027: Tech Equity Explained - What You Need to Know to Get Started

Christopher Nelson (00:00:00) - Too many technology employees today are sleeping on their equity. They work so hard to get it, and once they have it, they don't do anything with it. Is this you? If you don't take care of this valuable asset of technology equity that you've worked so hard to get, you are not going to realize its full value or you're going to lose a ton in taxes. All right. Welcome to another episode of Tech Careers and Money Talk. I'm your host, Christopher Nelson. I've been in the tech industry for 20 plus years. And after climbing the C-suite, working for three companies that have been through IPO and investing my way to financial independence, I'm here to share with you everything that I've learned and educate you on the basics, the things that you need to know today to be successful. In today's episode, I want to break down Tech Equity 101. One of the things that I always talk about is that working for tech equity is a way to compound your career compensation. Not only do you get a salary, not only do you get a bonus, but you also have ownership shares in some amazing companies.

Christopher Nelson (00:01:18) - In these ownership shares, you can grow and expand even while you're sleeping. They can be doing work. This is what Robert Kiyosaki talks about when you're in quadrant three. You're an owner and you're also an employee. Money is working while you sleep. We want to get there. The reality is that many of us don't understand all the pieces that we have. That's okay. That's why this podcast is here. Tech Careers and Money Talk is to talk about all of the fundamentals around earning tech equity. So I'm excited to share this episode with you today. It is going to be the first half. We're going to be breaking down the fundamentals of tech equity. I'm calling it Tech Equity 101. This is the foundational college course that you would need to understand the fundamentals of tech equity. Then in the second half of the show, what do you need to be doing when you get that first set of tech equity? What should be the first steps that you're taking? I know for myself it was confusing at first.

Christopher Nelson (00:02:27) - I wish that I had somebody walk me through it. We're going to do that with you today. So let's get into the episode right now okay. Tech equity 101. Let's just talk about what it feels like for a minute. Let's just take a moment. Let's break it down. Let's talk about what it feels like. You have your sights set on working for a technology company. You go through the interview process, you're applying for jobs, maybe multiple jobs. And I know it's hard right now. Your sights are set on getting equity. You know what it is. People talk about it all the time. It's with equity to be able to get ahead. And I know for myself I know this broad concept working for equity is a good thing. But I didn't know much more than the reading that I'd done, Robert Kiyosaki. I talk about that a lot. Rich dad, poor dad. He got this concept in my head, okay, if I can be an owner and an employee, that's a good thing.

Christopher Nelson (00:03:30) - And gave me the principles that said, okay, can grow while, you know I'm earning my paycheck, I have this other asset that is growing in appreciation. Then know much more beyond that. And then you get your first equity agreement. It's a legal contract, a big legal contract. And you're walking through it and it seems foreign. There's a lot of strange terms. There's a lot of legalese that you don't understand. It can be very overwhelming. And that's okay. It's important for you to understand that when we get started working for equity, it doesn't make sense. No playbook. But there's this episode. So we're going to break it down and we're going to get into it today. I want to remove the mystery. I want to give everybody a fundamental understanding. This episode today is not going to answer all your questions, but I think it's important when we get educated, we want to understand the foundational building blocks of what things are. I want to try and define in broad strokes what things are, and I want to let you know what are the first steps that you need to take.

Christopher Nelson (00:04:48) - And then from there you're going to understand what are the next questions that you need to ask, or what is your next area of study. And I'm going to be creating some more resources that you can go and look up. So if you want to go, continue to go deeper with some of these things. You can and I encourage you to do so. The more you study equity in technology companies, the better, because then you're going to understand more what it is, what a good equity looks like, what bad equity looks like, and all of the details that are going to allow you to make better decisions to grow your wealth faster. Definitely. So let me break down and overview at a highest level what equity is and then what. Why do they give equity in technology companies? This is important to understand when we start negotiating for equity and understanding why they give it. What is the incentive behind it is critical. So simply put, equity is ownership in a company or an asset. That's what equity is.

Christopher Nelson (00:06:07) - Ownership in a company via shares, or you own a company outright, or you actually possess purchase assets. And so there are three fundamental ways that you can get equity. You can buy it. Yes, you can go buy equity shares on the stock market. You own equity or a portion of that company and all the benefits that come with it. As I mentioned in my episode on private equity and alternative investments, you can buy shares, portions of real estate, commercial real estate, or you can go buy real estate. You can go buy assets and equity in those assets. Number two, the second way that you can get equity is you can build it. It's what founders do. Founders go build equity. You think of Elon Musk. You think of Mark Zuckerberg. All of these guys who now are billionaires, Jeff Bezos, Larry Ellison list goes on. They built companies that they had very large portions of equity and. And that grew their wealth tremendously. Made them billionaires. Many of those people I mentioned.

Christopher Nelson (00:07:22) - If not all. The third way you can get equity is you can trade for it. That's what we're talking about here. And I would say this is the way to get equity that's least talked about if you hear buying in trading equity all the time okay. Stock market in and out by real estate. You talked about all the time build founders found just startup. You know Jeff Bezos founded this startup here startup there. What we're talking about here is you trade for it. You are trading your time and talent in exchange for salary inequity. And so that's the third way. And that's what we're really going to dig into today is when you're trading for equity. What does that look like? That's what we want to talk about. So why do technology companies provide it? I was doing some research and did not realize they knew and went back to the 70s, but it was actually in the 50s, in the 60s that semiconductor companies there were Fairchild Semiconductor and Intel. Used equity as a way to attract and retain top talent.

Christopher Nelson (00:08:42) - Let's double click on that because this is where the incentives lie. This is where the negotiation happens, if they want to attract top talent. So if you want to attract top talent, you need to then have a desirable equity package. And sometimes, you'll find that the more the risk goes higher on a company. So in an early stage startup you're going to find less salary and more equity. But they want to attract you with a. Very attractive equity compensation package. They also want to retain you. Many people don't realize. We'll talk about this in a little bit that as you stay at companies, as you start moving through what's called your vesting cycle, and you're taking more of the ownership shares that they granted you, they're going to refresh, they're going to give you more. These are the golden handcuffs. You are getting more equity as time goes on so that you stay there. And they're doing this for top talent. As I talk about in my framework, you want to build expertise to trade for equity and in the negotiation, you want to position yourself as this rare and valuable asset.

Christopher Nelson (00:10:04) - It's because that's where you get leverage. They want to attract top talent. So here's a nice interesting package for you. They want to retain you. They want to continue to give you an equity salary and those types of things. But you need to be and be able to articulate that you are the top talent. That is key. And so that's important to understand those fundamental underpinnings of. What is equity? It is ownership in the company. They're giving it to you to attract and retain you as top talent. Those are the top level basics and fundamentals. So. Let's talk about how it can impact you financially. It's important that we understand what's the incentive for our side. So you could go and negotiate for a salary and a bonus at any company. But putting yourself into a technology company where arguably there's more stress, there's a lot of unknowns. Some of the environments can be incredibly fast paced. You can get sucked into a 24 seven lifestyle if you let it. But why? Why do this? What's the impact financially of working for equity? So.

Christopher Nelson (00:11:29) - On average people that work for equity. And this is across the scope of private companies to public technology companies. So let me pause right there. When we go back and we talk about the companies that want to attract and retain you. This isn't just the early stage startup that's taking a big bet. Now you have very large companies Amazon, Microsoft, Oracle, Salesforce.com, the list goes on and on. Public technology companies that offer equity compensation as part of their packages to attract and retain top talent, they need to remain competitive. They don't just drop off that component of equity compensation once they go public, and working for that type of equity is lower risk, lower reward. It's more conservative because it's already liquid. You get it. And. On average across the spectrum of early stage startups to establish a public company that's giving equity. People that work for equity make, on average, 35% more a year. That's a significant amount of money and that's just the compensation in that year. If the company continues to grow over time and that value increases, there can be more there.

Christopher Nelson (00:13:01) - So when you go to work for equity. You know, and you are that talent that's able to get those jobs in those particular companies. You on average get 35% more a year. The interesting thing I saw is when I went to levels, FYI, in some of their charts you see that directors in above in public companies you're roughly going to have a salary. So if you have a salary, some of the salaries I saw were from 200 to $275,000. Some more for specialized skills. That's getting matched in equity. Yeah. Sit on that for a minute. That's $500,000 a year and you're getting $250,000 cash, $250,000 in equity. Those are big numbers and those are significantly impactful. And so when you think about your career compensation over time, the more you can make money up front, the time value of money money today is worth more than devalued money. And you know that it suffers from inflation and everything in the future. You can take that money. And my strategy was always to live within the salary, enjoy the bonus and invest, invest, invest the equity, make that work for me.

Christopher Nelson (00:14:29) - But you can then make considerably more money in a shorter amount of time that can unlock your exit plan. So that's why we do it. Working for equity provides an additional income stream. It does. Now again, we have to think about private equity versus public equity. Public equity lower risk, a lot more guarantees there in the sense that you have liquidity. It has a dollar value. You can harvest that quickly. Private equity has much more risk. And you need to be thoughtful about the way that you choose to work for equity. That all aligns with your financial goals, and you know where you understand making that investment of your time and talent and how comfortable you feel with that. So let's talk a little bit about, um, you know, how equity works. I do get some questions on this. I have gotten some questions from some senior executives at companies that don't work for equity. And they are confused. Never worked for equity. Do I get paid 100% in equity? Where do I get my cash from? Let me make sure and break it down.

Christopher Nelson (00:15:42) - I think there is no such thing as a question that shouldn't be asked, especially when it comes to the fundamentals. How does it work? When you go to work for a tech company and you are in, you know you're aware of the interview process, you ask, is equity part of the compensation package? Yes it is. You are then going to get a salary, potentially a bonus depending on some levels or some where the companies are in growth. There may not be bonuses and then you're going to get equity. So. This, and this will go into an episode that we have on negotiation. But then depending on what your financial needs are, you're either going to be negotiating for more salary or more equity that are aligned with your goals and what you want to do. But when you get compensated with equity, there is a salary component, optional bonus component, and equity is a separate component. Now, I have heard there are some edge cases where I know I heard that in red, that Netflix engineers could choose to get 100% equity in payment, and they could get all of that, and they're managing their own cash flow when they have to sell.

Christopher Nelson (00:17:01) - But that is a. That is an exception. That's not the norm. The key thing to understand is that when you start working for equity, you're going to realize that you are that. Quality talent that's being attracted to these companies and your value goes up. I had a very interesting conversation with an executive, a female executive of a life sciences company, and she knew I was actually at an event. I was speaking, and we had a chance to meet up outside. And we're talking about equity compensation and how that changes your mindset. And she had no idea of how impactful equity compensation would be to her top line, and ultimately her bottom line of what she was taking home. And once she had that experience of working for equity, her minimum went up. She would no longer accept not working for equity. And this is one of the things that I'm trying to communicate and educate to everyone is that seek out equity, compensation, work for it in a way that works for you, in a way that you can get liquid, that you can have success.

Christopher Nelson (00:18:26) - And then all of a sudden you're going to be in a different salary bracket, in a different total compensation bracket, because you realize what equity can do for you. So let's recap real quick. Working for equity. Or equity in and of itself is really owning shares in an asset in a business. Here in technology, we are given equity in private companies, in public companies to be able to attract great talent and to retain it. And equity is going to be provided to you. In addition to a salary and or bonus usually, equity will on average will give you 35% more a year in total compensation. Again, this is across the risk portfolio. So you have to choose at your own risk and where you want to play. And in some public companies, when you get to director levels, you are making not just your salary, but you're also getting the same amount in equity as well. So let's talk about the basic types of equity and what you need to know. So when you're looking at the types of equity, you want to understand two fundamental concepts when you're looking at equity.

Christopher Nelson (00:19:54) - Number one is liquidity. When will his shares be liquid? Liquid means that then you have the opportunity to sell those shares, or you're getting those shares converted to cash or other types of stock. So that you can divest. Working for equity can put you in, can make you overexposed or overweight in a single position. I know that's happened to me. I'll talk about that example shortly. So the goal is that you can have your equity shares get to a liquid point, meaning that you could trade it for cash or trade it for another type of stock so that then you can start divesting out of that. So that's number one is you want to think about when you think about these types of shares, you want to think about liquidity. And number two taxes. You want to think about the tax implications? Because the real incentive in some of these types of shares have to be from a tax perspective. And so if you're not focused on tax and what's going to happen with the taxation around them, you can lose a lot of money, period.

Christopher Nelson (00:21:15) - You can. And that's where too many people I see take their eye off the ball. And then they get to a point where they turn and they put their eye on the ball. They start thinking about their equity again, and the next thing you know, it's too late. They have to pay the tax. Man. Time has expired on certain clocks. Let's get into some of that stuff. So I'm going to give you an overview on the basic types of equity that you are going to see in stock options agreement. I'm not going to go through all the exception cases. I'm not going to go through all of the math and all of the terms. I want you to be able to listen to this and have a good, solid, fundamental understanding and be able to ask more questions, but I can't answer all of them. The other thing is, I believe this type of information needs to be written down. And so that's where I'm going in the show notes. I'll direct you to some other resources so that you can do more research.

Christopher Nelson (00:22:21) - All right. So I want to divide this into private company stock. Uh, equity compensation, private company equity compensation, and public company equity equity compensation. These are two big, broad buckets. But it's important to understand that when you go to work for a pre-IPO, pre-acquisition company that is private, there's potentially more upside and there's also potentially more tax advantages. So while there's more risk you know the government creates incentives with some of these stock packages and types of stocks so that you can then benefit from those because they want the companies to grow. So let's talk about what they are? What are the two main types? Private company is. It. You'll hear the term ISO, which is an I, S and O, and the acronym that stands for incentive stock option. And one. An incentive stock option is a contract that gives the employee the right to buy shares of their company's stock at a discounted price. Let me say that again. An incentive stock option is a contract that gives an employee the right to buy shares of their company stock at a discounted price.

Christopher Nelson (00:23:59) - Generally speaking, the employee is going to need to wait a period of time, the vesting period, before they can exercise their options. Exercise is when you actually purchase it and you make the share yours. The important thing to understand about ISOs incentive stock options is that they have much more tax advantages than the other type of private equity compensation that's generally used. And so in the ISOs, the tax is not paid immediately when you do the exercise, but it's in the calendar year. This means that when you fold this in with a good tax plan, you can plan around these things. And the focus of ISOs are - The goal is that ultimately you're trying to get all of that gain to do, to be capital gains, long term capital gains tax. That's ultimately the goal. So let's break down a few things in the ISOs and let's understand how that works. When you go in and you sit down at a table to get an offer, they're going to be talking about equity compensation.

Christopher Nelson (00:25:21) - And you're at a private company. Well, what kind of equity compensation. Those are incentive stock options. Okay great. What is my strike price meaning what is the price that I'm being able to buy these shares at. And that's going to have to do with the value of the company. You know, at that point in time most companies get a valuation. That is done by a third party that says, here's the value of the company, and they reprice their shares when they're private. They can do it every 18 months, 24 months. But that's something that they do, especially if they're doing fundraising. But that's going to affect the strike price. The key thing for you is to go in. When you get your contract, you want to understand. You know what? What are the number of shares that you're being granted? So when you're given the shares, it's called a grant. We're granting you these 10,000 shares, 20,000 shares, 50,000 shares. To grant. You want to know the strike price? Because of the strike price types, the number of shares is what you're going to have to pay.

Christopher Nelson (00:26:36) - To exercise them. It's important. It's really important to understand that you are then going to have to buy these shares. You're going to have to make an investment to get them. That puts more risk on you. The reward is that if the company is growing, or if the company is going to go through an IPO event, then you can get a serious gain. And by taking that risk, you can get a lot of tax benefits. The key thing to understand with incentive stock options and most other options is there is a vesting schedule. So hello stock option agreement. Here's your grant and here's the vesting schedule. The vesting schedule is usually called a one year cliff meaning you have to work for 12 months. And once you work for 12 months, you will get 25% of your options then vested. That means that you then at that point have the right to purchase them. Remember, this is a contract to purchase at an agreed price. So when year one expires, you have 25% that you can buy, depending on the strike price and the number of shares.

Christopher Nelson (00:27:59) - That's going to be how much you would have to spend to invest more in your company and own those shares. The advantage of owning those shares sooner, and especially before a liquidity event, is that then you're starting the clock that says anything between that, you know, the ultimately the fair market value when I exercised and when I. And when. When I ultimately sell at the end, I can get that gain to be long term capital gains, which is the most advantageous. And when you're talking about large growth numbers or you're talking about a large number of shares, the dollar amount could be specific thousands, hundreds of thousands. It can be quite, quite significant. So these are ISOs. The key things you want to key terms you want to remember as they're granted to you, which that's going to be in the stock agreement. You're going to have a number of shares that are granted to you. Then you're going to want to look at the vesting schedule. Most of them are on a four year vesting schedule for ISOs that has a one year cliff.

Christopher Nelson (00:29:11) - And then after that you're usually vesting month to month. Okay, so I know a lot to take in there. You can go back and you can listen to that. But that's what I want to say about ISOs. I think there's a lot more there's a lot more nuance there. ISOs, if you have them, are something that needs to be studied a bit because they're the most nuanced, but also have the most advantages and also have the most decisions around them. Because when you're choosing to purchase incentive stock options. You're making a decision on what you want to invest in the company, and also you're actually making a decision on what you want to invest, putting your capital at risk that you also want tax advantaged. Many people don't realize that if you have, you know, 10,000 shares that you've invested, that you can purchase, you can buy a thousand, and you can let the other ones, you know, you still can have the right to purchase those shares. And once they go public, you can go in and you can do a same day sale.

Christopher Nelson (00:30:21) - So you can sell enough shares to pay to buy the rest of the shares. You're just not going to have the tax advantage. This is where the tax planning comes into this and where understanding your vesting schedule, understanding these dates in taxes are so important. Let's go to the next share which is non-qualified stock options. That's a type of stock option in private companies that is not taxed at the time it's granted to the employee. But when the employee exercises the option to buy the stock, they must pay ordinary income tax on the difference between the strike price and the market price on the day the options exercised. So very similar to ISOs in the sense that you're going to get a grant and then you're going to get a vesting schedule. However, it's not an incentive stock option. You don't have the same incentive. You don't have the same flexibility on the day that you purchase, whatever the strike price is. You know, if that's $2 and now the fair market value is four, you're going to have to pay the taxes on that $2 gain.

Christopher Nelson (00:31:42) - This is why tax planning is so important. And you're going to be taxed on that difference. And so it's something that is, you know, you can look at it in that it's very formulaic. You can do some clear planning on it. The same way, though, is that if you exercise early before you go through a liquidity event. You know, IPO or an acquisition. Then you can get the benefit of converting this to long term gains. So in a nutshell, right. You have incentive stock options ISOs. You have non qualified options that the initials are NSO or some people call them non calls. You'll hear that term go around. But ISOs can get to a lower tax rate of capital gains tax in NSOs you're going to pay when you exercise them you're going to pay the ordinary income tax. So that's important to understand. That's going to have a big impact. And there is no ordinary income tax that is exercised for the ISOs. So you have much more flexibility, can do much more planning and can be much more sophisticated in the way that you manage those versus the non-qualified are pretty basic.

Christopher Nelson (00:33:07) - So those are private company shares. So when you go to work for a pre IPO company I've been to work for three pre IPO companies. And I have seen these contracts and I've seen them with ISOs only. That was Splunk was just ISOs only I saw at Yext it was non-qualified stock options only. And then when I was at GitLab interestingly enough it was a blend. I got so many ISOs per year and then the rest went to non-qualified stock options. So this is where understanding the nuance understands what each one is. Your grant date, your vesting date. Understanding fair market value. Strike price. Right. This is so important because that's going to be part of the planning. Good news is you don't have to do it alone. And we'll talk a little bit about that in the second half of the show where we go into detail of, you know, how do you manage these? What are some of the things that you do? Let's jump over to public company stock. So in public company stock there's really three types.

Christopher Nelson (00:34:16) - Two are super similar. The most common that you're going to hear about is the RSU or the restricted stock units. Very common. You'll find it in a lot of the Amazon, Salesforce.com, Oracle, Microsoft. Majority of these companies are giving out restricted stock units. And that's just a share of these company stock that's granted to employees. And they vest over time so you don't have to purchase it. It's just truly part of your incentive package. And you get, you know, 15, 20,000 shares that vest over four years. So you get 20,000 shares that vest over four years. You get 5000 shares a year. You may have that one year cliff, it's interesting in public companies. I know some of them, depending on level, will start vesting in the first month. Like there's no cliff. Like you just take off month over month you start vesting. So the great news is it's simple. You don't have to buy it. You're just giving shares. The bad news is it's taxed as ordinary income is what many, many technology employees struggle with.

Christopher Nelson (00:35:36) - I work for Christmas. This is great. I'm getting all this additional income. But how do I manage the tax side of that? That's why looking and understanding the tax is so important. But they're very simple, very straightforward restricted share units. And again you're going to get from a public company a stock agreement that is part of the compensation plan that is going to outline how many PSUs you're going to get. It's much more simple because you get what's granted. And then you look at your vesting schedule. And I think asking in and around the vesting schedule are always interesting things to negotiate because again, to attract and retain talent, it's important to understand what's going on in the marketplace. Other companies are starting to change policies to make some of this stuff more attractive. Just be aware, be knowledgeable. Understand where you can negotiate and what's best for you. Um, PSUs or performance stock units. They're very similar to issues. They are in the same way that they execute. Meaning you're going to get a grant, but instead of time, it's based on performance.

Christopher Nelson (00:36:48) - So these can be used for executives that are supposed to hit certain numbers or team members and things as well. If they hurt, hit certain performance thresholds, boom. All of a sudden they vest and you know, great. I get all these shares. I also have all this income. And so that's really important to understand as well too. The third thing that is most common, and this is something that I experienced when I was in Accenture and I didn't get RSUs at that point. That's just for partners and above when I was there was the ESP employee stock purchase program. This is where you get a chance to buy the company stock at a discount. And people that were doing same day sales had the ability to, you know, get. Sometimes it's discounted from 15 to 25%. So if you have a company this large and the stock price is relatively steady, this is, you know, a very straightforward way to make 15 to 25% gross on your dollars and then also start owning shares in the company.

Christopher Nelson (00:38:02) - And if you're in a hyper growth company again, it can be a great way to make money. So. Recap ISOs incentive stock options. Private company. Very tax advantage, very nuanced. You need to understand more non-qualified stock options NSOs against private companies. You're going to get that as part of that private company package. Then public company. We have PSUs where very straightforward. You get a grant, you understand your vesting schedule. You get those shares. And then you have to be aware of all the new income you're going to get because you're granted those. Then there's performance stock options. Same thing as PSUs but based on performance. And then there's their employee stock purchase program. And the employee stock purchase program can be nuanced. Usually you're taking dollars out of your paycheck to buy those shares that have been set aside before. And it's usually every six months they make the purchase, and then you get those particular shares. That's the fundamentals and that is the baseline. If you have that information, you can start asking questions around that when you get your stock agreement okay.

Christopher Nelson (00:39:24) - What is my grant? What's my total grant? Understand what that is. What is the fair market value of the stock today? What's my strike price? How much? If it's an options package, how much can I purchase these for. What's my vesting schedule? Those are all essential questions that you can ask to get more information. And then as I've highlighted and this is what we're going to get into the second half of the show is. It's going to take some care and feeding. These stock options don't just grow. So I want to make sure and share a story. I want to share my story. So when I went to work for Splunk I got my. Stock agreement and I got a nice set of incentive stock options. And signed the agreement and I started. So I got my grant and then I started vesting. Now, 12 months later, we go through an IPO. We become a public company. I have my ISOs continuing to vest now, investing monthly, getting ISOs.

Christopher Nelson (00:40:45) - We're in a six month lockout period. From when we went public. So but within that period to retain us that went through this IPO that wanted to continue work, they gave us an RSU package. More incentive that happened within the first 18 months of employment. So now I've ESOs. I also now have issues. Now that we're a public company, they also offer an ESP program looking at Splunk growth trajectory and the opportunity there to, you know, because they actually were giving some of the ESP based off of the price that we were going out at. We'd already doubled on the first day and had doubled that gone from 17 to 32 and continue to grow. I realized I could buy these at a very steep discount. So then I participated in the ESP program as well. All great. Right. All okay. Adding to my portfolio. But. Over 90% of our net worth at that point. My wife and I, Régine, were in a single stock. That feeling was brutal because we were constantly riding the ups and downs of the stock market.

Christopher Nelson (00:42:06) - Every day we go up, oh we're up. Oh yeah. Oh, all of a sudden, oh, wait a second. We're not really sure if Splunk is the next company or what, 20%. Oh. What just happened? Those days are down. Or it could have been a great day. But the stock goes down. Oh, brutal. That is the challenge is, is and this is where we need to just have these conversations. And it's important to share this, that you can have a velocity of types of shares that are coming at you, and it's all laying in front of you and you don't know what to do next. You know, you want to get off the roller coaster, but you're also there's there's also this concept where your best thinking got you here. So you think, well, I'm just going to stay here. I'm just going to do this. That's not a good place either, because that's not where. Uh, the security is. That's not where creating a good base for your portfolio is in diversification.

Christopher Nelson (00:43:13) - In a diversification across, you know, companies when it comes to public equities and then also diversification of asset classes and private equity. So that was my real life experience. And I'm sure many of you are experiencing the same thing. I get questions all the time. This is why I felt motivated to create this episode is because I get questions all the time. I just got a, you know, a new offer. I got a lot of stock here. What do I do? Well, it's important. And this is where I want to wrap up. This segment is number one. Make sure that you understand what you have. And what do you need to do? So if you have private equity, sorry, private company equity, if you have incentive stock options or non-qualified stock options, then you need to be understanding a lot more details. You need to be getting that out on a spreadsheet. And you need to be thinking, okay, what are key dates coming up? You also need to make sure that you're asking questions.

Christopher Nelson (00:44:21) - I know we were privileged enough at GitLab. They gave us early exercise, so even though I didn't vest until a year later, I could exercise. On the day that I got granted my shares, which created a huge tax efficiency. Another tax game is a benefit. I don't want to go into the nuance right now, because I want to move on to the next half of the show. So right now we're going to take a pause. We outline the fundamentals, the basics of technology equity 101, your 101 class. Now we want to get to what the fundamental care and feeding that you need to do, so that you feel prepared to manage this tech equity. Hold on. We're going to take a quick pause and we're going to be right back. Okay, I know that first half was a lot to take in. We were talking about a lot of different types of equity at the same time. I am so confident in you, my technical guides out there, you do so many complicated things in your day to day job.

Christopher Nelson (00:45:27) - It requires a lot of knowledge, a lot of understanding, a lot of skill to do what you do. This arguably will become easier over time. You just have to get in the reps first half of the show. The basics, the terms, the what is. Now you have it. Let's pick up where we left off. My story. Okay, here I am almost two years into Splunk and I have incentive stock options. I have RSUs that are now vesting. I have incentive stock options probably halfway vested in those. I have issues that are vesting and I've purchased some SVP. What should I do? What should I do? What do you do in this scenario? Well, I know what I did is first and foremost, as I was getting these, I started writing down or I started documenting in a spreadsheet what they were, what were the key dates and what was happening. I wanted to understand and document, you know, when, when was vesting happening, getting to a vesting date, when we're going to share is going to become mine.

Christopher Nelson (00:46:40) - I wanted to understand and document fair market value, strike price and start putting together some estimates. Because understanding the dates, understanding what happens when is so important. So if for ISOs, for instance, I was tracking the grant, I was tracking the vesting date I was tracking. Oh, the fair market value. I was tracking the strike price. Because we were planning. Okay, what were we going to actually, you know, invest to purchase these shares? So tracking and understanding what you have going back to this first episode and sort of documenting what you have in front of you is really important, and laying it out on a spreadsheet is important so that you can see what is happening. You can see key events, key dates, making sure to always do an inventory that you're getting what was on the contract. It's so important. So just having that purview and that understanding and understanding and looking and seeing what the dollar amount is going to be in that level of income is important for you because you are the CEO of your financial future.

Christopher Nelson (00:48:01) - Do not turn this over to somebody else. You are the CEO. This is a set. This is an asset that you are creating for yourself, that you're earning. And while you're trading your time and talent for equity, doesn't mean that you're any less of an owner. It doesn't. You're trading sweat equity for this. Arguably founders get more, but you're getting what you're working for. So. Document it, manage it, understand what it is and what it means. That's step number one. Understanding what you have. Step number two. You want to review the contract with a stock options attorney. There's many stock options attorneys to choose from that specialize in equity compensation. If you are an executive and you're going to get an executive equity compensation package, having a stock options lawyer help you negotiate and manage clauses is essential. It'll save you a lot of heartache and it will save you. Just worrying about things, especially if you're relocating. But stock options attorneys are going to then if you know what it is going to cost an hour and an attorney's time today maybe 350 to 450 an hour to get an hour of their time.

Christopher Nelson (00:49:24) - They're going to walk you through this contract and this education will be worth it. Trust me, it will be very, very worth it. Because they can walk you through. And so here's the boilerplate areas of the contract. Many contracts. There's boilerplate. They can give you an overview. What does that really mean? And then they're going to zero in on what are the key clauses that you need to know. Are there any clawback provisions? Clawback provisions are when the company can circumvent this agreement and take back the equity. What? Oh yeah. Clawback provisions. It's so important that you understand what those are as part of your package. That may make you decide on another offer. If you have two offers in front of you and one has a very aggressive clawback provision, something to consider, continued employment requirements. So what are the details of your continued employment so that you can continue vesting? What if you have to take a medical leave? What if you have a sick relative that you need to go care for? Those are important things to understand.

Christopher Nelson (00:50:39) - Life happens and you are making this commitment. So what does that look like? Termination restrictions. So you know that is critical to understand as well transferability limitations. So if for some reason you die and get injured, can you transfer that to your spouse or your partner. Also the transferability limitations. When you're looking at private company equity, can you take this to a secondary market? And that's worth a whole other episode in and of itself if there are opportunities for private companies. I think it's Stripe. I know Stripe and other large companies like that. They're trading on secondary markets. Employees can go sell their shares. So what are your restrictions? Can you do it? Also, looking at trading restrictions, sometimes you can have third parties set up to trade for you and you can eliminate blackout windows. But all of that's going to be in the agreement. So have a lawyer. It's worth it to get educated and understand what it is. I've done that a couple times in my career, and once I got to know the contracts, I knew the provisions, and I had a group of peers that we could look over it together.

Christopher Nelson (00:51:56) - If there's something worrisome, then I go to a lawyer, but you get comfortable and this is where you have to get in your repetitions. You got to get in your reps. You got to see these things, understand them, and so understand what you have. Go see a stock options lawyer to understand the contract of what are the contractual obligations both parties and do. Does the company have any? Overriding clawback privileges is so important to understand. Number three. And this is the one I want you to listen to very, very closely. You need to find a certified tax planner. C t p. It's a specific designation that only 1% of CPAs certified public accountants have, and it will make all of the difference. Financially for you as somebody who owns tech equity. Why do I say this? Well, CPA's will say things like, you make too much money or here's what you owe. A certified tax planner will say things like the tax code is a book of incentives, and if you follow it, you will pay little to no taxes.

Christopher Nelson (00:53:24) - A certified tax planner will plan with you year over year to reduce your tax burden over time, sometimes with advanced strategies that are just available to the ultra wealthy. But with technology, a lot of them are helping us execute them today. I know I use a certified tax planner and it makes a world of difference. And so as we mentioned before, a lot of these types of stock have tax implications. And when you think about my scenario where I had three different types having a sophisticated tax plan. Save us. Thousands and thousands and thousands of dollars saved us so much money we still paid a lot. Don't get me wrong. But when you start saving significant amounts, you start seeing the value of having a certified tax planner on your team who is looking around the corner, helping you think about things strategically, harvesting your equity in the most tax efficient way possible so you can then get to diversification. But it's going to take a certified tax planner to do that. So, understand what you have,

Christopher Nelson (00:54:47) - review everything with a stock options lawyer tax plan, and then you need to build a financial plan. So what. Like what is going to be your ultimate goal? You know, to build what I call the evergreen portfolio, which is this business that you want to build. To be able to move in there, you need to have a financial plan. And there are fee, fee only financial planners that will put together a financial plan. And they don't, they're not going to manage your money. And they're going to put together a plan for you. I know for myself, I was not interested in somebody actually doing the day to day management of my money. I had been doing that for years with stocks. I was moving into private equity. I was clear on that, however, enlisted some fee only financial planners to put together a comprehensive plan to make sure that we had the estate planning to make sure that we had. Some other things ticked and tied, and I think that's really important. But you again are the CEO of this business of yours.

Christopher Nelson (00:55:55) - Financial future. You're the CEO of your financial future. So whether you want to outsource that, whether you want to enforce that, that's ultimately your decision. But you need to have a clear financial plan that's going with this because this should be a part of it. This should be the engine. That drives it. So. But know what? You understand what you have. Review it with the stock options attorney so that you understand the contract certified tax planner. Build a financial plan. It was these steps right here and continuing to iterate on those and work with that team. That allowed me to accelerate financial independence because of all of our equity. Except for portions that we use to pay off. We paid off our student debt. We just wanted that behind us. It was just an emotional and mental drag. Paid that off very quickly. And other than that, we have used this not to pay down debt, but to continue to invest and to build out our evergreen portfolio that will be here for multiple generations.

Christopher Nelson (00:57:07) - And it was all built on tech equity. It wouldn't be there without it. I didn't really I didn't know how I would do it. Just working for salary and bonus. Didn't see it. I knew there was this additional component that I could go trade my time and talent for this equity. And you can do it too. So. Thank you for joining me on this journey, this episode. This is very important for everybody who is working for tech equity and understands. If you have any questions, hit me up at Ask@TechCareersandMoneyTalk. I try to answer all questions, send you a reply, and if. You know, do you have any suggestions for other episodes or things that you want just included in that email? I'd love to hear from you. So that's all we have time for today. I really appreciate you. Thank you so much for joining me. And I would ask one thing if you can go on to Apple, Spotify, Amazon, wherever you listen to this podcast app, you YouTube.

Christopher Nelson (00:58:13) - Please leave us a review.

Christopher Nelson (00:58:15) - And let us know what you're taking away from the show. I would ask for a written review that would be great to support us, because we're trying to get the word out to help other technology employees grow their career, build wealth, and meet their financial goals. We'll see you on the next one. Thank you.