[Music]
well thank you so much for the kind
introduction um it's really great to
meet everyone um i'm jordan i'm one of
compound's founders and today i'm going
to start by talking to you all about my
hatred of personal finance um i helped
start compound a few years ago because i
didn't understand my personal finances i
was trying to work on a startup at the
time and all of these personal finance
machinations kept getting in the way of
my life um and in particular i hated all
of this jargon all of these acronyms
that were associated with my equity
compensation um
so like any enterprising ambitious
person um i mapped it all out
and i was incredibly annoyed by the
complication associated with
trying to figure out how this equity
thing worked um i actually wrote a blog
post about it and posted it on hacker
news um and it went viral um and
thousands and really hundreds of
thousands of people read the essay um
and thousands of people uh emailed me
and said hey jordan
i have all of these complicated boring
adult tasks can you please help me right
so there i was the former software
engineer who quickly became an expert at
all things equity compensation
and i was helping people with their most
complicated boring adult tasks um so at
a time i kind of asked myself i said
why are these people trusting me with
their most important information right
uh surely there there'd be someone
better uh that has solved this before
and it turned out that most of the
people who can you know help you with
your finances tend to look a bit like
this um you know they take you golfing
um they kind of uh specialize in selling
kind of public investment funds but i
wanted you know someone who knew the
details someone who could get into the
weeds and explain things to me in a
language that i could understand as a
former software engineer i wanted kind
of a wealth management product
specifically designed for people who
work in the technology world and that's
what we built at compound um we're an
all-in-one financial management solution
for startup founders employees investors
we work with thousands of clients who
who are at all the top companies and our
our mission is to help people not have
to worry about their finances and
instead focus on what they really care
about in life which may be building
great companies or their families or any
of their personal interests um and
today we're going to talk about one of
my new favorite topics that i've spent
the past three years of my life becoming
one of the world's foremost experts in
which is startup equity compensation um
and i like to be really transparent
about it um my real goals for this
conversation are first and foremost to
get you to care about your equity um
it's a there's confusing terms it's not
particularly fun but i promise you that
if you can pay attention for the next
you know 30 minutes or so you will leave
with an increased odds of
achieving your goals in the future so
that's number one is making sure you can
care about this two is i want to make
sure that you're not scared by the key
terms so i'm going to go over a few
terms i'm not going to get into
everything but make sure that you
understand the key terms and then three
and perhaps most importantly is i'm not
just going to scare you and say good
luck i'm going to make sure you have
opportunities to kind of move forward
from here um and
um i'm gearing this towards people who
are not necessarily experts in the
subject yet um but they are kind of just
introducing themselves to equity um and
are curious smart people and they want
to understand how it works so you may
have a job offer you may have recently
joined a private startup you may have
been working at one for a while and
investopedia doesn't really solve all
your problems you know this talk is
really for you
i'm more than happy to answer any
questions specifically so you feel free
to leave them in the chat and max who's
also on the team at compound uh we'll
surface those to me and if there's
anything i don't get to hear a we've
written these amazing guides that go
into a lot of weeds so you can you can
read read uh
for a very long time about them or you
can email me um and i'll give my email
at the end and i'm happy to help you
kind of dive into that um uh with our
company so um mission one get you to
care about it well first of all you've
taken the first step you're on this call
um here's a quote from someone that we
helped a bit ago you know really saving
people millions of dollars or you know
hundreds of thousands of dollars or tens
of thousand dollars a material portion
of their net worth by making sure uh
they understand their equity so again
you're on the call hopefully you're
motivated by it you can save 20 to 40
percent of the value of your work by
thinking about the taxes right so just
doing that alone you're coming to the
party this stuff is important it's not
fun it's adult stuff but we're going to
make it as easy as possible for you so
so i hope at this point you somewhat
care about it but now i'm going to do
something a little tricky i'm going to
tell you tax lawyers don't rule the
world so there are things you can do but
i have to give the disclaimer before we
have fun with all the acronyms that tax
lawyers don't rule the world the single
most important thing you can do nyc is a
great place to look for this but the
single most important thing you can do
is pick the right place to spend your
time right and i want everyone here to
think about themselves like an investor
of their time and they want to return
and the return can be money but it can
also be fun and learning and impact and
prestige and networking all these
different things and the most important
thing you can do to get the best return
on investment is make sure you're
picking that right company right because
unlike a venture capital firm
right you don't get to diversify across
dozens or hundreds of startups right you
get to pick one or two or five over the
course of your career so i really really
think it's important to invest in
underwriting your company by looking at
the people and the team and whatnot
because equity at the end of the day
right is just like an investment right
you can invest your time anywhere you
can also invest your money anywhere and
equity is just one one of those places
so
um with that i know it's a bit of a long
preamble with that uh we're gonna dive
into equity um and you may have read
some about it before
when i first heard about equity i i saw
a lot of these sort of images it's this
like weird amorphous thing some people
say it may be a lottery ticket some
people say that you know it's worth
nothing um
you can impact it but you also can't
really complain to your friends about it
because no one really feels sorry for
you that you you got these lottery
tickets that you could potentially
impact so it's this weird thing that you
don't know how to necessarily represent
on your balance sheet or you know really
digest that night when you're thinking
about your personal wealth and the best
part is most startups as nice as they
are you know when they give you your
offer letter you get something like this
it's like 1 000 options right and i'm
like
what does this mean right i'm like i got
1 000 options in some startup that i
hope is going to be successful but what
does this mean
and um the reality is the startups are
not evil people they probably actually
don't understand how this stuff works
that well either
so really it is up to you and is your
responsibility to figure out some of the
key information associated with your
equity right and i say this with a great
deal of confidence and we'll send this
out but it is your responsibility to do
this oftentimes people are like oh am i
going to be offending them am i rude to
them
no no this is an asset that you are
acquiring and is your right to figure
out this information um and you should
work hard to figure this out figure out
this information over time so
we're going to cover a lot of the key
details we'll go through a few examples
um but like i said if you want me to
dive into particular areas feel free to
ask um and we'll be able to dive in from
there
so the first uh uh thing to start with
is what type of equity you may have
exposure to and as you work at startups
it's very likely that you'll get
multiple types of equity over time the
two broad buckets to start with though
are grants and stock options so
grants
often called restricted stock units or
rsus are often given to people at later
stage companies
companies with more than 100 employees
broadly
options uh or stock options they're not
shares right so grants give you the
shares of the company stock options give
you the right to purchase shares in your
company
right so grants give you the the grant
the shares directly stock options give
you the right to purchase the shares and
um for both granted stock options uh but
we'll focus primarily on stock options
for the next few slides um you actually
don't receive all the equity right when
you join your company right so instead
to incentivize you to stay at your
company you will be provided what's
called a vesting schedule and the
vesting schedule says exactly over what
time period you're able to purchase your
shares right so at what point in the in
your stay at the company um can you
purchase your equity um and generally it
says something like a one-year cliff
meaning you have to wait a year before
you can buy anything and then it will
vest over some period of time right and
that's that's what's called the vesting
schedule now okay you've got an option
it gives you the right to purchase the
thing you can do it over some period of
time the natural question for me is like
well what can i purchase it at and that
is what's called the strike price
so the strike price is generally
stipulated at the time you were issued
your equity right it's not when you
signed your offer letter it's actually
when you're issued your equity and that
strike price
here we go it gets fun now the strike
price is equal to the 409 a valuation at
the time you joined the company right
because private companies don't have a
public valuation so they do something
called a 409 a valuation every year
around every financing event where they
hire some law firm or accounting firm to
audit their financial history and come
up with the valuation and um it is a
uh the strike price in negotiable term
or is it legally bounded to the 409 409a
um it is uh
they have to issue it at the 409 a
valuation now the 409a is something that
they do like i said on on a regular
basis um but uh it can go up or down
over the company's life cycle so there's
no guarantee that it will continue going
up over time and
to draw this out just to really
reinforce this when you join your
company you're given your option at the
strike price the strike price stays
static over time but hopefully the 409 a
and the valuation for the company
continue to rise
of course this is not guaranteed and
it's
probably very likely that your company
doesn't go up into the right forever um
and there's a world where your option
becomes valueless but in the positive
state for the world um you you begin to
have a difference between the strike
price and your latest valuation and this
difference is known as the bargain
element
and this difference is what enables you
to eventually buy low and sell high
which means that the option has value
but
it's not as straightforward because a
your company might not succeed
so when you buy your option low there's
a chance that it's actually not worth
anything and your investment goes to
zero so it's a risky investment
two when you buy your option or exercise
your option they call it or buy your
shares when you do that
you may have to hold on to the equity
for a long period of time because even
if the company one day succeeds it's
very likely that it will take many many
years before it is now called liquid or
you're able to sell it so that's the
second hard part and then the third hard
part where it gets especially fun um is
there are tax implications for
exercising your stock options so when
you make a decision like this right the
company is illiquid so you're paying
money at the strike price to exercise
your options you may also owe taxes
before you have any liquidity and that
is where there can be a lot of confusion
um because the taxes depend on the type
of equity you own and within stock
options there's different types of stock
options which we can go into uh and
within grants um there's different types
of vesting events that could occur
and the taxes occur uh depending on the
timing and type of exercises that you're
doing
so when you're exercising you want to
think about
exactly
when you're exercising and
timing it in a way that you're able to
cover the tax obligations as well
so there's two main reasons or
incentives for exercising your options
earlier rather than later
the first is going back to that bargain
element that that difference between the
strike price and the 409 a that we
talked about the smaller that gap is
the less you'll probably owe in taxes
right so if you wait to exercise your
options and the company does really
really well
right and you um didn't exercise your
options
well now you're in a great spot right
your company is doing super super well
and you are now holding options that are
worth a lot more money but you will now
have to pay taxes on that entire spread
right so it becomes more costly to
exercise your options that that's the
first challenge around exercising now
you may not be able and we'll dive into
what happens if you were to not exercise
your options if you're to leave your
company but it puts you in a tricky
position
the second reason to exercise your
options is that uh you're taxed at both
the exercise event so when you decide to
exercise but also the sale event
and the way you're taxed depends on the
difference between the time you exercise
and the time you sell
so
if you are more than one year between
exercising and selling and there's some
more nuance but broadly let's speak um
then you will get long-term capital
gains in the united states for that
asset
but if you are less than one year
between exercising and selling you will
only get short-term capital gains um or
ordinary income taxes
so there's about a 15 to
13 difference between those two
depending on the given tax year that you
may incur based off of the timing of
your exercise
i know this is a little bit complicated
uh we'll we'll get into more details in
a second
now you may be thinking okay so i'm i'm
thinking about exercising i just got an
offer
what could my equity be worth in the
future
now the reality is it's impossible to
predict exactly what your equity will be
worth in the future and if any founder
or you know hiring manager is telling
you they know exactly what what the
future value will be
they are not evil people necessarily but
they are not telling the truth entirely
because the reality is is no one knows
um there are different ways to
approximate what things may be worth but
at the end of the day we're looking at
some fairly simple math and we're
guessing exactly what the valuation
could be in the future um what i
recommend doing is trying to think about
a uh
are there any competitors or public
competitors or comps of the company that
you're looking at and then b
what goes well in the success case
and how much value does that have um and
then see
what what happens if the company does
poorly like very poorly and what's the
outcome in that regard for you
one of the numbers you're going to want
to look at to avoid this whole i own 1
000 options in this amorphous thing i
don't really understand is trying to get
to what's called the fully deluded
shares outstanding that's the total
number number of shares across investors
warrants grants
employees that the company has
and that way if you can get that number
you can then divide the number of
options or number of grants you have by
that number to get roughly your
percentage ownership of the company
without that you won't be able to know
exactly
what potential value you may have right
so you need to understand the
denominator in order for the numerator
to really make sense as you think about
the value of your equity
now
another thing that trips people up often
is that there's this term called
dilution
so every time your company raises more
money
right they issue more shares to the
world because they're welcoming in new
investors
your percentage ownership will go lower
right because the denominator is
increasing and your numerators staying
the same
so oftentimes people get upset about
this they're like oh no like we're you
know we're deluding ourselves my equity
is less but my reaction to that is often
one that
which you should pay attention to really
is the total value not just the
percentage ownership you have because
it's very likely that the reason your
your founders and your team are raising
more money is because they're increasing
the value of your equity overall um and
as a result you shouldn't look at a
dilution as this like terrible thing
often it's a vehicle for increasing the
value of the equity that you hold so i
did want to make a defense of the
startup for one second
okay we're almost there so
the next thing i wanted to briefly touch
on um was a topic called the post
termination exercise window and again
this is a concept that if you're getting
an offer right now or you work at a
startup figure out what your post
termination exercise window is
termination is kind of a scary word but
uh if you find yourself in your company
parting ways either you quit or you're
let go or various other reasons you only
have a limited amount of time to
exercise your options
that's because you have something called
a post-termination exercise window so
let's imagine you've been working at a
company for three years
and you decide to leave for whatever
reason and you haven't exercised any of
your options yet let yet
all of your vested options mean the
options you've earned
uh you will have up until the post
termination exercise window to exercise
them before they expire
right so the standard window is 90 days
but some companies
extend their exercise window beyond 90
days to something like three years or
five years something much longer
there are some tax implications to
extending the window and we can talk
about that if anyone's interested but
you should be aware of that because it
buys you a lot more optionality if you
have more time to decide whether or not
you want to exercise your options right
and many times people are in positions
where they're at their company and they
want to leave but they can't afford to
exercise their stock options and as a
result they're doing a job that they
don't like for many many years
and it's a very sad thing for the world
and very much wasted potential so look
out for this and really ask your company
why they chose whatever they chose and
factor that into your overall decision
making
jordan what happens if a company doesn't
disclose
information such as the number of fully
diluted shares outstanding that was a
question we got from the audience
yeah thanks for that and i saw the other
ones too so we'll dive into it so um the
reality is there's no law yet uh that
they legally have to do this um
generally my approach in any in any
negotiation like this is to really um
first of all list out your own
priorities right this is one input
across many potential inputs for your
job and i don't want you to put yourself
in a position where you're over
negotiating one item when you really
need a job so that you know next month
you can afford rent so first of all
always start with your own priorities
but then second
my approach would be one of very much
curiosity
why wouldn't they tell you the fully
deluded shares of sending right and i
would genuinely ask the hiring manager
what is the reason
right and um uh of all the things we
mentioned i would say fully deleted
shares outstanding is not the top of the
list so we can go through kind of where
to prioritize and what to kind of stick
on but i would say that a lot of times
these hiring managers and founders are
just listening to their lawyers um but
they don't actually spend the time to
like really understand the implications
of sharing this information or asking
about this information or etc so my
suggested strategy in that regard is to
really come at it with curiosity and try
to understand it maybe they have a
really good reason
i don't know the really good reason
having talked to many many lawyers in
many companies about this but
perhaps there is one out there and i'd
be curious as well um
one of the other questions max that i
think was there was about the tax
implications of the longer window um so
uh
one thing we didn't cover is there are
two types of stock options uh there are
more but the two primary ones are called
incentive stock options isos and
non-qualified stock options nsos and we
have some great uh
essays on this that that also make it
really clear but um they have different
tax implications so isos
when you exercise them they don't owe
ordinary income tax they owe something
called the alternative minimum tax amt
it's a different type of tax calculation
and nsos
when you exercise them they owe ordinary
income tax so they're different types of
tax applications
when you get an extended exercise window
let's say it's three years so the
standard is 90 days let's say your
company is like i'm amazing we're gonna
make it three years for you
after 90 days your isos will
automatically convert
into nsos or they'll automatically be
treated as nsos so on day 93 you decide
to exercise your options they will no
longer be treated as isos they will only
be treated as nsos not necessarily a bad
thing depends on your overall situation
but it's a difference in tax treatment
hopefully that makes some sense
and then jordan in terms of each company
do they have various termination windows
where one company has 90 days another
company at 10 years
yeah so there are companies um
there's a great list on the internet and
and we're working on one as well uh to
promote companies that do
offer extended exercise windows um but
uh
it does vary it is a per company
decision um and i think as a trend we
are seeing more companies offer extended
exercise windows um but uh to defend the
company it does require a lot more
operational support right because you
have all of your ex employees now that
you're communicating with and you're
having to maintain their equity records
so there's a little bit of work there
but this is just an example where you
should think about incentives between
the candidate or the employee and the
company they're not always perfectly
aligned
awesome
i'm gonna keep going but then max if you
could round up any questions feel free
to um
we'll dive into those we'll have a lot
of time for this um so
i wanted to be clear you know these are
what i believe the most important topics
you know to to get from your from your
um employer especially during the offer
stage but even if you haven't when
you're working at the company again my
suggestion is to take this in a very
much a curiosity uh approach in that
these are not bad people right this
isn't like you against them although
there is some of that as a negotiation
this is far more like hey i'm trying to
figure out my financial situation i
talked to i talked to jordan he told me
i needed this information you know blame
me or blame someone in your life and he
told me i needed this information to in
order for me to do my taxes right when
you go buy a house they let you inspect
the house right but and i want to do
this um and uh it's important to kind of
get that information
now again i'm going to underline tax
lawyers don't rule the world the most
important thing you can do in my view is
work on the company that makes you the
most excited for whatever reason that is
but that is really important now i
understand that y'all are not like
signing up to be finance phds or running
your own personal treasury department
shameless plug for us but we've
automated all this so we can model all
of your taxes for free we have like a
free net worth dashboard modeling tool
etc um it's important to kind of weigh
the pros and cons because the reality is
there's no right answer so our goal and
i think whatever advisor you work with
goal should really be to help you figure
out what can go well but then also what
can go really wrong and as we're seeing
nowadays the reality is is that startups
don't always go up into the right and
they have to make hard decisions and
that not everything is going to be
fairytale and with companies forever so
it's important to be critical um what i
want to remind people around is that you
are an investor right so vcs hire
you know analysts for however good the
analysts are they hire analysts to
underwrite companies they invest in
right and they make hundreds of
investments potentially a year right you
don't have any analysts right and you
also only get to invest in one company
at a time for the most part um so treat
this like an investment decision you can
very well join a company and not
exercise your options i may ask you why
not uh and if it's because you don't
believe in the company perhaps we can
help you find a better company um but
the reality is is that it is a risky
investment decision and you should
consider it a risky investment decision
because you can put your money in crypto
you can you can put your money in the
market you can put it in cash you can
invest in yourself like there's a lot of
ways to allocate your resources this is
one of many investment decisions you can
make so i i encourage you to do this
kind of global optimization across your
finances so
this is my my presentation um happy to
dive into any questions now please do
challenge me on the law i love reading
the tax code uh turns out there actually
is a tax code kind of like you know
engineering code there is a tax code you
can read it yourself it's free on the
internet um so there is a lot of
information there for anyone who wants
to check it out um and if you sign up
for compound you put the yc event we'll
expedite you off the waitlist as well
they made me say that all right now
let's uh dive into some questions
if there aren't
yeah i have a handful of questions
jordan um is the equity amount ever
something you would negotiate how do you
think about um generally approaching a
negotiation and finding the right amount
based on your job and role
awesome question so
everything is negotiable uh in life i've
learned um you don't want to take that
too far but equity is definitely a
negotiable piece um uh it depends on the
company that you're negotiating against
let's say or with um but generally
speaking uh you will be able to
negotiate i would say the approach i
would take if you're trying to get a job
at compound and we are hiring but if
you're trying to get a job at compound
um is i would go to jordan myself and
i'd say you know what man i really
believe in your company like i'm so
optimistic in the long term i i want to
you know really really invest in the
long term of compound
i need more equity upside right i need
more exposure to the kind of i want to
be at the ipo day so that i'm on the
stage with you like let's get some
equity together and and realizing that
equity is a risky thing right and
realizing that but i think taking the
approach of the long-term view and
pushing in that direction is what i i
found works quite well uh for people
in terms of how to understand if your
offers fair
how would you what information would you
use today to do that
yeah so there's not a great resource um
because and this is the big because
the uh
each company is different right and um
in a lot of ways you're making it you
have an investment opportunity in that
company so i tend to advise people to
test the market for themselves right
because you are a constant but all the
companies are different so go figure out
how much you're worth across various
companies and that's one way to have a
market assessment for your own uh
personal finances um this is a problem i
want to deeply solve though and give you
all more leverage so uh if you have id i
have some ideas but there's not a great
resource today for individuals to be
able to figure out exactly what they
could be worth
on the market
i would one thing i would say though a
lot of people never do this but i would
highly encourage it is if you asked uh
the employer and you said hey like how
did you come up with my offer
right so most startups have no idea
second of all if they say well we use
this compensation benchmarking thing and
i'm like you know you're the 75th
percentile my response is like yo i'm
not 75th percentile i have one life i'm
trying my hardest like i'm 99 percent
higher some version of that um but you
know i really think like really bet on
yourself and uh try to kind of figure
out exactly their methodology because at
the end of the day i'll tell you this
you don't win for a lot of these
startups you don't win by being grossly
overpaid in an incredibly unfair way so
that they can't hire any more talent
right so you don't want that either
because this equity is only valuable if
the company is successful right you want
to find a fair compromise that works for
both sides so that both people are
excited because what would happen if you
negotiate for way way way too much
equity um well maybe you're going to
underperform and they're going to let
you go because you're this massive piece
on their balance sheet right or maybe
they're not able to hire the people they
need to help make your equity successful
so it really needs to be a two-way
negotiation where both sides went
and then just focusing on the questions
that are a little bit broader before
diving into the specific questions could
you explain a little bit more about rsus
versus options and in which circumstance
maybe options would be better than rsus
great question so there's not a better
um there are differences from a tax
perspective and from a liquidity
perspective so for restricted stock
units rsus um you don't have to exercise
them so that is a benefit but
uh you and this is where it gets a
little complicated you have something
called a double trigger rsu
so
instead of paying taxes as the rsu's
best right because you're earning an
asset you'd think you'd owe taxes on
that asset as the best instead they use
something called a double trigger so
they delay the taxes you owe on the
vesting for the rsu's until a liquidity
date in the future
right that's called double trigger rsu
investing the problem with that is that
you are not allowed to participate in
any and this is another question i think
in any liquidity events or company
sponsor tender offers if you have double
trigger rsus so the options give you
more optionality to acquire shares
outright that aren't you know covered
with this weird tax double trigger tax
treatment but rsus aren't um
the other thing is that our stock
options are generally given to people
earlier on in the company's lifecycle so
they tend to give you kind of more
exposure to the company but rsus and
options are not really like a negotiable
thing companies aren't like one-off
giving options to people and then
one-off giving rsu's to people it's far
more of a company-wide administrative
change to move between options and rsu
so you shouldn't really be able to
negotiate it unless you're like also an
advisor to the company or some version
of that
and then in terms of seeking liquidity
before an ipo how
can employees today think about selling
maybe two investors in an upcoming round
or navigate that process
great question so you know one of the
downsides of working at a private
company is that there's not a liquid
public market for your shares right so
some companies offer regular liquidity
events spacex is one company that's
known for that um
and they they will buy back your shares
on an on a regular basis so every
quarter or you know a couple times a
year now the problem with that is that
they dictate the price right so it may
not be a price that you want to sell for
and it's only you know a couple times a
year so you have to really make a
decision every so often most private
startups don't do this um and they don't
do it not because they're bad people
they don't do it because there's not a
market for them it turns out that these
are risky startup investments and most
of the time these companies fail right
so there's not always going to be a
liquid market for all of these different
options now that being said there are
brokers and exchanges that specialize in
secondary markets um you could explore
them you'll probably get linkedin
messages from people uh trying to buy
your equity as your company gets harder
we do offer a service where we help
people navigate those different options
so they get the best price and they
don't have to talk to 10 brokers but um
i encourage you to like explore what's
out there um if you are looking for
liquidity in your company happy to chat
about that with you um i will say uh
each company has its own rules around if
you're allowed to sell when you're
allowed to sell how much you're allowed
to sell so it does depend on the company
that you work out as well um because
they do control the asset
and then is the 409
and other information publicly available
or do you need to ask the startup for
that information or is it even in a cap
table management software great question
so
um
when you join the company there's think
about the timeline between getting an
offer
to
signing the offer to joining the company
to your options being issued to you that
time period could be like multiple
months
right so in your offer letter it's
actually not going to tell you the
strike price often depending on the size
of the company because the strike price
remember is the is according to the
latest foreign evaluation
so a lot of startups what they do is
they batch their options they issue them
like around every board meeting because
every time they issue options they need
to get it ratified by the board so every
quarter or whatnot they are issuing
options and they're using the latest
foreign evaluation at that time so what
i recommend people do is when you're
when you're um
when you are getting an offer you don't
you can't ask for the like what the
evaluation is going to be for the shares
because they don't know right they don't
know when the next board meeting is
maybe they don't know exactly when
you're gonna get your strike price what
they can tell you though is what the
latest strike price is so like what the
last four in an evaluation was and you
can also ask them
it's this is kind of you know where
you're gonna bring out your winking face
or some version of that but you can ask
them do you expect another 409
evaluation to be happening soon or are
you fundraising anytime soon remember
every year they have to do a 409
evaluation legally and anytime there's a
fundraising event they also will do a
for a foreign evaluation so the reason
you want to do this and this is where
sometimes people get quite upset is
imagine you sign the offer the company
raises a monster around tomorrow um and
then you join the company and your
strike price is way higher or you've
been diluted a lot so the actual
percentage of ownership you have is a
lot higher so you don't actually get you
know what you were promised and that's
honestly an opportunity for leverage and
negotiation for you um but uh
it does happen pretty often and it's no
one's fault it's just a lack of clarity
sometimes in the communication
and then jordan i'm just going to call
on a couple people who wanted to ask the
questions live uh luis i think you have
one question about compound generally
yeah i was just curious to hear kind of
the story behind it how it got started
what the vision is what the plan is
moving forward um i can give context as
to why i'm asking but just keep it
general right yeah i'd just love to hear
more about it
yeah well i'm i'm materially
self-promotional so we've written all
about it we can share you the link there
um but our goal is really just to build
the thing we've always wanted i probably
come off a little selfish i just hate
talking to like people who golf all the
time when i'm helping with my finances
so our goal is to like help people um
with their finances um really
specifically all these startup specific
needs so things like exercising options
investing your money away from an ipo um
borrowing money all of that sort of
stuff
but happy to tell you more about it
we've we've written it about it at
length as well
and i just passed along a link um as
well and jack i think you have one more
question
yeah thank you so much um and thanks for
the presentation uh both you has been
really helpful um my question is just
digging a bit more into the you know
companies which allow you to sell your
options pre-ipo i'm kind of curious um
how common is it for a company to go all
the way to ipo without allowing
liquidity for for all their normal
employees because i hear of uh sometimes
companies will allow it but only for
very early people or execs i hear all
sorts of different things about um
just how common it is to allow that and
i have talked with other friends at
later stage startups who say yeah it's
very normal that they just allow you to
sell once you're at some certain stage
in the development so if you could speak
a bit about the norms or uh just how
common this is uh that'd be really great
question interesting for us yeah great
question thanks jack and one kind of
nuance there you actually can't sell
options
right so you could only sell options
that you've exercised the reason this
matters i know i'm nitpicking i am that
type of person the reason this matters
is because
if you are in a situation where you can
sell but you haven't exercised any of
your options you will then be forced to
exercise and sell your options at the
same time
it's what called it a public company a
cashless exercise
this isn't terrible but what ends up
happening is if you remember the delta
between the time you exercise in the
time you sell is less than one year
right so you owe ordinary income tax
which is not as good of a tax treatment
at the time of exercise so anyways that
is just one kind of nuance to point out
um as far as comment how common it is
well i'll tell you if you ask a series a
founder and you say yo
are you well don't say yo but if you say
hey are you going to um
issue equity to liquidity to our
employees most of the time i think they
have no idea what they're talking about
because they run a series a company and
they've never been at series d so you
could you can kind of get an idea for
their philosophy but they may not
understand the implications of giving
out liquidity in the coming years so i
would if you're interested in that stage
company it's very hard for them to
predict the future because they don't
really know the nuance around it i will
say generally speaking as companies grow
to series d e and beyond
and obviously those are somewhat
arbitrary benchmarks but um we are
seeing more and more of them offer
liquidity
there are more and more startups helping
startups offer liquidity um but the
nuance check that you point out is why
do people only offer it to early
employees the reason is because if you
join a startup and then you sell most of
your equity one year in
then the purpose of the equity
compensation right the incentive stock
options which are to incentivize you to
stay at your company
don't really work as well so whether or
not it's fair we can kind of debate but
that's what the startup believes is hey
like we still want to have an incentive
for you to stay so even when they do
offer liquidity programs it's generally
speaking only for something like five to
twenty percent of your company
of your of your equity it's not going to
be your whole tranche and i think i saw
a question earlier you can um
you can
exercise one percent of your of your
options you can exercise all of them you
don't need to uh uh you don't need to do
you you can do whatever traunch you want
you can do a certain percentage every
month we can help you kind of model out
like what if you do them monthly as they
invest you know there's a lot of
different uh things you can do one of
the questions that i think i see there
um is around early exercising um so
we're about to enter extra fun land for
people uh early exercising is a concept
where
your company is a really important one
your company when when you join they
give you the ability to purchase all of
your stock options to exercise all of
your stock options before they best
right so if you're interested stock
options you can buy all of your shares
before they vest and in the perfect
world right when you if you do this up
front then your options will be issued
at the strike price
right and you will have a 409 evaluation
the latest four in an evaluation and if
you do this all up front right and i can
go back to this chart right so if you do
this all up front and you're here
right that bargain element is going to
be what it's going to be zero right
because the foreign air the strike price
are the exact same
so what that allows you to do is file
something called an 83b election
where you go to the government you say
hey i love you government
i am going to pre-pay all my taxes up
front
for my exercising and my options
now you don't tell them but hey there's
no taxes owed so it's you know it's a
good deal for you but um you pre-pay all
the taxes up front of which is zero or
it's less than what it will be in the
future and you are locking in that
bargain element so early exercising
allows you to do that so you have that
preferential tax treatment so you won't
owe any taxes potentially at the time of
exercise now the nuance here
is if you were to leave your company so
let's say you're at your company for
three years you early exercise meaning
you bought all four years up front but
you leave after year three
the company will buy back your shares
from you
at the price you exercise them for
so they will just purchase them back for
you unless they went bankrupt in which
case you're out of luck but they will
buy them back from me does that kind of
make sense hopefully
any other questions max i know we have a
few minutes
um let's see is there any things that
you've seen that are the most
important takeaways um or
i would say like both ends of the
spectrum like the things someone
absolutely should know um and the
biggest optimizations for example we got
the question like what's the most unique
way you've seen someone use their equity
um
yeah i'm kind of boring
you have a lot of opportunities to
innovate in your life right and you have
super powers you may be an engineer
designer marketer business person
that's where you innovate this boring
stuff
don't innovate right just do the boring
things for the most part like you're
going to take plenty of risk with
yourself so yes you can maybe save by
setting up like a grant or retained
annuity trust and like moving to
delaware and not having any and nothing
against delaware but like you could do
all of these different things but my my
encouragement to people is just in
general keep it simple there's like
people out there in the world that
dedicated their lives for some reason to
being experts at these things
they're weird they're like me and you
should try to find the ones you trust
whoever they are so ask them lots of
questions be kind of annoying to them
and then delegate things to them and
then check their work and kind of work
with them over time that that'd be my
bias as far as something more applied
that's not a cop-out answer my
encouragement to folks is
really first of all care about it second
of all get the key terms you need plug
them into some sort of calculator build
it yourself use ours whatever um and
then be left with what's the best case
scenario what's the worst case scenario
and make sure you build a strategy where
you're happy in both of those worlds too
often i see people say oh hey i'm about
to exercise all these options but even
if the company becomes the next airbnb
yc didn't pay me to say that but even if
they come the next airbnb um you know
i'm still not happy then it's like well
what are you doing with your time um so
i really encourage people to to look at
both kind of ends of the spectrum over
time
then a couple more questions came in
but on a high level could you talk
quickly about stock option financing and
options to acquire liquidity to exercise
your your options yeah so one of the
scenarios here is that you you may not
have the money so you may be like okay
jordan i'd love to exercise everything
like of course it's better from a tax
perspective there's all these things we
didn't talk about all of them max will
send some essays like there's something
called qsbs the qualified small business
stock tax exemption you save 10 million
dollars in tax free capital gains which
is like great if it applies to you and
there's some nuance around it but you
may be like great but jordan i have no
money and i'm like then don't exercise
your option the only other thing you can
do is go get a loan from someone to
exercise the cheapest is if your family
for some reason is an extra you know
hundreds of thousand dollars laying
around first introduce them to me and
then you can you know get a loan from
them um but secondly um
there are like funds out there that will
give you a loan to exercise your options
they're called non-recourse loans or
private financing contracts um they are
tricky so my encouragement would be to
talk to someone who can help you
navigate them again plug first off we
help you do that but find a lawyer who
specializes in this sort of stuff they
are very tricky contracts they can
sometimes be very expensive uh the
actual loans and not worth it um so i
would highly i'd be skeptical going into
any of those but they can work
especially if your options are about to
expire
then if you're at a company and you've
been working there for a year
and there could be an upcoming
fundraising event how do you think about
dilution getting a refresher grant
yeah
so
dilution like i said is a thing that
happens um it's not all bad people are
always like oh my god i was deluded and
i'm like well your company just made
more about you know more valuation
higher prices etc so it's not all bad um
in general my view is is you should
totally negotiate and try to get more
equity and more exposure over time you
can definitely show your math and say
hey you know my i was deluded x remember
that the founder that you're talking to
was also deluded the exact same
proportion as you so they do feel a
little bit of the pain even though they
own more of the overall company um but
yeah
some companies have a refresher grant
program so if you're looking at later
stage businesses they employ people
whose full-time job it is is to think
about compensation practices my
suggestion for all of you is to become
friends with those people when you join
the company and become friends with the
finance people as well because they're
going to know when the next foreign
evaluation is going to be they're going
to know how the leveling program works
they're going to know exactly how
refreshers work over time so these are
all things you can do
to kind of figure that out if that makes
sense
i have a question that is not directly
related to equity but it could be uh
what roles are you hiring for and how
can someone get a job at compound there
you go so we are hiring um across the
board right now we are hiring software
engineers especially um i'd say uh send
us an email uh you can send me an email
directly jordan at withcompound.com and
i'll funnel you to the right people just
to make it easy also happy to just be
useful to anyone if they're looking for
a job can also connect them um but to
others um but the thing we really care
about with people is we really care
about quality and craft um and the thing
we always talk about is there are
certain types of people when they go to
a restaurant like they notice the fork
is like super heavy and they're like
comment on it those are the types of
people who work at compound like they
care about the forks uh at rest you know
our terms of service page is really
pretty not by accident so that's that's
what we're looking for uh we care deeply
about writing and quality and going to
the weed so um that's a little bit about
compound
then robert i think you have a question
yeah sure i was just curious about the
norms around creating a compensation
package for co-founders
so say you offer 15 of the company is
there a vesting period um any advice
would be great
awesome question so
i think yc has actually some great
content on like co-founder relationships
in general they talk a little bit about
kind of splitting equity across people
there's definitely different
philosophies around it i won't opine
there's no best one i would definitely
think though you know how do you and
your co-founder kind of overlay with
each other i would say um as far as
vesting though the biggest thing right
the purpose of compensation remember a
business is a ball of risk there's all
these different things you can do to
de-risk it over time you can raise money
you can like build product you can talk
to your customer all these different
things one of the things you can do is
incentivize your team appropriately
right so that's the purpose of
compensation and when you design your
compensation program my view is keep it
simple you don't need to reinvent the
wheel necessarily but you want to
incentivize people to build a long-term
enduring business we're learning a lot
right now that short-term optimizations
don't earn you a lot of brownie points
for you know the public or the private
markets over the long term so what can
you do to incentivize uh you know over
the long term for for most startups
that's just a four year investing period
so that's kind of standard for people i
know companies that do longer than that
but they're different um and for
co-founders that's included now as a
co-founder
um you can go to your board and say hey
you know i've been working on this for
four years all my equity vested like
i am beholden to the board into the
company like should we incentivize me to
work harder or not with compensation and
they can issue you more equity as well
um and that can't happen at any time in
the company's life cycle uh there's a
chance your co-founder and you split and
there's you know more equity in the pool
there's a chance that you you know buy
out your investors over time there's
many different uh outcomes you could
have but my view is especially early on
it's like you don't want to do something
too innovative i mean i'm not
restricting innovation but you you don't
want to necessarily take unknown risk so
definitely think again about the best
case scenario and the worst case
scenario with any decision that you make
and and maybe put another way every
second you spend not making your startup
successful right you are hurting your
customers right so right after this i'm
about to not be talking to 100 people at
once that's why i'm still here because
i'm hopefully increasing all of your
odds of success in life and that to me
is worth the roi but any second you
spend
building you know the next cayman trust
or whatever like is okay you can do it
but like realize there's an opportunity
cost and if you were in y combinator
like we were they would they would kind
of you'd get some sort of frowny looking
face from the yc team that would be like
you know what what are you doing with
your time like and it'd be kind of
embarrassing so that's how i think about
that
and then emmanuel i think you have one
question saying that you have options
that are fully vested um how do you
think about managing that
potentially with an upcoming liquidity
event and then maybe like diversifying
or selling them
uh yeah so in that version of the world
the question
um
you know
once there is a liquid event maybe an
ipo maybe an acquisition you know maybe
there's a tender offer you will have all
of this other money or the potential to
have all this other money and it's not
clear what you should do with that money
right it may be actually more money than
you've ever seen in your life right it
may be so much money that you will buy a
house in tahoe and like another house in
tahoe as well and then you'll be like
well what do i do with the rest of this
money so that version of the world can
very well happen there's not a lot of
empathy for those people but i have it
so it is a weird position to be in in
the world um
my suggestion
is to go back and really write a memo to
yourself listing
how you want to use your money to make
your life better or others lives better
so literally write a memo to yourself
before you diversify saying i am going
to sell equity in my startup because of
x y and z and then go execute on that i
think people have a very hard time
calibrating risk oftentimes they say
well if i sell 90 of my company equity
now that we've gone public i'm super
conservative right
i think about that and i say well no no
you're super optimistic in your company
you think the ten percent that you left
on the table is going to be worth so
much in the future that you're not even
going to think about the 90 that you
just sold and took off the table in that
kind of really best case scenario but in
the worst case scenario again you've
kind of built a reservoir for yourself
so again i'd go back and i'd say let's
figure out the cash flow model the tax
implications for the best and worst case
scenario and try to work backwards from
there
i think there's a few more questions
that could be starting to get a little
bit more specific um when you're
thinking about negotiating and sharing
equity compensation do you compare
yourself to people in similar positions
at your company maybe at other companies
yeah and and this is the question from
paul max the last one yeah yeah exactly
awesome yeah so and then i think maybe
implicit here is like can you form a
union like against your company to kind
of negotiate people i would say like
you know i don't see it commonly maybe
there's a startup idea in there
somewhere but um i think in general like
you are the real point of leverage right
they want you if you've got an offer for
a company you have leverage right and
they want you because you are awesome um
so i would i would generally start there
i think
um what i would go back to is like being
default optimistic right these are about
to be your employer right and you're
about to make them hopefully really
wealthy in the future and they're going
to help you make be really wealthy in
the future so i wouldn't necessarily
start in like an antagonistic step we're
all trying to like get to the end result
at the end of the day i think um
obviously i'm biased i'm a founder and
max is on the team so i'm not ready for
any unions uh to form quite yet but uh i
would say that um in general
uh if you ask them very candidly i'd
love to understand your compensation
philosophy right and you really ask them
to share
like figure out like are they doing a
good job of that like do they care about
the weight of the fork in this regard
they may say no no we're prioritizing
our sales and our customers all the
other things but remember the founder
has two jobs right build a product but
also build a company right and if they
don't think about the compensation
philosophy of the company sure they're
not evil people and maybe that's the
right kind of balance to make but also
it does say something about what they're
prioritizing and that can be for better
or worse and you could say and we had
someone do this to me early on jordan
our competition philosophy is not good
enough but i'm a smart person i'm going
to solve it for you right so you can
actually be the champion of these things
at your company and then you can say hey
jordan come give a talk at my company
you know we're gonna we're gonna go
increase all of our odds of success so
that's another uh path you could take
if we have a break in the questions uh i
just wanna quickly ask first of all
thank you everyone for coming thank you
especially to the compound team for
being here jordan and max
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and yeah lots to go