065: Public Company Due Diligence for Tech Employees with Brian Feroldi

00:00 - 00:21 | Brian Feroldi: If I was brand new to my career, I would be looking at the big boys, the Facebooks, the Googles, the Microsofts, Amazon, because if you're getting stock based compensation with those companies, the odds that it is going to be worth a sizable number in the future is extraordinarily high. I would like some kind of guaranteed money early in my career, just so I had a base to build off of in the future.
00:23 - 01:21 | Christopher Nelson: Welcome to Tech Equity and Money Talk. I'm your host, Christopher Nelson, and I am super excited to introduce everybody today to Brian Feroldi. Brian Feroldi is a financial educator. You can find him on YouTube. He's also an author as well. He's been intensely interested in personal finance and investing since graduating from college. Like many of us, he got started investing early, his 2004, had no idea what he was doing and went out there and got kicked in the teeth. He realized he needed to understand more about money. He now has become a financial educator. His mission statement is to demystify the stock market. He loves to help other people do better with their investments. and has written over 3,000 articles of stocks, investing, and personal finance for The Motley Fool, which I'm a huge fan of, learned a ton from. And he's also a best-selling author of Why Does the Stock Market Go Up, published in 2022. Brian Feroldi, welcome to the show.

01:21 - 01:23 | Brian Feroldi: Christopher, awesome to be here. Thank you for the warm introduction.

01:24 - 02:15 | Christopher Nelson: My pleasure. And there is nobody better to help us and help help the technology employees who are listening today understand what is their strategy need to be as they are looking at public technology companies to trade their time and talent for equity in. As I share with everybody here, the most valuable stock that you can pursue is stock that is already liquid for companies that are appreciating in value. So today I thought it would be fun to leverage your superpower of analyzing companies and putting you in a scenario where you are applying for a director of finance performance and analysis. I actually think you could do that job very well in some tech companies. and you're trying to analyze, you know, what is the next company that you want to go to work for? What are some of the things that you would start looking at?

02:16 - 05:52 | Brian Feroldi: Great question, and I love just the way that you're approaching this and thinking about it. I really like the subject of your podcast. To me, stock-based compensation is a confusing topic. It's a category that generally people don't have a lot of information about. The information they get is from the company they're working for. For many people, especially new employees, Afterthought, it's not something, for example, first job I got out of college, I was offered stock-based compensation in a startup. And I was like, hey, sounds great, right? They just gave me stuff and I was like, accepted it. Through sheer luck, that stock-based compensation, which I've since sold, if I held it to today, that was a $500,000 decision. Right? And I'm talking right out of college, lowest of the low, right? Could not get any lower in an organization. And yet the stock-based compensation they were giving me was worth half a million dollars. I didn't know it at the time. But it just shows you how how incredibly important this topic is and really useful it is to understand. But I want to answer your question. So if I was on the job market and actively looking at joining a business, the number one thing Number one that I would be looking for would be equity. If I'm investing my time and energy into a business, yes, salary is important, yes, benefits are important, yes, bonuses are important, but the number one thing that I would want would be a way that if that company was successful and I helped contribute to its success, that I would get a massive payday from that. And the way that you would get a massive payday would be looking at the stock-based compensation. Assuming that the company was publicly traded, the very first thing that I would do would be to go to the internet and look up that company's financial statements. Now, there's a bunch of websites that you can do that on. My personal favorite is called FinChat. It's FinChat.io. It's a great way for organizing and finding information about a company. I would look at the company's financials, I would look at the income statement, I would look at the balance sheet, I would look at the cash flow statement, do all my typical due diligence that I do on a company. What's the revenue growth rate? Is the company profitable? Does it have free cash flow? What's its balance sheet look like? But I would hone in specifically on two things. First, what's the dilution rate? The dilution rate is how many shares of a company outstanding, how quickly the shares of a company are increasing over time. Now, as an investor, I want this number to be low. If I'm buying the stock, I want this number to be under 3% dilution. But if I'm looking at it from an employee perspective, I want this number to be high because that means that the company actually has a very generous stock-based compensation practice. And I would only join a company as an employee if it had a generous stock-based compensation practices. Because as I've heard you say on your very podcast previously, the philosophy of the company, the philosophy, the internal culture of the company when it relates to stock-based compensation varies hugely, hugely from company to company. And generally speaking, you want to look for a company that is very generous with stock-based compensation and avoid those that are stingy.

05:53 - 06:23 | Christopher Nelson: And that's a great place to start, right, is understanding the financials and understanding, you're right, where the companies are from their philosophy of granting equity compensation, because where there's incentives aligned, there's opportunity to grow with the company. I'm curious, just at a high level right now, thinking about the sectors that are out there in tech from a B2B, B2C perspective, where would your inclination be to look first for a company and a product market fit?

06:24 - 06:33 | Brian Feroldi: Yeah, so specifically the fake job that I'm going to be hiring for was financial analyst, or I'll just go with director of investor relations. Okay, let's do that.

06:33 - 06:34 | Christopher Nelson: I love that.

06:34 - 08:36 | Brian Feroldi: Let's go there. That's what I think that I would be most qualified for. So given that, my personal role in this company would be related to investor relations, which is just pure overhead. It is not a a mission critical task, it doesn't relate to engineering, it doesn't relate to sales and marketing, I would be pretty agnostic about the category that I was looking for. But if you do want to think one level deeper, when it comes to technology, and you think about a company's tech stack, the safest revenue that a company can have, safest, would be related to probably security. IT spending and security, right? No matter what is happening, I think it's a pretty much guarantee that companies are going to need to spend more money on cybersecurity and IT infrastructure in the future than they do today. This is a problem that is just growing and getting bigger, and it is not an optional expense. It is a mandatory expense. So if I was looking at that, I would first look towards the security industry and a company that I thought had some kind of competitive advantage in the security industry. Now, I'm not a cybersecurity expert, but I know that that level of spending is likely to increase over time dramatically. On the flip side, some of the lowest level spending would be productivity technology that is specifically geared towards consumers. Consumers are very fickle with their spending. They have higher churn rate. They often want very low payments and getting renewals is just trickier. So, small businesses and consumer businesses tend to be harder than those that sell to large businesses. So, I would think more about it from that perspective than necessarily the specific sector.

08:36 - 09:35 | Christopher Nelson: That's something that I think is so important when we are looking to trade our time and talent for equity that is valuable, having predictable spend and predictable revenue, right? And we say this with air quotes, right? Because again, these are investments, nothing's guaranteed. And this is pure education, not advice. Lawyers love it when we say that. You know, you want to be looking at where there is predictable and growing spin because you know it's a growing market. And I agree, you know, being an ex-IT guy myself, that cybersecurity is not going away. The threat vectors are just getting more complex. There will be more investment there. Same thing with infrastructure. So when, now that we're thinking at a high level, okay, we want to look where there is some predictable spend. When you're thinking we're in the public market, so we know the equity is liquid. I want something that can grow. What do you think is a size of revenue or a market cap that you would be targeting?

09:36 - 12:15 | Brian Feroldi: So there's always a trade-off, right? Generally speaking, there's a trade-off. And the smaller of a company you go for, the more like a lottery ticket it is. And the bigger the company you go for, the more your upside potential is likely capped. So it's going to be a trade-off between the two. Personally, the way that I would approach it is if I was Brand new to my career, right? Brand new with starting out. I would probably want to get as close to quote unquote guaranteed equity as I possibly could. So I would be looking at the big boys, the Facebooks, the Googles, the Microsofts, the Amazons. Because if you're getting stock based compensation with those companies, the odds that it is going to be worth a sizable number in the future is extraordinarily high. And I would like some kind of guaranteed money early in my career, just so I had a base to build off of in the future. And I would probably try and target working for one of the big boys for, let's say, three to five years and getting some real capital equity. You could probably make a couple hundred thousand dollars in, quote unquote, guaranteed stock-based compensation if you play your card right. Once you have a foundation to work off of, then to me, I would start to move down market. And by down market, I mean from a market cap perspective. I would personally think that the sweet spot would be publicly traded companies that are worth between $1 billion and $20 billion. that are in the tech sector, obviously, and that I could clearly see when looking at those companies, a growing market, a competitive advantage, and a management team that I could trust. I think that that is that sweet spot, one billion at the smaller end, because if a company gets to a billion dollars, they've clearly established product market fit. They have a high likelihood of, they're past the extremely risky part of the business cycle. They're publicly traded, so there is a liquid market for the companies. And yet, if a company is one to 20 billion, if you pick the right company and you get stock-based compensation, there is a chance that that stock-based compensation could multiply many times over, simply because the company has a smaller initial market cap that it's working with.

12:16 - 13:42 | Christopher Nelson: And so it's so important to call out that Brian, coming from this aspect of being a pure investor and analyzing the scenario, I know he hasn't listened to every single episode of my podcast, and I know that he is now teasing out patterns that we have seen play out with real people and with real life. I think about Ratendra Datta, who is now the head of Applied AI at Databricks, he started his career at Google, and he spent a lot of time taking equity off the table at Google. Then he went to Facebook, now Meta, took stock options, sorry, RSUs, took stock off the table there. Now he's gone to pre-IPO company. And I've seen this time and time again, and it's a pattern that I want to call out for people that when you go to the larger established companies, you start filling up your personal portfolio and you start feeling a nice established base because you're financially secure. That gives you the security to go down market, number one. Number two, you also start understanding what excellence looks like in these larger companies that are continuing to grow and scale. and operate at a high level, you can take that pattern matching as you start moving down market to some of these smaller companies as well too. This is a strategy that I've seen a number of people that I've interviewed here have success with as well. So I think that's a great call out.

13:43 - 15:17 | Brian Feroldi: And I want to say that that strategy that I just outlined is, to my mind, the lowest risk way to do that. I understand why some people would push back and they would say, oh, if you're in your 20s, Swing for the fences, right? Join the smallest company that you can. Get the most experience that you can. Get as much stock in that small company as you can because if you're working for the next Facebook, the next Google, you're done. You're one and done, right? One great company and you're done. I understand that level of thinking. So the way that I just tried it was definitely the lowest risk. The problem with going for a teeny tiny company right out of the gate is that the odds are heavily stacked against you that you found the next Facebook or the next Google. When a company is small and it has not established product market fit, when it has not gotten to the opportunity to get to profitability, you are taking on a huge number a huge number of risks and I would say you have a maybe a 1 in 20 if not a 1 in 30 chance, 1 in 30 of working for a company that is going to grow and work out for you. So I would rather personally, I would rather get some guaranteed money going, get my bank roll going, get my net worth in a decent place so then I could take additional risk on top of that but that's just another strategy to pursue.

15:18 - 16:26 | Christopher Nelson: Well, it is another strategy. The thing that I also want to call out about the early stage company first versus the more mature company first is the fact that you may also not be skilling up in the right way. Right. When we think about this, this trading your time and talent for equity, it is an exchange, meaning that the more I can develop my skills to expertise and I can demonstrate that, the more I'm going to get compensated for that. And many times when you go to these early stage startup companies, they provide you a lot of leeway, a lot of flexibility, but you may not learn scalable techniques, you may not get advanced leadership training and different opportunities they provide at the larger tech companies to skill up. So this is where I essentially in the trading game, I find that more risk. because of the fact that you then may be creating the cycle, and this is what I've seen and observed some patterns, Brian, is people then end up staying and they keep trying to swing for the fences because they haven't gotten the revenue, and they also then don't have the maturity of skills to operate at some of these larger, medium-sized companies, so they just sort of stay where they're comfortable.

16:26 - 17:07 | Brian Feroldi: Yeah, absolutely. And if you're going to go for the smaller, riskier, you just have to know that you are getting hired at purely a lottery ticket company, right? And it is just a lottery ticket. So the odds of that stock-based compensation turning into something substantial for you are extraordinarily low. And the odds of that actually becoming a big fat zero for you, where you're literally trading your time for equity that then goes on to be worth zero, are extraordinarily high. I'm generally a risk-averse person when it comes to finances. I would personally go for a higher likelihood outcome at the start than a low probability outcome, but that's just me and my personality.

17:07 - 18:27 | Christopher Nelson: Well, it is. And this is where everyone has to choose their investing strategy. Every investing strategy is different. And I want to make sure and highlight these more conservative strategies, because so often we see out there in the media, everybody wants to, you know, talk about the accomplishments of the Bezos, the Gates, the Jobs, who have done these incredibly risky things to achieve great success. but not a lot of people wanna talk about the Tim Cooks or the Frank Slootmans, these guys that have specialized skills, weren't founders, but actually traded for equity and did very well for themselves. And so getting back to this use case of you're now looking for different jobs, I wanna understand, so walk us through again, from a financial perspective, you're going to go to finchat.com, FinChat.io. You're gonna be downloading a 10Q, a 10K, doing some financial analysis. You're also going to be looking at product market fit, probably looking how customer sentiment is. You're gonna be reviewing the management team. Help us understand, like when you're looking at the income statement, what are you looking at from a margin and recurring revenue perspective? What are some of those metrics that just pop out to you?

18:27 - 23:16 | Brian Feroldi: Yeah, so to be clear, I think FinChat.io is a fantastic first resource to go to, to understand the advantages of a business. You just brought up some excellent points. Is there recurring revenue? That's a really, really key thing to understand. And you won't learn that from FinChat directly. You'll just see the numbers on FinChat. But I almost wouldn't work for a company that didn't have recurring revenue built into its business model. Like I wouldn't do it. It's that important to me as both an investor and an employee. So all recurring revenue means is that when a company gets a customer, that customer continually provides the company with revenue again and again and again, ideally monthly, if not annually. But you don't want to buy, you don't want to invest in companies that for lack of a better term, consume their customers, meaning they get them, the customer comes in, they buy their product, and then they never hear from that customer again. A great example would be a patio furniture company. I just bought a new table for my patio last year. That thing's going to last me 15 or 20 years. So even if I love that patio furniture, they have consumed me as a customer. I'm not buying that patio furniture again simply because the product is long lasting. So that is a gap of a one-time customer versus if I pay my Verizon bill every single month, right? So that is a repeat purchase. Anything that is on your credit card again and again and again, that's a repeat purchase, a customer. But to get your point, I'm gonna go to FinChat, I'm gonna look up the company, and I am first gonna click on the company's revenue. I wanna see that revenue is going up and to the right. uninterrupted, up to the right. And the company, this is especially true during 2020 and 2021, right? The most recent troubled period for the economy. It's incredibly important to me that a company grows its revenue at a very fast clip, especially during periods of economic stress. Now, tech companies In particular, 2020 and 2021 were typically banner years for them because there was so much demand pulled forward. So it actually might be interesting to see, well, how fast did they grow in 2022 and 2023? Because those were periods when spending actually pulled back on tech companies. But that to me is the first thing I look at. I want to see revenue up and to the right, and a recurring revenue business model. The second number that I would focus on in the income statement would be the gross margin. This is gross profit, which is revenue minus the cost of goods sold, divided by revenue. Tech companies are uniquely advantaged in that they can put up gross margins that are well above 60% in many cases. So the higher the number, as a general rule, the better, but I would want to see at least a 60% gross margin. Ideally, it'd be a gross margin over 80%. Gross margin and gross profit to me are more important metrics than revenue. Because that is, when you think about what gross profit is, that is essentially the market saying to the company, I value your product or service so highly, so highly that I'm going to give you this profit to do what you want with. So it is revenue minus the cost of revenue. And management teams, when they're allocating capital, they can't spend revenue. They can spend gross profit. That is 100% within their control. Do they spend it on overhead? Do they spend it on selling in general? Do they spend it on R&D? Management teams have full control over gross profit. Customers have full control over revenue. So, gross profit is very important to me. And then sticking with the income statement, I'm going to also look at the weighed average shares outstanding for the business. Weighed average shares outstanding. This will tell you how many fully diluted shares a company has outstanding at any given time. And I want to see this number ticking up at a pretty good pace. Again, I'm thinking from the employee perspective. The year-over-year change in shares outstanding because that is an indicator of what the company's internal philosophy is with stock-based compensation. If I saw this number over 5% on an annual basis, and there are a whole bunch of reasons that that this number can be wonky if the company went public, if it issued a convertible stock. But generally speaking, if this number is up over 5% per year, that as a general statement means that that company is likely to have a very generous stock-based compensation policy.

23:16 - 23:30 | Christopher Nelson: Excellent. Excellent. So those are some of the upsides, the positives that you're looking for. What are some of the red flags? Like let's say, you know, because we're always as investors, where's the risk? Where's the downside management? What are some of the red flags you'd be looking for?

23:31 - 25:29 | Brian Feroldi: Yep, so to me the biggest red flag with a company, from an employee perspective, is the company's valuation. In other words, what is the relationship between the market value of the business it's market capitalization, and the company's revenue. The higher that ratio is, the more current expectations are built into that business, and the more market value that that company is being assigned to. If you think back to the late 90s, if you tried to get a job at Cisco Systems, and you were given a ton of stock-based compensation. Cisco Systems, the business, the business is actually stronger today, much stronger today than it was in 1999. But if you got stock in Cisco Systems at a 1999 valuation level, you've done horribly. as an investor, simply because the valuation of that company was so insanely high in 1999 that you, the investor, have done horribly. So I want to see what the valuation of the business is. And as a general statement, boy, is this general, but if a company's price to sales ratio is over 10, that to me would be that very high expectations are built into that business. And if the price to sales ratio is below five, that would mean that low expectations are built into that business. And the starting value, like the valuation of the company on the day that you sign your agreement and the day that you're starting work, boy, does that matter? Now, that is completely outside of management team's control. That's not very much in your control as an employee, but that can have a huge impact on whether that stock-based compensation pays off or not.

25:29 - 26:39 | Christopher Nelson: That's such important insight. That's such important insight for people to consider, right? Because when they do go and they sign the stock agreement and they get their grant, they are going to have that grant is going to have a related stock price that is going to be based on the current valuation. So these are very, very important things to consider. So now, You're hired. You got the job. And so you now are on this vesting schedule and you're starting to receive your stocks. One of the things that is not talked about enough when it comes to technology employees and tech equity. And what the challenge that I've seen in many tech employees portfolios is they think their best thinking got them there. And they so badly want to be part owners in these amazing companies, which we all do, is they get overweight in their positions. I mean, there's many people that have 80 to 90% of their net worth in a single stock. And so, but that's not you. You have a strategy because you have come into this game as an experienced stock investor. So I'm curious, what is going to be your divestiture strategy that you're approaching this with?

26:39 - 29:55 | Brian Feroldi: So I can actually talk exactly about the strategy that I pursued, and you're bringing up a great topic right here. So when I, that company I was talking about previously, I worked for them for 10 years. Wow. And I joined them pre-IPO, all the way through IPO, and that company has been sensational, sensational investment. Last I looked, it was worth $15 billion. I joined them when they were worth about 200 million. Wow. So just pure luck. Pure luck on my part. I was hired by that one in 30 companies that just happened to work out. However, whenever my personal stock, and I got restricted stock and stock options, so ISOs, I got both. Whenever they invested, I was a pretty consistent seller of my equity over time. Not because I didn't believe in the long-term potential of the business. I saw the potential of the business, but I did so purely from a risk management perspective. When you work for a company, your salary is dependent on that company. Your bonus is dependent on that company. In my case, many of my expenses were covered by that company. My personal capital and relationships were dependent on that company. I also didn't want to bet my retirement on that same company. So as stock vested and came to me, I was selling it and I was using that capital to invest in other businesses that I was interested in. Again, not because I wasn't a believer in the company because purely from a risk management perspective. So every investor has their own comfort level with how much of their net worth they should have in any given business. But as an investor, it is so important to think of your downside. So let's say I let everything ride and that company went out of business. If something happened, maybe it was a medical company. So what if the FDA said, you can't sell this product anymore? What if there was a recall? What if we got sued by a competitor of some kind? There are so many business risks that you can't even think of. There are so many risks that you are taking on that you can't account for when you're investing in a business. So I wanted to minimize my downside, sell as I went, and use that to diversify into other companies. For me, the most that I would ever have my personal net worth tie up in any one business is 15%. That is my personal, this is the highest that I'll go. Above that number and I start to lose sleep. So every investor should say, how much money could I have in any given one business where I would still sleep soundly at night? I know people that the answer is 80%. They would be happy to have 80% of their capital in one business. That's their sleep well at night number. For me, it's 15. So find a number. Stop and think about what that number should be and then manage your equity to be roughly in line with that number and you will have a strategy which most people just don't.

29:55 - 32:21 | Christopher Nelson: That's the point that I want to tease out of this that you just articulated, Brian, which is be intentional about it. Don't just, you know, the heartbreaking story, and I've heard a number of like these, but the one that I always go back to is this story of a gentleman who had, we graduated from the same university, he went to work for, it was a chip manufacturer, and his RSU holdings by the time he was five years out of school was worth around two million dollars. And so, you know, what he shared with me personally was the fact that, The way that he thought about it, because he did not pursue education and investment, was my best thinking got me to this $2 million holdings in this single company. I'm just going to let it ride. What happened, and this goes exactly to your other point, is who knew that this company got into litigation challenges? IP. Oh my goodness. The next thing you know, the $2 million, dropped down to 200,000 and then in fear, he sold everything. If he would have held since then, it's comeback plus, we all know going long. But the point I'm trying to make is that, as Brian just articulated, you have to have a strategy. Don't just, and this is one of the challenges I see, this is why I'm advocating on the podcast that you think like an investor, not just with your time and talent, but with this equity compensation that you get, is it's not just a savings account that you put your stock agreement in a safe and you just let it sit there and when you retire, you're gonna go harvest it. It needs to be managed now. You need to pick a number that you're comfortable with and essentially manage to that. Because I think in this scenario, what Brian is saying, okay, 15%, you may build up that position over time, but as you're getting the equity compensation, you're going to be selling, if you have the ability to sell monthly, you would sell monthly. If it was quarterly, you'd sell quarterly. But you would then manage that, and I'm sure you would be doing that in concert with your tax professional, making sure you're doing it in the most tax-efficient way possible. And then where, what are some of the things that, where are you parking some of that? Do you, generally speaking, would you move that to cash and then you would then be looking at your investment strategy and figure out where to deploy it later?

32:21 - 33:50 | Brian Feroldi: This is a, the question you're asking is really fantastic and it really gets into what are your, what are the money needs in your actual personal life? And one other risk that we, one other thing to think about, When it comes to should I sell my equity or should I keep it? Let's just briefly talk about probably the best equity investment over the last 13 years in the in the quote-unquote tech sector. I put that in air quotes Tesla Right? Tesla's been a phenomenal company to work for. The stock is up, gee, since IPO, this stock is up 11,600%. 11,600%. 10 grand. If you got 10 grand in Tesla at the IPO, 10 grand, it's currently worth $1.16 million. Wow. doesn't get much better than that. However, with Tesla, Tesla's stock peak to trough has declined 60% three times. Wow. Three times. Volatile. And this is a pattern that emerges in all Great companies, all of them go through periods, often multi-year periods where the stock can pull back and it can stay down for a long time. And the risk that you're taking on as an employee is what if I have my net worth in that company, it goes through one of these downturns and I need the capital.

33:50 - 33:50 | SPEAKER_00: Right.

33:50 - 35:48 | Brian Feroldi: I want to buy a house. I want to send my kid to college. I want to leave and start my own venture. What if you're in a great company, but sheerly due to the forces of the market? It's a horrible time to sell, right? So you're also taking on the timing risk for that individual company. So yet another reason to sell and diversify away. But to answer your question, this depends totally on your personal capital needs. Again, I am a hyper, hyper conservative person financially, especially when it comes to my personal finances. So what should you do with it? Well, I go through my normal everyday checklist. Number one, do you have any debt? Do you have any high interest debt? Wipe that out first. Number two, do you have all of your retirement funds fully funded? 401k, Roth IRA, HSA, et cetera. Number three, do you have any kids? Do you want to send those kids to college? Is your 529 plan fully funded? So let's pretend that all of that has been taken care of first and foremost. If not, that would be the first thing that I would look to do with it. But after that, if you want to take that money and keep it invested, you can just set up an automatic plan to sell your stock and then just reinvest that into the market via any of the index funds that are available. The NASDAQ, if you really want to keep it in the tech sector but don't want to pick your own stocks, that's been a great place historically to do so. That's fairly easy. Or you can just build cash. with it and wait for an opportunity that you see. So it really depends on what type of investor you are. But as a bare minimum, simplest thing to do, right? If I worked in tech and I wanted to keep the money in tech, I would just sell my restricted stock or incentive stock as it came and I would just take that capital and put it right into the NASDAQ. And instant diversification, no thinking, you're still benefiting from tech.

35:49 - 36:21 | Christopher Nelson: Boom, I love it. So now you're working for the company, you're getting all these shares, you're diversifying. You also have a responsibility to understand, is this the best value of your time? Meaning that you are going to be constantly re-evaluating the company that you're working for. As time goes on, what are some of the metrics that you're going to manage for your employer, who you're getting stock compensation to understand, should I stay? or should I be looking elsewhere?

36:21 - 38:02 | Brian Feroldi: So, the number one thing, again, this is me thinking as me working for these businesses, is what is the recurring stock-based compensation practices of the company? Is this a company that issues a huge amount of stock-based compensation when you get hired and then once you're an employee, forget about you, we gave you your golden handcuffs, or am I getting a recurring transaction to keep those golden handcuffs If it's largely a one and done company, well after my stock vest, I'm on the open market looking for a new business to work for. But if it's a company that continually doles out a good amount of stock based compensation and I have my reinvestment process going, then I would think about staying, assuming that the company was performing well on the public markets. And by performing well, I mean not that the stock has gone up, I mean that the business is doing what management said that it was going to do. So if they're saying revenue is going to do this by this date, that revenue did that by that date. Or if they're saying we're going to become profitable, that the company is becoming profitable. Or whatever the key internal business metrics that you're tracking to, the company is at least hitting those and ideally blowing those numbers That is what leads to a big upside in the stock over time when a company sets expectations and then outperforms those expectations. That is not something that you control at the employee level. That is controlled at the executive level. So if you're investing your time to get stock in a company, you want to make sure that the executive team at that company delivers.

38:03 - 39:16 | Christopher Nelson: And it sounds like the process that I'm seeing, and this is something that I instruct people to do as well, is you're just keeping a scorecard where you're tracking, and I was part of private and public companies, and they usually have their quarterly goals, and I want to understand, did they miss, meet, or beat? and I would have a series of the metrics, and I would have red, yellow, green, so that as time went on, if I'm staying in the green, and to your point, if I'm getting those constant refreshes, and I keep seeing, and the metric that I always use, one of the metrics that I use is, especially as my career was ascending, and I was going from director, senior director, VP is, how many paychecks am I making in a year? If I'm able to make my salary, and I say this is where you're in what I call the career compounding quadrant, is you have the skill where you're actually making multiple paychecks a year, and I'm able to take those paychecks, because I live within my first one, the rest just goes straight into the investing account. But if I'm able to get equity compensation that's keeping me in one, an additional paycheck, or multiple paychecks a year, that company has my full attention so that I can keep building my career there while I'm building my financial fortress at the same time.

39:16 - 40:24 | Brian Feroldi: Yeah, that sounds like a smart way, that sounds like a great way to think about it. But generally speaking, companies that set expectations and then outperform those expectations, the odds that they have something internal to the culture an internal intrinsic to the management team that makes them want to do that, those are the companies that are likely to be the stock market stars of tomorrow. It's the companies that consistently exceed and execute on their expectations. If a company has a history of setting a number and then Lowering the number and then missing the number and then setting a number below that. That is a company that is just suffering from execution issues. And I would be, if I was working for one of those, I would be looking for an exit and my next, how to join a company that was the former rather than the later. So yeah. It's critical. It's critical that you monitor the progress of the company. And if you're betting on that stock price being higher and your equity compensation in that company being worth more in the future, you want to work for a company that executes, not one that does not.

40:25 - 41:07 | Christopher Nelson: Well, and this is one of the fundamentals I learned about investing from reading and scouring the Motley Fool for years, is that if the business is executing well, regardless of how the market is treating it, over time, the market is going to realize the value in the business. And I've seen this firsthand from working at multiple tech companies is, We continued to execute, we were meeting and beating, and sometimes the market was just, we were drug down by the lookalikes and other things, but over time, investors start realizing, wait a second, this company is actually exceeding goals, has for a while, the rewards can come later, and that's just being patient as an investor.

41:07 - 41:31 | Brian Feroldi: Absolutely. It's the execution of the company that matters and the execution of the business that wins out in the long term. In the short term, and by short term, I mean less than three years, less than a three-year period, anything can happen. In the short term, it's the mood of the market that dictates the stock price. In the long term, it's the execution of the business that dictates the stock price.

41:31 - 41:46 | Christopher Nelson: So thinking through this exercise, is there anything that I missed? Anything that as you are working for equity compensation, analyzing the companies, divesting or analyzing, is there anything that I missed here that you would be thinking about as an investor?

41:46 - 44:01 | Brian Feroldi: Yeah, one additional thing to just throw out there. So when you're looking at a company, especially a publicly traded company to work for, let's say you find one that's worth between $1 and $20 billion. For example, I think Instacart is in that range. Their ticker symbol is C-A-R-T, and I think the company is technically called Maple Bear. So this is a company that's currently at the time of this recording is worth about $8 billion. That to me is at a good range, right? It is not too big that it's going to be, that's going to have a hard time multiplying from here, but it's not too small that it's risky. It's a proven out business model. One thing you can do as an investor is go to FinChat or the SEC's website and pull up the two documents. First, the annual report that is document the SEC filing 10 space K, the 10 K of the company. Read that report. Read it. If that sounds like homework, yes, exactly, that's homework. But you will learn a ton about the business, the business model, the opportunities, the risks, all kinds of information is in that document. The second document that you want to look up is called the proxy statement. The form name here is horrible, but it's D-E-F space 14-A. Who came up with that as a name, right? But you're looking for the proxy statement. This document will tell you the equity, the compensation practices that the company has for top management. It will show you what ownership, how much stock top management owns. It will tell you the other major owners of the stock. It will tell you how management teams are bonused. And it will tell you the stock-based compensation practices of that business. So those two documents, the 10K and the proxy statement, aka the DEF space 14A, read those. You will learn a ton, a ton about the compensation practices of the business, about the stock-based compensation, whether they pay restricted stock or incentive stock. So it's all there. It's all there for you to read through. But I would guess that 98% of tech employees don't do this simply because they don't know how to do it.

44:03 - 44:44 | Christopher Nelson: That's gold. You just dropped that right at the end of our conversation here and that is such gold because it's so important, technology employees, that you get educated on the companies that you're working for and understand them as a business because this is where you're truly transitioning from somebody who is just out there working a job and getting tech equity to you're thinking like an investor with your time and talent. So, before we take off, thank you so much for all of the information you dropped today. We want to go into the fire round. I want to ask you five questions really quickly here to really understand a little bit more about you and give us some thoughts. So, how do you keep learning?

44:45 - 45:16 | Brian Feroldi: Oh, I constantly learn and I have a daily habit of watching YouTube every day before I go to bed. It is truly astounding what you can learn on any internet channel, but I particularly like video. So YouTube, I still read books and probably my favorite way of learning are in-person conferences. So in-person conferences, especially if those conferences have a mastermind, which is when a group of people get together and just talk. Those are the primary ways that I continue to learn.

45:16 - 45:18 | Christopher Nelson: And what do you do to recharge?

45:18 - 45:38 | Brian Feroldi: Physical labor, I find, is the way that I recharge. So I like to mow my own lawn. I like to clean my house. I like to put on a podcast and do some kind of thing where my body is in motion, but my mind is free to wander. I find that that recharges me the most.

45:38 - 45:43 | Christopher Nelson: That's beautiful. And then what's advice you would give your younger self as an investor?

45:43 - 46:15 | Brian Feroldi: Create a checklist. A checklist. All, all of the great investors of our time use checklists. Really simple. One, make a list of all the positive things you wanna see in a business. Two, make a list of all the negative things that you don't wanna see in a business. And three, combine them together and create a checklist for yourself. Checklists are like magic for increasing the quality of your decision making. So no matter what stage of an investor you are, Make a checklist.

46:15 - 46:23 | Christopher Nelson: Yes, a nice clear process so that passion does not rule reason. I love that. What's the worst money or investing advice that you've ever received?

46:24 - 47:00 | Brian Feroldi: I've received so much great advice over the years, it's really hard for me to nail down the worst advice that I've ever received, but when I first started out as an investor, I studied heavily under Warren Buffett, Benjamin Graham, and if you study those investors, one of the things that comes through loud and clear is that valuation is everything when it comes to investing. Valuation is everything. I would amend that to say valuation is important, The quality of the business is everything. So it's more about the marriage of business quality and valuation. It is not solely valuation.

47:00 - 47:05 | Christopher Nelson: That's some good insight right there. And what do you think is the greatest skill for an investor to possess?

47:06 - 47:27 | Brian Feroldi: the willingness and ability to hold. That is extremely rare. And having the willingness and the ability, the financial ability, the mental ability to hold is a skill that if an investor possesses, it's probably the biggest advantage that they have over the rest of the market.

47:27 - 47:40 | Christopher Nelson: Well, Brian, thank you so much. I can't express my gratitude enough for you coming on and sharing this with all of our listeners today, because I know that you've delivered a ton of value. So thank you for your time and take care.

47:40 - 47:42 | Brian Feroldi: Thank you so much, Christopher. It was a great conversation.