft, the Amazons, Facebook, these companies today have to do it. They have to, to retain top talent. So if you understand that broad playing field and you understand that companies are doing this to retain talent, and when I say to retain it means that you can get a, you know, and let's talk about this, what happens is you go to work and you're going to get a compensation plan and it's going to be salary and equity. It's not one or the other. I had somebody ask me the other day. So when you go to work for equity, that means you don't get a paycheck. You only get this equity. No, you get both. In these compensation packages you get a salary, sometimes a bonus, depending on your level, and you get equity. It's all dictated by a stock agreement. This tells you all the ins and outs. And we'll talk a little bit about what are some of the skills that you need to be good at working for equity. So they do this to retain talent. And it happens today and it happens in startup companies. It happens in, you know, mature unicorn companies that are getting ready to go public or get acquired. And it happens in public technology companies if you can work for equity. Why is this so powerful? It's powerful because you're not just trading your time for money. you actually get ownership shares in the company. So when we think about Robert Kiyosaki, Robert Kiyosaki wrote a seminal book, I read it in the late nineties when I was going to college, Rich Dad, Poor Dad. In Rich Dad, Poor Dad, he created this cashflow quadrant. Quadrant one, you're working, you're a W2 employee, you're trading your time for salary. He then had, you know, quadrant, Uh, the, the lower crowd was then your consultant. Then he had your business owner in the top, uh, right hand side. And then on the bottom, he had your passive investor, your investor, your, your cash is scaling and making money for you. And the key thing is, in these top two quadrants, you have the working trading your time for paycheck, and then you have the equity. Now the reality is he wrote a gap in between. But there's really a bridge, and that's why I call this concept Kiyosaki's Bridge. And this is why I think this is so powerful, is that when you work for equity as a W-2 employee, you get the benefit of both. You get the benefit of being an employee. Well, what's the benefit? The benefit of being an employee is it's flexible. For many states, it's at-will employment. There's no employment contract, so you can leave whenever you want. Unlike an owner, an owner of the company, a lot of them have to stay there for years through ups or downs, even if it's successful or not. But you are working as an employee, you can go. You also get the income from a steady paycheck, right? That is something that is part of your agreement and your plan is you are going to get some income. but you're also then gonna get these ownership shares. This is the compounding factor. I call this career compensation compounding where you have the ability to have fractional ownership shares in the company and there's a portion of your compensation based on the results of the company. It actually can go up to the right. This is the power play, right? This is the opportunity to then be able to be an owner in the company but have the flexibility of being the employee. It's what I call Kiyosaki's bridge. And this is why you always wanna work for equity, is because when you have this, you have the ability to then get the benefit of both. And let's talk about what the power of this is. I pulled out a stat this morning that I thought was really interesting. So the average total compensation of a non-tech, non-equity engineer, so somebody who doesn't have equity but who's working in a non-tech company with no equity as an engineer, their base salary, average base salary across the United States, $125,000. $100,000 salary, $25,000 bonus. That's their compensation package. It's a nice six-figure compensation package. Let's look at the same for an average total compensation of a Facebook engineer. So somebody who's doing some engineering at Facebook and these numbers were for 2022, their total compensation package, $357,000. They had a higher base, $175,000 base. So these technology companies are paying a higher base, but they had $182,000 equity package. So the difference there is more than twice as much. When somebody goes to work for these companies, and this is what, when you're also in that environment and you're working for equity, there's also the benefit of commanding even higher salaries as well, because this is all around retaining great talent. To recap, we covered at a high level how equity works, right? You can go to work for these technology companies that provide equity as part of the compensation. That compensation is going to be significantly higher. And this is where you get the ability to be the employee and the owner at the same time. And this is the compounding effect there. So let's talk about what are some of the skills that you need? What are some of the skills that you need to be able to do this? Well, so number one is you do need to understand and be able to manage your equity. There's many people that I know who get their equity and they think, oh, I can just put it over to the side. But you can't. Equity is an investment. It needs to be managed. There are types of equities, ISOs, incentive stock options that are given to pre-IPO employees, that if you don't manage that before you go through the IPO, you can lose a significant tax benefit that can cost you hundreds of thousands of dollars. I've seen it. I've talked to people. We've cried together. It's horrible. So you have to actually manage that equity. The same thing is when you get RSUs, restricted share units that are provided in public technology companies. If you're not actively managing and harvesting and divesting those as you go along, you can be seriously overexposed in a single position. So the concept always works for equity. Always make sure you have that part of your compensation package because over the life of your career you're going to be able to compound and make much more if you don't. So that has to be fundamental principle number one when you're thinking of leveraging working for tech equity as a wealth building strategy. Then the skills you need to have is how to manage the equity and then also how to pick the right companies. Not all Companies are created equal, right? There's some companies that don't have, uh, that have very risky ideas that may not take. There's also companies that are business to business companies where they're selling into, you think of cybersecurity companies, they're selling into, uh, security departments, IT departments that have defined budgets. That could be more predictable on the financials than a B to C company. That may be part of a fad that may be part of a. you know, something that's currently important, but could potentially get disrupted very quickly. Those choosing those companies are really important when you're working for equity. And the key thing I'm trying to call out here is that this is not a get rich quick scheme. This isn't something that you're going to do and all of a sudden get dollars quickly. It can happen that way, but you want to set your mind that this is a path where you can align it to your current skill set, and you can then get equity, and then you can benefit over time with this compounding effect, and you can make more dollars in a compressed period of time. So this is not a get-rich-quick scheme. But it's also, this is not speculating. This is not gambling. It's not. We have been, there's, you know, we get fed a lot of messages from mass media, from social norms, and a lot of the noise out there says, Oh, we're going to work for startups is really risky. Well, it is. But if you're, if you're thinking about building wealth, working for equity, you're going to look at the whole spectrum of risk. There's plenty of people like these Facebook engineers that have gone to Facebook from a non-tech company, they've gotten a boost in salary, and they have Facebook stock that's relatively stable. It's a FANG stock. It is, you know, not fluctuating tremendously. It has a lot of growth or you can think about Google, you can think about Amazon. A lot of these stocks are well established in the market and growing and the stock is liquid. It has a value today that you can take off the market. That's completely different from going to work for an early stage startup company. So I wanted to make sure in this first concept that we covered today, always work for equity. You understand some of the fundamentals. How does it work? You understand that this is a key wealth building concept. We get to be an employee and an owner. We get the benefit of both in that it's not a get rich quick scheme and it's also not gambling. What I want you to understand is that as we get to the end of this first segment, we're then going to transition to the second half. To work for equity, you need to think like an investor. You need to think like an investor with your time and talent. And I'll tell you why. When I, the three mistakes that most technology employees make when working for equity is number one, they let passion rule reason. You know, we get emotional about these startups that have these great visions and missions. We don't ask questions beyond that. We get sucked in emotionally to these companies. Number two, we take on more risk than aligns with our financial goals. If you're thinking like an investor, you're making an investment of your time and your talent, and you want to get the best return on that. And then number three is we go at it alone. We don't talk about it. That's the point of this podcast. That's the point of my meetup, is that we can get together and we can have these conversations about career money. And so when you think like an investor, it mitigates these things. Because when you think like an investor, number one is you're going to have a framework, a way that you approach this. This is the topic of this book that I'm going to be publishing later this year. It's a proven playbook for how to trade your time and talent for tech equity. It's the strategies and the playbooks. It's the instruction manual. And so you can have that. And that's what I'm trying to say is you don't have to go invent it. Like it's, it's there. I'm publishing it for you. Number two is there. We also understand and know our risk profile that aligns with our financial goals. Investors, you know, great investors. You look at Warren Buffett, is he going in all on micro cap, high risk, high reward? No. If you look at his portfolio, he looks at a lot of core fundamental products, arguably boring businesses that he is investing in that he knows that he's gonna be able to make a return on. That's what we need to do as investors of our time and talent. We need to be looking the same way and understand our risk profile. And then number three is when you think like an investor, you're always gonna be doing it with people because investors have other investors they get their ideas with. Other investors do not go at this alone because they know that they may have a way of thinking, they may have blind spots, they want to get as much data as possible from other people. And again, this is why coming into a community is so important. So that's the first part. The first part is always working for equity and having some of those key skills of being able to understand and manage equity, selecting the right companies. Those are critical skills in this first fundamental strategy. I'm going to take a quick break. It's going to be a break and we're going to come back and then we're going to talk about the second strategy, which is you are the asset. And this is the thing that's going to shift your mindset and bring it all together. I'm talking just for a moment. Okay, welcome back to tech careers and money talk. We're coming back to the second half of episode six, where we're talking about two main strategies to leverage tech equity as a wealth building strategy. So, strategy number two is you are the asset. So, We have to look at the playing field. If you want to play the game well, you have to know the field. You have to understand the game board, how all the pieces are set up, right? So here you're going to a technology company. And you are trading. It's an exchange. It's a negotiation of your time and talent for equity. So then you are the asset. You are this rare, valuable, prized asset that you're trading for equity. Now, just this mindset shift is very, very important because when you realize that you are the asset, you're going to ask yourself questions of, well, if I'm the asset, then what do I bring to the table? Why would companies trade equity for me? And the flip side is, okay, if I'm the rare and valuable asset, what could I get for this? What can I get for it? What's my market value? And also you're going to ask questions like, where should I invest this valuable asset? Because remember you are the talent and it's time and talent that you're trading for equity, meaning that you want to get the best return on your time. Time isn't scalable. Time is our rarest asset. And this is really why I'm so passionate about this subject is because if people start to understand that they have a very limited amount of time and they say, no, I'm not going to work for a W2 job without equity. I'm definitely going to work for equity. That's going to be so critical because then they're going to be able to get the best return on their time possible. So you are the asset. So when now with this mindset shift, then you're going to want to understand a couple of things, right? When you're in this trading, you're going to want to understand what is the value that you bring to the table. You're going to want to understand what your market value is. And this is why I encourage everybody that I coach to need to go and understand your role, your level at other companies. What's the compensation? What are the skills that they require? How are you mapping to that? Do you have the same skills? Do you have the same comp? That's really the exercise that you want to do. Realizing that you're the asset, you should always be able to articulate your value. in the marketplace and where you're placed. That's just doing good business. That's just thinking like an investor to ensure that you're going to get the best value possible going into any negotiation. And so the flip side is that you also want to understand where you are going to get the best return on time. This goes back to, you know, some of the shared skills that you're going to want when you have these strategies is how do I think about the best companies that I need to be investing this And I want people to understand that this type working for equity is for any type of role is not just for engineers, right? And this probably should have mentioned this earlier in the podcast. But whether you work in finance, whether you work in HR, whether you work in marketing, Right? Anybody who has that type of skills, technology companies or businesses, engineers build it, product managers help shape it, but they need sales people to sell it. They need customer support people to support it, marketers to market it and, and everything, you know, so, so this is where this is for everybody. And then knowing your value in what you can bring to the table in your selective discipline. is going to allow you to then negotiate for the best equity possible. So I want that to sink in. I want everybody to really understand that when you always work for equity and you understand that you are the asset, these are the two key concepts that are going to allow you to start moving forward in building wealth working for tech equity. Now, what are the skills that you need in the framework of you are the asset? Well, one of the key skills that you need is you need to be able to describe and articulate your value in terms of results. This is where people get really confused because they think that the results are what they did and it's not it. It's not what you did. So the way that I articulate this is you have a set of skills. So let's say that you are, um, in customer support. So you're a customer support person and you're able to, you know, handle calls, resolve problems and. And so that's what you do. You, that's your contribution. Your contribution is your day to day work. You take your skill, you contribute to the company and your results are customer retention, customer satisfaction scores, you know, implementing programs that then change those things. And that's what you need to speak about. When you're sitting in an interview to know that you are the asset looking for equity, you want to be able to articulate how you uh, maintained and raised customer satisfaction stores, scores, how you created programs to, uh, reduce customer complaints to be able to, um, provide them more value. You know, if you're able to articulate how you are helping the customer versus, you know, they're going to then ask what you did and how you did it. They're going to walk you through that conversation, but what's going to show your value is that you can articulate that in results. So just a few skills there. The other thing is selecting the right company. So this is important and I want to just take a minute and be able to share with you that people are doing this every single day. And this is what I witnessed. And I saw this on LinkedIn. I saw people that worked for multiple companies in a row that were public companies that were growing. So they were getting great stock that's already liquid. I saw people that were taking companies to acquire one, two, three, you know, maybe there'll be some misses in the middle. They weren't perfect, but they had this portfolio. of companies where they did something significant with the stock. And that's where I leaned in and I started gleaning all these principles and started putting it together into a framework so that you can do it too. Right? My mission here on this podcast is to see a thousand technology employees get to financial independence. And the way that we're going to do that first is by educating you on how you get the most out of your W2 job? How do you use that to accelerate your earnings? So then you can take that, invest that wisely and get to the exit from your career. And I want to make sure that if you go to episode three, you'll hear Brian Weiss say three amazing IPOs in a row. Somebody who I greatly admire, who I get a lot of information from on how do you think about working for equity as a wealth building strategy? There's others. I'm going to bring on other guests as well. And this concept, once you understand these two concepts, it's going to change the way that you think about how you work and the companies that you work for. Uh, just recently I sat down with an executive of a biotech firm and biotech is again, and life sciences, they provide equity in those companies as well too. And she was telling me that when she had for many, much of her career had not worked for equity, then she went for a company and like most of us got the equity agreement, sort of saw what it was, went to work for it. And then. As the equity was liquid and started coming in, she was like, wait a second. The value that I had for my asset was here. Now that I'm seeing this compensation package and understanding what working for equity is, my value and what I know I'm worth is here. And so now when she has recruiters coming to her for new job opportunities, if it doesn't have equity, she's not going to look at it. Because she's like, why would I invest my time there? Because I'm not going to maximize my return. And this is the key fundamental thing that you want to understand this whole process is that you're only going to get what you're worth if you know your value. And once you start playing in this space, you'll realize that you are worth so much more and there's so much more opportunity out there for you. So that's it. I know that there were two big concepts to take in in this episode. Always work for equity. You are an asset. And you're doing this while you're thinking like an investor. And that's what we talk about here on Tech Crews and Money Talk. We are a new podcast. So as I'm wrapping it up, I do need to say, number one, please follow our podcast. And number two, please leave us a review. We would love for you to leave us a five star review. Tell us what you are getting out of the podcast. And number three, tell your friends, right? There's more people, more technology employees that need to understand what we're doing here. So thank you so much. Have a great day. Bye.