August 27, 2025 • 16 mins
How would you like to move from Labor to Capital? You can, by shifting some of your compensation from cash to equity. There are some tricky tax rules to learn, but potentially big gains to be had.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:25):
How would you like to become part of the ownership society.
It's complicated with lots of moving parts, rules, regulations, and taxes,
but if you do it right and get a little lucky,
there are potentially big gains to be had. To help
us unpack all of this and what it means for
your compensation, Let's bring in Joey Fishman. He's an expert
(00:48):
in equity based compensation and Ben's Oregon his clients from
Seattle and Redmond down to San Francisco and Silicon Valley
and full disclosure. Joey is the equity compensation expert at
Redults Wealth Management and is also one of my partners.
So let's start Joey from the employer perspective. What does
(01:09):
a firm like RWM get out of equity compensation for
its senior employees and partners.
Speaker 3 (01:16):
It sets the tone from the beginning and incentives as
long as their property aligned. It puts everybody in the
right position to help push the firm forward and help succeed.
Speaker 2 (01:27):
So let's drill down to some of the most important
aspects of this. Obviously, if you're either offering stock options
or any form of equity compensation that's going to be
less expensive than using cash. That's obvious. But what about
attracting talent, retaining talent, and then getting all the horses
pulling in the right direction.
Speaker 3 (01:49):
That's a really good question, and I think a lot
of it depends on the individual industry with what you're
working in. So you know, for years, over the last
you know, run up to the bull market of the
less fifteen years, there was a huge demand for coders
and people in the tech world, and so if you
could fog a mer, you were offered, you know, one
hundreds of thousands of incentive stock options to come join
(02:10):
this or that tech company to help build them out.
In the banking world, you know, RSAs or restricted stock awards,
was a different form of equity that suited better that
industry just because of the way which cash flows came in,
and RSUs seem to be the better approach for the
oil and gas industry. There is a lot of volatility
in that market, but there's also a lot of stability,
and so rfcus tend to work really well in that environment.
Speaker 2 (02:33):
So you mentioned banking. In the space we work in
wealth management, it seems like it's very much bifurcated. Some
companies very much embrace it. Other firms don't really pay
much attention to it. What do you see in this
space for equity based compensation?
Speaker 3 (02:50):
I mean, if you want to keep your employees around,
you're going to incentivize them accordingly, They got to get paid.
Speaker 2 (02:56):
Is is that why we seem to have sort of
a prisoner exchange at the big wirehouses. They go from
MERYLLL and Morgan to Ubs to Goldman and back. They
take a big cash check in front as opposed to
a long term back end equity version of this. I'm
just I never really thought about it that way, but
that seems to be what happens in parts of the industry.
Speaker 3 (03:19):
You hit the nail on the head exactly so by
giving or by allowing us to be share share owners
of the firm, there's no incentive us for us to
be lured away by someone else offering us a huge
check just to move for the next couple of years.
Speaker 2 (03:33):
What about different employees at different levels of the companies?
We have founders, partners, employees, and for lack of a
better word, probationary employees. What does this look like in
all fields, not just wealth management.
Speaker 3 (03:48):
Once you get to the executive letter a level excuse me,
the pay package changes, and so it may not just
be NSOs or ISOs. They're going to add in what's
called psuser performance stock units. So after you meet a
predetermined threshold that's part of your agreement or part of
your contract, you'll be granted X number of additional shares.
(04:10):
They too have their own tax treatment. But we're seeing
now that it used to be more reckless to banning.
We're just going to sign and grant you shares each
year as part of your equity refresh. Now it's a
little bit more of performance stock unit compensation where it's
put up a shut up, show us that you're worth
the compensation before we're actually going to be granted to you.
Speaker 2 (04:29):
Let's talk about profit interest, which has been something that
I've noticed a lot more of over the past five years. Hey,
you're joining a company with a billion dollar valuation. If
the company is sold for anything over that, and you
have a profit interest, you participate, but you don't have
to pay in and there's no initial tax penalty for this.
(04:51):
Tell us about profit interests back.
Speaker 3 (04:53):
Appreciation rights is maybe in line with what you're discussing.
There's something also called phantom stock to if phantom stock
is not used that much anymore because the tax liability
associated with it is so severe if you get caught
on the wrong side. But stock appreciation rights is more
aligned with what you're discussing here, which is we're not
granting you or giving you shares per se. But what
(05:15):
we're doing is we're going to give you whatever appreciation
takes place between now and the next date. And let's
say we're going to give you one thousand shares. We're
going to assume that you have one thousand shares now
if it's trained to ten bucks a share, and if
it increases to fifteen dollars a share, well, the net
to you is the equivalent of five thousand dollars because
(05:35):
you know we've given you that stock appreciation.
Speaker 2 (05:37):
Right, Let's talk about winners versus losers. You mentioned the
banking industry. We were talking about technology previously. You and
I have talked about oil and gas. How common or
rare are the modest winners and how rare are the
you know, lottery tickets like in Netflix or an Nvidia.
Speaker 3 (05:58):
A really really good thing to wrap your head around
so at the end of the day, it's about four
percent of stocks are responsible for the vast majority of
market returns. So four percent of stocks. Of that, roughly
eighty percent of employees sell their shares immediately after they best.
Speaker 2 (06:14):
Really, so that is shocking to me.
Speaker 3 (06:17):
Yeah, So think about, like, think about what has to
happen in order for you to you know, hit it
out of the park. You have to join early enough
to get a meaningful amount of equity. You got to
stay long enough at least four years to vest all
of your equity, and like God willing knock on wood,
you're getting equity refreshes each year as part of your bonus.
You need to exercise at the right time to avoid
(06:39):
you know, tax traps. If it's ISOs, it's a MT
tax that you have to navigate around. If it's NSOs,
it's ordinary income that has to be navigated with. Over time,
is more liquidity events or funding rounds happen, your ownership
stake is going to be deluded, but hopefully the firm
is getting more valuable. And then finally you have to
wait until there's an actual liquidity event. And if it's
(07:00):
a publicly traded firm or a firm that went iPod,
it's six months after that IPO. Even if it's fully vested,
do you then have access to it? So it's kind
of like winning the lottery, but you don't. Yeah, there's
ambiguity in terms of when you can sell in it,
what price you can sell it, So there's always going
to be that fluctuation and price. The rarity amongst the
winners is much much lower, I think than most people realize.
(07:23):
And you know, going back to Michael Musson's book of
Skill and Luck and Business and Investing, like this is
a great example of what it takes to find yourself
in the right place, to have the skill to be there,
and then to also be lucky enough to thread all
of the needles that need to be navigated for you
to win.
Speaker 2 (07:42):
I'm genuinely shocked to hear that eighty percent of employees
sell their stock immediately after vesting. Why wouldn't they want to?
Is it just that I'm risk embracing and I want
to go on the ride, and other people have mortgages,
kids and bills and they just want to take the cash.
Speaker 3 (07:59):
I think it goes back to four percent of stocks
responsible for the vast majority of returns. The other way
to say this, or another way to look at the
markets is that sixty three percent of stocks are losers
throughout the course of their lifetime. So the vast majority
of stocks at IPO or the vast majority of equity
grants that are given, turns out to really be buckus
in the end.
Speaker 2 (08:20):
Buck gus in the end. So let's talk about some
of the rules that govern this. They're kind of fascinating. First,
there was a big rule change in the nineteen nineties
under the Clinton administration for executives where they were capped
at a relatively low amount of compensation in cash, and hey,
(08:44):
they had to participate by being equity owners. That worked
out really well for senior management, didn't it.
Speaker 3 (08:52):
It did. What took place then is the original goal
was to put a ceiling on executive compensation and the
output that actually occurred. So they allowed incentive stock options
to flourish at that time and as long as it
fell under as long as that option contractor that grant
fell under the auspices of being incentive, So you needed
(09:14):
to work or prove yourself to be incentivized to be
gifted that option, then you would be eligible for a
much more favorable tax treatment and avoid those laws that
went into place.
Speaker 2 (09:24):
And then there were some rule changes following the dot
com implosion. What took place in the two thousands that
affected employee equity compensation.
Speaker 3 (09:33):
Among the main challenges is the requirement that each year
an independent valuation take place through the process of what's
called a four to nine to A. So what that
means is that the company itself can't just pull out
of its tush whatever valuation they expected to be. Instead,
it has to be verified by a third, independent, third party.
The other thing is that equity now vests upon a schedule,
(09:56):
so there are a number of backdating scandals that took
place in the late nineties early two thousands. Apple Steve
Jobs was even famously and started one of them. And
so there's a much more stringent set of rules as
it governs equity compensation. The main ones to take away
from obviously the four nine A and that going forward,
no forms of equity compensation can be given below market value.
(10:20):
It has to be at least in one hundred percent
of market value, or if you're an insider or an executive,
it has to be a one hundred and ten percent
of current market value.
Speaker 2 (10:28):
Huh really interesting. What about some of the crazier tax stories.
I know you've regaled me with all sorts of wild
scenarios that take place. What are some of the wacky
attempts to circumvent taxes that have led to bad outcomes?
Speaker 3 (10:43):
Everyone knows the term like who you hang out with
is who you become. It depends on the socioeconomic demographic
with what you're hanging out with, you know. But right now,
like making the rounds as conservation easements, these are a
tax scheme to help absolutely gut your tax liability on
the ordinary side. The IRS has put a stop to it.
And basically I think how they work these days is
(11:05):
that for every dollar that you would put into a
conservation easement, I believe twenty cents goes towards litigation over
the next eleven years on your behalf. So it's not
for the fainthearted. They don't materialize in the way that
they promise. So that's among the main things where people
really get themselves in trouble. And I will say, like,
if you find yourself on the wrong side of a
conservation easement, the tax bill that's going to be jammed
(11:28):
down your throat is going to be so insane you'll
regret having done it in the first place.
Speaker 2 (11:33):
So you sound very conservative when it comes to tax
schema that aren't approved by the IRS. Let's talk about
one that the IRS has already blessed. The QSBS. Tell
us about what that is and how does that work.
Speaker 3 (11:49):
That is the gold standard so qsbs or qualified small
business stock essentially is the new rules actually just change
with the big beautiful bill. But what it does is
that if the company or the industry with which you
work in, if you are issued shares and as long
as you hold it for a certain time period, then
all of the games are entirely tax free. So there
(12:12):
are situations where folks come to us and they they've
been at the company for ten years, they've had this
stock for ten years, their cost basis is fifteen cents,
and now it's trading at thirty five or forty dollars,
and so the first ten million is entirely tax free
at the federal and the state side. So like in
the California example, you know, is opposed to walking away
(12:34):
with you know, fifty forty eight cents on the dollar,
when all of a sudden and done. You know, you're
walking with one hundred cents on the dollar on the
first ten million dollars worth of gains.
Speaker 2 (12:43):
Really really interesting. One of the things that we talked
about with private companies is often a lack of a
liquidity event for some time in the future. But a
lot of these small startups, especially in technology, they're venture funded.
You have the seed round, the A round, the B round.
How significant are dilution issues for employees or if this
(13:06):
goes public, it doesn't matter. It's just money, money, money.
Speaker 3 (13:10):
Well, ideally you're not having a down round when you're
raising cash. If you are, then the odds of your
is hose working out tend to be slim to nil.
But typically in the startup spaces you want as many
option contracts as you can because if this thing ends
up being a runner or ends up being something magnificent,
the leverage factor is just so enormous that it's well
(13:34):
worth it. You know, the vast majority of these companies
end up crumbling. Carter does a really good job of
the regulatory work that's required behind the scenes for the
startup space, and so I say, over the last probably
five or six years, they've been one of the greatest
improvements in this space and helping like the broader investor
(13:54):
class or employees that have access to this stuff have
a much better understanding of what is a very very
complicate in seat of personal finance.
Speaker 2 (14:02):
And for people not familiar with KARTA, they're the ones
who track the entire cap table from seed investments to
ABCD round. They know everybody that owns every last Yare
you get a sense of exactly what the value of
your holding is, at least relative to the most recent round.
Last two questions, let's talk about common mitigation strategies. What
(14:25):
should an employee or an employer be doing to make
sure that the compensation structure is fair and that everybody
involved pays their legitimate but minimal taxes.
Speaker 3 (14:38):
So, if you're an employee, I've never seen a plan
where this wasn't the case. But if your employee, the
company is responsible for withholding taxes on your behalf whenever
you exercise, if there's taxes owned that exercise, and whenever
you sell the shares or that's a tender offer, So
the company itself is responsible for withholding taxes. Where things
(14:58):
can go sideways is that the company is only required
to withhold the statutory minimum, which is twenty two percent
or twenty four percent. Most folks, like if you're having
a big payout, are in the thirty five to thirty
seven percent federal tax space, so you'll find yourself under withheld.
So it's important that you work with the CPA or
advisor to figure out exactly what your tax liability is
(15:18):
on that distribution.
Speaker 2 (15:19):
So final question, we've been talking very judiciously about all
the risks and all the downsides and how circumspect you
need to be about this. But obviously equity compensation has
been really attractive going back to the nineteen nineties. How
advantageous can these be? Not in an Nvidia, Microsoft, Netflix
(15:43):
sort of way, but just in a good, solid company
that has fairly reasonable results over the course of your
employment there.
Speaker 3 (15:51):
It is fantastic any additional cash flow that you can
capture that you can then add to your financial plan
to help reinforce your quality of life as a.
Speaker 2 (15:59):
Great Thanks Joey. This has been really interesting. So to
wrap up, if you have an opportunity to become part
of the ownership society, understand what you're getting into. It's complicated.
There are a lot of moving parts. There are rules
and regulations and taxes, but if you do it right
and you get a little bit lucky, there are enormous
(16:22):
potential upsides to be had over and above your employment
cash compensation. I'm Barry Ridolts. You're listening to Bloomberg's At
the Money
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:25):
How would you like to become part of the ownership society.
It's complicated with lots of moving parts, rules, regulations, and taxes,
but if you do it right and get a little lucky,
there are potentially big gains to be had. To help
us unpack all of this and what it means for
your compensation, Let's bring in Joey Fishman. He's an expert
(00:48):
in equity based compensation and Ben's Oregon his clients from
Seattle and Redmond down to San Francisco and Silicon Valley
and full disclosure. Joey is the equity compensation expert at
Redults Wealth Management and is also one of my partners.
So let's start Joey from the employer perspective. What does
(01:09):
a firm like RWM get out of equity compensation for
its senior employees and partners.
Speaker 3 (01:16):
It sets the tone from the beginning and incentives as
long as their property aligned. It puts everybody in the
right position to help push the firm forward and help succeed.
Speaker 2 (01:27):
So let's drill down to some of the most important
aspects of this. Obviously, if you're either offering stock options
or any form of equity compensation that's going to be
less expensive than using cash. That's obvious. But what about
attracting talent, retaining talent, and then getting all the horses
pulling in the right direction.
Speaker 3 (01:49):
That's a really good question, and I think a lot
of it depends on the individual industry with what you're
working in. So you know, for years, over the last
you know, run up to the bull market of the
less fifteen years, there was a huge demand for coders
and people in the tech world, and so if you
could fog a mer, you were offered, you know, one
hundreds of thousands of incentive stock options to come join
(02:10):
this or that tech company to help build them out.
In the banking world, you know, RSAs or restricted stock awards,
was a different form of equity that suited better that
industry just because of the way which cash flows came in,
and RSUs seem to be the better approach for the
oil and gas industry. There is a lot of volatility
in that market, but there's also a lot of stability,
and so rfcus tend to work really well in that environment.
Speaker 2 (02:33):
So you mentioned banking. In the space we work in
wealth management, it seems like it's very much bifurcated. Some
companies very much embrace it. Other firms don't really pay
much attention to it. What do you see in this
space for equity based compensation?
Speaker 3 (02:50):
I mean, if you want to keep your employees around,
you're going to incentivize them accordingly, They got to get paid.
Speaker 2 (02:56):
Is is that why we seem to have sort of
a prisoner exchange at the big wirehouses. They go from
MERYLLL and Morgan to Ubs to Goldman and back. They
take a big cash check in front as opposed to
a long term back end equity version of this. I'm
just I never really thought about it that way, but
that seems to be what happens in parts of the industry.
Speaker 3 (03:19):
You hit the nail on the head exactly so by
giving or by allowing us to be share share owners
of the firm, there's no incentive us for us to
be lured away by someone else offering us a huge
check just to move for the next couple of years.
Speaker 2 (03:33):
What about different employees at different levels of the companies?
We have founders, partners, employees, and for lack of a
better word, probationary employees. What does this look like in
all fields, not just wealth management.
Speaker 3 (03:48):
Once you get to the executive letter a level excuse me,
the pay package changes, and so it may not just
be NSOs or ISOs. They're going to add in what's
called psuser performance stock units. So after you meet a
predetermined threshold that's part of your agreement or part of
your contract, you'll be granted X number of additional shares.
(04:10):
They too have their own tax treatment. But we're seeing
now that it used to be more reckless to banning.
We're just going to sign and grant you shares each
year as part of your equity refresh. Now it's a
little bit more of performance stock unit compensation where it's
put up a shut up, show us that you're worth
the compensation before we're actually going to be granted to you.
Speaker 2 (04:29):
Let's talk about profit interest, which has been something that
I've noticed a lot more of over the past five years. Hey,
you're joining a company with a billion dollar valuation. If
the company is sold for anything over that, and you
have a profit interest, you participate, but you don't have
to pay in and there's no initial tax penalty for this.
(04:51):
Tell us about profit interests back.
Speaker 3 (04:53):
Appreciation rights is maybe in line with what you're discussing.
There's something also called phantom stock to if phantom stock
is not used that much anymore because the tax liability
associated with it is so severe if you get caught
on the wrong side. But stock appreciation rights is more
aligned with what you're discussing here, which is we're not
granting you or giving you shares per se. But what
(05:15):
we're doing is we're going to give you whatever appreciation
takes place between now and the next date. And let's
say we're going to give you one thousand shares. We're
going to assume that you have one thousand shares now
if it's trained to ten bucks a share, and if
it increases to fifteen dollars a share, well, the net
to you is the equivalent of five thousand dollars because
(05:35):
you know we've given you that stock appreciation.
Speaker 2 (05:37):
Right, Let's talk about winners versus losers. You mentioned the
banking industry. We were talking about technology previously. You and
I have talked about oil and gas. How common or
rare are the modest winners and how rare are the
you know, lottery tickets like in Netflix or an Nvidia.
Speaker 3 (05:58):
A really really good thing to wrap your head around
so at the end of the day, it's about four
percent of stocks are responsible for the vast majority of
market returns. So four percent of stocks. Of that, roughly
eighty percent of employees sell their shares immediately after they best.
Speaker 2 (06:14):
Really, so that is shocking to me.
Speaker 3 (06:17):
Yeah, So think about, like, think about what has to
happen in order for you to you know, hit it
out of the park. You have to join early enough
to get a meaningful amount of equity. You got to
stay long enough at least four years to vest all
of your equity, and like God willing knock on wood,
you're getting equity refreshes each year as part of your bonus.
You need to exercise at the right time to avoid
(06:39):
you know, tax traps. If it's ISOs, it's a MT
tax that you have to navigate around. If it's NSOs,
it's ordinary income that has to be navigated with. Over time,
is more liquidity events or funding rounds happen, your ownership
stake is going to be deluded, but hopefully the firm
is getting more valuable. And then finally you have to
wait until there's an actual liquidity event. And if it's
(07:00):
a publicly traded firm or a firm that went iPod,
it's six months after that IPO. Even if it's fully vested,
do you then have access to it? So it's kind
of like winning the lottery, but you don't. Yeah, there's
ambiguity in terms of when you can sell in it,
what price you can sell it, So there's always going
to be that fluctuation and price. The rarity amongst the
winners is much much lower, I think than most people realize.
(07:23):
And you know, going back to Michael Musson's book of
Skill and Luck and Business and Investing, like this is
a great example of what it takes to find yourself
in the right place, to have the skill to be there,
and then to also be lucky enough to thread all
of the needles that need to be navigated for you
to win.
Speaker 2 (07:42):
I'm genuinely shocked to hear that eighty percent of employees
sell their stock immediately after vesting. Why wouldn't they want to?
Is it just that I'm risk embracing and I want
to go on the ride, and other people have mortgages,
kids and bills and they just want to take the cash.
Speaker 3 (07:59):
I think it goes back to four percent of stocks
responsible for the vast majority of returns. The other way
to say this, or another way to look at the
markets is that sixty three percent of stocks are losers
throughout the course of their lifetime. So the vast majority
of stocks at IPO or the vast majority of equity
grants that are given, turns out to really be buckus
in the end.
Speaker 2 (08:20):
Buck gus in the end. So let's talk about some
of the rules that govern this. They're kind of fascinating. First,
there was a big rule change in the nineteen nineties
under the Clinton administration for executives where they were capped
at a relatively low amount of compensation in cash, and hey,
(08:44):
they had to participate by being equity owners. That worked
out really well for senior management, didn't it.
Speaker 3 (08:52):
It did. What took place then is the original goal
was to put a ceiling on executive compensation and the
output that actually occurred. So they allowed incentive stock options
to flourish at that time and as long as it
fell under as long as that option contractor that grant
fell under the auspices of being incentive, So you needed
(09:14):
to work or prove yourself to be incentivized to be
gifted that option, then you would be eligible for a
much more favorable tax treatment and avoid those laws that
went into place.
Speaker 2 (09:24):
And then there were some rule changes following the dot
com implosion. What took place in the two thousands that
affected employee equity compensation.
Speaker 3 (09:33):
Among the main challenges is the requirement that each year
an independent valuation take place through the process of what's
called a four to nine to A. So what that
means is that the company itself can't just pull out
of its tush whatever valuation they expected to be. Instead,
it has to be verified by a third, independent, third party.
The other thing is that equity now vests upon a schedule,
(09:56):
so there are a number of backdating scandals that took
place in the late nineties early two thousands. Apple Steve
Jobs was even famously and started one of them. And
so there's a much more stringent set of rules as
it governs equity compensation. The main ones to take away
from obviously the four nine A and that going forward,
no forms of equity compensation can be given below market value.
(10:20):
It has to be at least in one hundred percent
of market value, or if you're an insider or an executive,
it has to be a one hundred and ten percent
of current market value.
Speaker 2 (10:28):
Huh really interesting. What about some of the crazier tax stories.
I know you've regaled me with all sorts of wild
scenarios that take place. What are some of the wacky
attempts to circumvent taxes that have led to bad outcomes?
Speaker 3 (10:43):
Everyone knows the term like who you hang out with
is who you become. It depends on the socioeconomic demographic
with what you're hanging out with, you know. But right now,
like making the rounds as conservation easements, these are a
tax scheme to help absolutely gut your tax liability on
the ordinary side. The IRS has put a stop to it.
And basically I think how they work these days is
(11:05):
that for every dollar that you would put into a
conservation easement, I believe twenty cents goes towards litigation over
the next eleven years on your behalf. So it's not
for the fainthearted. They don't materialize in the way that
they promise. So that's among the main things where people
really get themselves in trouble. And I will say, like,
if you find yourself on the wrong side of a
conservation easement, the tax bill that's going to be jammed
(11:28):
down your throat is going to be so insane you'll
regret having done it in the first place.
Speaker 2 (11:33):
So you sound very conservative when it comes to tax
schema that aren't approved by the IRS. Let's talk about
one that the IRS has already blessed. The QSBS. Tell
us about what that is and how does that work.
Speaker 3 (11:49):
That is the gold standard so qsbs or qualified small
business stock essentially is the new rules actually just change
with the big beautiful bill. But what it does is
that if the company or the industry with which you
work in, if you are issued shares and as long
as you hold it for a certain time period, then
all of the games are entirely tax free. So there
(12:12):
are situations where folks come to us and they they've
been at the company for ten years, they've had this
stock for ten years, their cost basis is fifteen cents,
and now it's trading at thirty five or forty dollars,
and so the first ten million is entirely tax free
at the federal and the state side. So like in
the California example, you know, is opposed to walking away
(12:34):
with you know, fifty forty eight cents on the dollar,
when all of a sudden and done. You know, you're
walking with one hundred cents on the dollar on the
first ten million dollars worth of gains.
Speaker 2 (12:43):
Really really interesting. One of the things that we talked
about with private companies is often a lack of a
liquidity event for some time in the future. But a
lot of these small startups, especially in technology, they're venture funded.
You have the seed round, the A round, the B round.
How significant are dilution issues for employees or if this
(13:06):
goes public, it doesn't matter. It's just money, money, money.
Speaker 3 (13:10):
Well, ideally you're not having a down round when you're
raising cash. If you are, then the odds of your
is hose working out tend to be slim to nil.
But typically in the startup spaces you want as many
option contracts as you can because if this thing ends
up being a runner or ends up being something magnificent,
the leverage factor is just so enormous that it's well
(13:34):
worth it. You know, the vast majority of these companies
end up crumbling. Carter does a really good job of
the regulatory work that's required behind the scenes for the
startup space, and so I say, over the last probably
five or six years, they've been one of the greatest
improvements in this space and helping like the broader investor
(13:54):
class or employees that have access to this stuff have
a much better understanding of what is a very very
complicate in seat of personal finance.
Speaker 2 (14:02):
And for people not familiar with KARTA, they're the ones
who track the entire cap table from seed investments to
ABCD round. They know everybody that owns every last Yare
you get a sense of exactly what the value of
your holding is, at least relative to the most recent round.
Last two questions, let's talk about common mitigation strategies. What
(14:25):
should an employee or an employer be doing to make
sure that the compensation structure is fair and that everybody
involved pays their legitimate but minimal taxes.
Speaker 3 (14:38):
So, if you're an employee, I've never seen a plan
where this wasn't the case. But if your employee, the
company is responsible for withholding taxes on your behalf whenever
you exercise, if there's taxes owned that exercise, and whenever
you sell the shares or that's a tender offer, So
the company itself is responsible for withholding taxes. Where things
(14:58):
can go sideways is that the company is only required
to withhold the statutory minimum, which is twenty two percent
or twenty four percent. Most folks, like if you're having
a big payout, are in the thirty five to thirty
seven percent federal tax space, so you'll find yourself under withheld.
So it's important that you work with the CPA or
advisor to figure out exactly what your tax liability is
(15:18):
on that distribution.
Speaker 2 (15:19):
So final question, we've been talking very judiciously about all
the risks and all the downsides and how circumspect you
need to be about this. But obviously equity compensation has
been really attractive going back to the nineteen nineties. How
advantageous can these be? Not in an Nvidia, Microsoft, Netflix
(15:43):
sort of way, but just in a good, solid company
that has fairly reasonable results over the course of your
employment there.
Speaker 3 (15:51):
It is fantastic any additional cash flow that you can
capture that you can then add to your financial plan
to help reinforce your quality of life as a.
Speaker 2 (15:59):
Great Thanks Joey. This has been really interesting. So to
wrap up, if you have an opportunity to become part
of the ownership society, understand what you're getting into. It's complicated.
There are a lot of moving parts. There are rules
and regulations and taxes, but if you do it right
and you get a little bit lucky, there are enormous
(16:22):
potential upsides to be had over and above your employment
cash compensation. I'm Barry Ridolts. You're listening to Bloomberg's At
the Money
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