081: How to Leverage Equity for Financial Growth in the Tech Industry

00:00 - 34:14 | Christopher Nelson: Like many others, I was just starting out working in tech. I thought the only people that made money were founders or CEOs or somebody who worked for an early stage startup. But I ultimately learned that I was wrong. I saw so many people in my network that were doing very well for themselves working for these different types of companies. And so I had to know how. And this is where the mindset shifts, thinking like an investor with your time and talent is so important because this is an investment, meaning that there are fundamental rules. There are people at the negotiating table and they have different interests and wants. If you understand the rules and you understand how to play the game, then of course you're going to be able to win. This is when things got really exciting. Welcome to Tech Equity and Money Talk, the only podcast that talks about building wealth with tech equity and how to manage the money that comes with it. Do you work for equity compensation? Do you have questions on how your tech equity and money work together? Welcome. Every week we discuss strategies and tactics for how to get smarter around equity compensation and money management to help you reach your financial and lifestyle goals. Let's get to the show. Hello and welcome to this episode of Tech Equity and Money Talk. My name is Christopher Nelson. I am your host. And today we're going to dig into the fundamentals of trading your time and talent for equity, right? This thing that we do going to work for equity is what many people call it, but I want to break down the fundamentals of what this exchange of time and talent for equity really looks like. A lot of people are frustrated and they believe that the game is rigged. They want to win. They want to be able to get high value liquid equity. But unfortunately, because this isn't taught in school, because there's not a lot of fundamentals out there, people don't know where to get educated. So that's what I'm going to break down with you today. And we're going to start at high-level fundamentals that anybody who is thinking about going to work for tech equity can understand. But this is also for people that have been doing this for a while. I know there's plenty of professionals out there, mid-career executives that actually are holding equity and in maybe even large amounts, multiple seven figures, but they're trying to understand, okay, where do they go next? What is their next transition and how do they repeat what they maybe accidentally fell into the first time? So let's break down the fundamentals. How does somebody transition from a paycheck mindset into understanding how to trade your time and talent for equity? Well, you start with the fundamentals of how do we build wealth? The majority of wealth is built by owning high value assets. And in this case, what we're talking about is owning portions of technology companies. Technology companies in the last 30, 40 years have built a phenomenal reputation of being able to grow rapidly, create value for customers, and then also increase the value of their share price, whether that's publicly or privately owned, to be able to increase wealth very rapidly. It's also not tied to your time. When you own an asset, it can grow in value and it's not dependent on the amount of hours that you work. So let's start with the fundamental principle that owning pieces of these companies is able to increase your net worth very quickly. And what we usually talk about is owning shares. So you're owning portions of those companies. And so Robert Kiyosaki talked about this in his seminal book, Rich Dad, Poor Dad. He drew out this cash flow quadrant and he talked about the fact that if you are a business owner, if you build equity, meaning there's nothing and you start and you come up with a concept, you get some investment, you get some developers together, you start building the startup story, you can build value that will then scale beyond the amount of time that you put into it. You're bringing other people to work for you. That will scale and generate wealth. So building equity is one of his primary ways that he talks about building wealth. The other one is buying equity, when you get to a point where you make enough money that you start investing, you're then going and you can buy equity shares. Both of those are very viable ways to build wealth. The second one, you think about buying equity, many people trade shares and it's easy to get into the stock market and be able to buy shares of Apple, Alphabet, Microsoft, you name it, you can buy shares of those companies that can increase in value and you can get involved with not a lot of money. The challenge with building equity is that it takes a lot of time and a lot of risk because you're starting in an area where there's not, you know, may not be any type of foundation. You're spending a lot of time and people put a lot into that. We know the early stage startup story. The other way to make money is buying equity. However, then you're constrained by how much money you have to buy equity. And you always want more to be able to create a diversified portfolio that one day can be your business, that can support you and your family. There is a third way that is not always talked about, and this is the one that we're going to deep dive into today, which is trading your time and talent for equity. This is a way that has been happening for years and years, starting back in around the 50s. Gonna dig into that in a second. But when you trade your time and talent for equity, it is a trade. You have time, you have a skill that technology companies want. You give that to them for a certain period of time. In exchange, you get equity. That's the highest level of what we're talking about here today. And you may be saying, well, can people really make money trading for equity? I'm here to tell you, yes, this is how I was able to build my personal wealth and got it to multiple seven figures by selecting companies that were 12 to 24 months from an IPO. And I was right three out of four times. That's what worked for me. But myself aside, you can look out there, you can look out in industry and you can see that there are some traders, people that trade for equity that have done incredibly well. And you know many of them. Tim Cook, Apple CEO. Never been a founder. He started working early in his career for Apple, became an executive, developed valuable skills, was able to take over for Steve Jobs, worth $2.13 billion because of his skill. Same thing with Satya Nadella. Again, it came in early as a public company, not early when it was private, but as a public company. 970 million. Sundar Pichai, CEO at Alphabet, 600 million. Then you have Frank Slootman, who has been a serial CEO for multiple companies, the ones of Note, ServiceNow, and Snowflake, in which he owns 4% of Snowflake. And his skill was helping, as a CEO, helping companies go public in scale. That's what he's known for, wrote a book about, and $2.6 billion. He actually has a greater net worth than Tim Cook from the skills that he was able to flex. And then I know Godfrey Sullivan, who helped Hyperion to an acquisition, took Splunk public, $495 million. All the names on that list are people that weren't founders. I'm sure they're buying equity now, but when they started their careers, they were trading their skill to be able to build wealth. And essentially what I've done is I study these gentlemen, their traits and other women and people in industry and really wanted to understand what is this framework that we're operating under that allows us to trade our time and talent for equity and how do I understand the rules? So now that you understand the framework that we're looking at this third type of building equity, which is trading your time and talent for it, let's go a little bit into the history and then let's start really understanding what are the fundamental rules of this game. So, early on in the 1950s, there were, it was actually chip companies in California were offering scientists and people starting to work in technology on the East Coast, they were offering them equity to move to California, to move to the Silicon Valley, because they wanted to not just entice them with money but they knew that if they could make them a part of this company in a part of the future that then they were going to be able to attract and retain great talent. And this is essentially the premise that has been going on to this day is that Technology companies know that to be competitive, they have a framework where they are solving very difficult problems in high speed environments. There's a lot of pressure from customers to produce very high quality products. They need to attract and retain the best talent. So this is the fundamental of this exchange is technology companies want to attract and retain the best talent. So let's remember that. So the key thing to understand is this is a trade. It's not a, you know, when you build, you're able to build something, whatever you want out of your own imagination. You want to obviously look for a product market fit, but I've, I've definitely been. sent some ideas that somebody's building something they want and it may have nothing tied to reality. In buying stocks, there's a buyer and a seller. So the seller needs to display value and then the buyer is going to figure out what's the market price for that. and they're going to pay with currency, whether that's US dollars, euros, British pounds, you name it. A trade occurs when there's a transfer of assets between two parties, and it happens when both parties have something of value that the other desires. And this is so important to understand, and this is where I think people miss, and this is where they struggle, is because they don't understand this concept and really dig into what they're looking to position themselves as is something that is to be desired by the other party. And then also to look and understand what do they really want and what is high value that they want to be acquiring. So when you think like an investor, and this is what I educate people on all the time, is that to be successful in this, you have to think like an investor. This is a business negotiation and you are investing your time. Time is your most precious resource. So when you prepare to sit down at the negotiating table and you're studying this and you realize, okay, this is a trade and I'm trying to position my value and I'm trying to understand what I want, what's the value on the other side, you want to understand What are the players who are the participants in this negotiation and what do they want? So the tech company, as I've mentioned earlier, the tech companies want the best people. They want highly skilled individuals where they can invest in, invest dollars, invest equity into that they know will drive innovation and growth and help them meet their goals. That is the desire of the company that has the equity. That's their fundamental need. If they do not have great employees to drive innovation, then they're ultimately not going to be able to grow in this highly competitive environment. and technology is definitely a scale or die environment. Their desired outcome is that they are able to bring in these highly talented employees and retain them for long periods of time, achieving multiple goals, quarter over quarter, year over year. And to do this, they are going to provide them with salary, possibly bonus, equity, and benefits. So this is when the trade, this is what the technology company, this is what they're thinking through, is they're looking across the table, is this a highly skilled employee that's going to help me achieve our goals? And can I retain them for a long period of time? And ultimately, I'm going to be able to bring to the table, I, the tech company, will be able to bring to the table the salary, the bonus, the equity, and the benefits. That's the technology company side of the table. What does the technology employee want? Well, I'll tell you, for myself, I'll tell you my perspective, and I know other people that are doing this successfully, is when they sit at the other side of the table, I am looking for the maximum value of my time and my talent, and I want that compensated with salary bonus and equity while, and this is an and, and getting exposure to new projects, being able to deliver results, and being able to potentially get exposed to new technology as well. Why is that? Because If I just do the same thing I'm known for and I don't get a chance to grow that, then my value as an asset stays static. So I want to make sure that I'm getting the maximum compensation I can for right now and the opportunity to grow. It's an ad statement. My outcome is to be a part of a company that is growing, is highly valued, and the stock is liquid. Growing highly valued in the stock is liquid. What do I have to trade? I have to trade if I have proven talents. I have skills that I'm able to articulate in the form of results. And I can sit there on the other side of the negotiating table. I can articulate that. I can give references that can validate that. And I can describe to them the ways that I am going to use that to help their company reach their goals. That is my role. Now, where do I see people falling short here? As many people don't understand these two roles, they don't sit down and dissect how this trade works so they can understand how to negotiate and to position themselves well. In this negotiation, Number one, if the company that I am interviewing for, if I'm not able to understand when their stock is going to get liquid, that decreases its value for me, regardless of what they say. For me, for myself, because I know the value is in the liquidity. One of my strategies was to position my career in business applications with a specialization in helping companies go through SOX audit. SOX audit is a requirement when you go public. So I wanted to position myself to be open for roles for companies that were 12 to 24 months from IPO. And if there wasn't that clear line of sight, then I knew it wasn't a right fit for me because I was willing to take the risk with one to two years of my time, as long as I was able to see that we were going to get to liquidity. That was my risk measurement. I did not want to go earlier than that because I didn't want the risk. I see many people being very successful in going to work for public companies. executing this negotiation very well, showing companies where they can deliver great value, have a breadth of experience, and they're negotiating for equity that's already liquid, that they're going to potentially get a larger percentage of their salary, match their salary, or get multiples of their salary every single year. Those are the people that are negotiating to build wealth. The companies on the other hand, and this is where I believe that a lot of companies who are just positioning equity and increasing the volume, are able to get in people's heads and they see, oh, I have this percentage of the company or I have a large portion of equity. but there's no conversation around the liquidity event or how they're going to get to the liquidity event. And this is, it's a misconversation because in this negotiation, you don't want to overvalue something that there's not clarity or an understanding of getting to that liquidity because liquidity is then the key to unlocking your personal wealth. Don't forget that. So now that we understand the players, we understand here is the technology company. The technology company wants to attract, retain employees. They have the equity, they have the salary, and they have these shares, right? They want to be able to position themselves as a company that's growing and line of sight to liquidity. On the other side, you have the technology employee that wants to position themselves as this, you know, predictable asset that can come and bring value, that wants the ability to work on very impactful projects for the company. And the desired outcome is to be able to get a large portion of equity that is growing in value and that is liquid. So let's talk about the negotiating table. So now you understand the players when they sit down, and they're going to have a negotiation, and this is how it works, there's four phases. And this is important to understand how this all works because don't waste your time having conversations that you don't understand your intention. I do know many people that have a lot of conversations because they want to ensure that they are brushing up on their interviewing skills and they want to just make sure that they're out there in the market. I'm saying you're going down and having really intense conversations and negotiations when you don't know that or when you know that this isn't a company that you want to work for. You just want to be careful around that. So what are the four faces of negotiation? Number one is displaying common interest. So this is truly the phase one when you identify a company that you think has the potential to meet your criteria. And again, I'm gonna be doing another episode. I've done one before. I'll link to it in the show notes that I talk about risk, but this is where you wanna be targeting companies that are aligned with your personal financial goals that you want to work for that are going to then be in this risk level. Maybe you want high risk and you want to go early, maybe you want low risk and you want just public companies, but you want to get clear on that. And then as you're looking for companies, they're going to then see your resume or somebody is going to recommend you as a potential candidate for a role. And you're going to have this common interest. Then the next phase, I like to describe it as the presentation, where then you get on the phone and you get the opportunity to listen and understand. This is usually going to be a first line recruiter where they're going to be describing to you the company, what's happening in the company, and you get to articulate who you are, what are the results that you've delivered before, what you see that you could bring forward to this company, and why you're interested in this role. This is the presentation. And you want to make sure that at that moment that you are focused on positioning. Positioning means that you are understanding the role and where they want the role to contribute in their organization. And you're talking about similar contributions that you've made before. You're able to map to some of the things that they're interested in that role. So that then during this presentation, the goal is that you want to be able to then go to the next level. Because in presentation, this is truly the interviewing process, right? When you're going from interview to interview, everybody is presenting, everybody is positioning. And during this phase, you need to be clear on what you are looking for in the equity of the other company. You have to have a clear idea. This is where I see people slip and fall because they're focused on presenting themselves. And so they think that they need to sell themselves to get this offer at all cost. At the same time, they lose sight of the fact that they need to be getting details on what is the product's role in the marketplace, right? I mean, is it a leading product? Is a new product that is just breaking into the market? What's its differentiation? You know, what's happening with customers? How do customers perceive the product? What's the culture of the company? Who are the leaders? A lot of these things. And then getting to, you know, once you get to the presentation, when you get to negotiation, which is the next phase, that's where you want to really start talking about, okay, what is the plan for liquidity? In presentation, though, it is important that you are understanding the value that they're bringing to you as much as you're bringing to them. And this is why I tell technology employees, you are the asset. You have a lot of value. So you need to make sure that on the other side of this exchange, because that's what it is. And remember, you're looking for mutual value exchange, that you're getting the value that meets the quality of your asset. So we've had a common interest. Then we're at the presentation, the interview process. Then you get to the negotiation. So this is where you actually get to in concrete terms. The negotiation starts when you receive the offer letter and the offer letter is then going to have described out the details of the salary, the bonus, and what your equity is going to be and how you're going to get it. So you have the negotiation phase. And in the negotiation phase, there's also going to be the vesting schedule. And this is so important and something that people need to consider is in the vesting schedule, that is how much equity you're going to receive for how much time given. And this is becoming a very nuanced and new place where people are able to negotiate. This year, I heard for the first time about a front-loading vesting schedule, meaning the standard one is four years where you get 25% for a year and there's a one-year cliff, meaning you work for a year with no equity. Then you get 25% on your year date. Then after that, it's going to vest monthly or quarterly and you get a portion based on how long you continue to work there. Now I've seen 50% in year one, 30% in year two, 20% in year three. Why is this? To attract and retain the best talent. So this is where this is key for negotiation, but you in the negotiation phase, that's where you want to sit down and you want to really be able to articulate your market value, you're doing your own analysis and understanding where they're marking you to market, where you've been marked before, and having a conversation around the salary, the bonus, and the equity of where you ultimately need to agree to get this deal done. And I want to wrap up these four phases because I want to talk through some strategies, and then I also want to just continue to drain this process. But this negotiation process goes through display common interest, presentation, you get to the negotiation, And then you get to the final agreement. And in the final agreement, this is where documents are signed, right? This is a negotiation where you have the tech company, you have the tech employee sitting at the negotiating table, and they go through this negotiation process. And then ultimately they agree upon the offer letter, where the offer letter is going to have what is your salary, your bonus, and your equity described there. The equity needs to also adhere to a stock agreement. You're going to have those. And then you're also going to have the vesting schedule that is described. Now it can, I've seen it, the vesting schedule described in a stock agreement. I've seen it described in an offer letter, but those are the output of this negotiation. Those are the contracts that are then signed. And so knowing this, so now that we've walked through this whole procedure, it's important to understand that you have leverage and how to really think about where you need to position yourself and where you have the ability to negotiate. So let's think through some success strategies. So preparation is key. Preparation and understanding and knowing who you are, your experience, and your market value is critical to getting into a solid negotiation where you're ultimately going to get the package that you want. Part of that preparation is understanding this process, right? Understanding that you're going to have an opportunity when you're in this presentation phase. It isn't just you presenting to them. They need to present to you. You need to find something that is of the right value that you want to invest your time in to be able to meet your financial goals. So preparation is key. Performing your due diligence, meaning that you want to be in these conversations during the presentation and asking a lot of questions and understanding if this is the right value for you. I have helped a number of people recently with a compensation analysis that I call Should I stay or should I go? And for some people that are at that point in their career where they've been working for public technology companies and they want to go to work for private technology companies, they want to go through an IPO, it's important to compare what they have on the table right now and what's right in front of them versus what is being proposed by these other technology companies. I know in this particular scenario, we went and did a, you know, forward-looking three-year analysis of the current comp package at the public technology company, and then we looked through the private technology company that was, it was a role with more responsibilities, so there was a higher salary, and then there was stock that was based on a, we may go public in three years. And so when you look at that up, you look at realized gain, just like you do on the stock market, like what's realized, what's cash you can take off the table versus what's an unrealized gain. And I know I'm sort of using those terms a little loosely here, but ultimately in two out of three of these conversations, People selected to stay at the public technology company because they had line of sight to an additional seven, seven plus figures. And to meet their financial goals, it was just easier to stay where they were, not to take the promotion right now and to just keep harvesting the equity that they have. That's thinking like an investor with your time and talent. And that is doing due diligence on these potential types of moves. And, you know, in two of those situations, I mean, they were getting the volume of shares they were getting were very high, but it didn't meet their criteria from a risk perspective. They wanted to make sure that they could take some dollars off the table that were liquid today to be able to put aside into a diversified portfolio for their family so that they can be accelerating their financial independence. That's when you think like an investor, this is when this becomes a strategy, it's not a game. Because you're thinking about the fundamental rules on the table and part of those rules are when you're an investor, you're going to look through a lot of opportunities that don't fit your criteria to find the one that does. You're also gonna be more conservative sometimes, meaning you're gonna go for the bird in the hand and not the two in the bush. because you know that you can take those dollars off the table. A lot of people are not thinking like that, but this is where they're now becoming aware of how to really execute some of these strategies. The third strategy is really understanding your leverage, is understanding that there still is a war on talent, finding great talent that can execute at a high level. Leadership skills are very, very sought after here in the tech industry. So you do have some leverage, And it's important that you understand that, and you're able to bring that to the table. Now, on the other side of the table, let's look at the company. What is their leverage? What do they bring to the table? Well, if they're able to understand you and your needs and what's important to you, and they can get clear, if it's a private company and they understand you're seeing a lot of risk, they can bring more cash to the table. They can ensure that you're getting the cash that you need. They can have, you know, I think some companies are doing a great job. I think of Stripe in particular, where it's making sure that it stayed private very long, but it's bringing secondary market liquidity to its employees to make sure that they can start getting liquid. and it's not just the founders, but they can then retain those people. I was hearing that Figma, I don't know what the result is, I'll have to look that up, but Figma, after they were not able to merge with Adobe earlier, they then had to go back and look at Tinder offers, secondary market liquidity, what were ways that they were going to take care of their employees. And that's so important to understand that The technology companies understand this, that they need to take care of their employees with equity to be competitive in this broader market. This market isn't going away. The market is growing. More and more technology companies are being formed every single day. People are working for equity. So this is your opportunity to understand this framework from the ground up as this trade in this exchange and understand what your value is and what your leverage is here. And so I do want to take a moment and I do want to talk about, let's talk about those contracts again. You have the offer letter. So that is going to outline your salary and your bonus, your benefits, and possibly the divesting schedule could be called out there, especially if it's amended. Or you look at your stock agreement. And the stock agreement is really, really important because in your stock agreement, It's important that you make sure that you're looking at what happens to those shares if the company is sold, if an acquisition comes through, what happens on those transitions, understanding what are your voting rights, understanding what are your trading rights. As you are in this negotiation, you want to really understand this process and in these agreements, because this is a valid way to work for equity. Going back to the beginning of this conversation, you can now understand that all of this process that I'm calling out for you, when you think about the Frank Slootmans, the Tim Cooks, the Satya Nadella's, all of these people have had these conversations, right? When they're getting new promotions, they're sitting down and they're negotiating this. I remember in a conversation, in listening in, I was listening in on a Q&A with Godfrey Sullivan at one point, and he talked about as offers were coming to him, he has teams, you know, a team, not teams, but a team, multiple people that he then relies on to help him do diligence of companies that he wants to invest his time in. He was referring to now as board members where this is where CEOs, when they're no longer active CEOs, they sit on boards of other companies and they usually get all stock compensation. But that's part of the vetting process is bringing in people to look at the underlying fundamentals of the company because the goal isn't to just throw away their time. The people that do this very, very well get very, very picky and they just want to work at the best companies. They just want to trade their time and talent for the companies that they know are going to have the most potential upside and they're looking to get equity shares in exchange for that talent. And the truth is, is this can play down on many different levels. This can play down even at an entry level. I saw at Splunk, I saw fresh out of college candidates starting getting RSU packages as the company grew that, you know, they started when they were 23. By the time they left when they were 27 or 28, some of these packages were high six, low seven figures. And so the point I'm trying to make is when you think about this strategically, and when you break down the framework of this exchange, and you understand your role, you understand the company's role, you understand everybody outcome that they want at the table, what they have to bring to the table, and the leverage, you can negotiate to win. you can negotiate to win at whatever level you decide to participate. Equity is a significant way to build wealth yesterday, today, and tomorrow. My encouragement for you is that you understand this, get grounded in it, and leverage this to build wealth for you, for your family, and to be able to accelerate your journey to financial independence so that you can live a life with impact. It's my hope for you. My name is Christopher Nelson. Thank you so much for joining us today. See you next time.