Transcript of Don't Get Screwed By Your Company's Stock Options: What To Ask Your Employer About Your Equity

When I was early in my money journey, I felt like I had to do money rehab all alone. But on your road to financial independence, you have me and chime. We've all hit a point where we've realized it was time to do some money rehab. Take control of your finances by using a chime checking account with features like no maintenance fees, fee free overdraft up to dollar 200, or getting paid up to two days early with direct deposit. Learn more@chime.com mnna and when you do check out chime, you'll see that chime is making finance overall feel less lonely. And one of the ways they're doing that is by allowing eligible members to give complimentary boosts to increase a friend's spot me limit. That means you can help increase your friends fee free overdraft limits and vice versa. This we're all in this together spirit is how our financial world should work, and chime agrees. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in 2 minutes@chime.com. man, that's chime.com. m and MH Chime feels like progress banking services and debit card provided by the bank Corp.

Na or stride bank NA members FDIC spotme eligibility requirements and overdraft limits apply. Boosts are available to eligible chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to chime.com disclosures for details. Buy low, sell high. It is such a simple concept, but not necessarily an easy concept. Right now, high interest rates have rushed the real estate market. Prices are falling and properties are available at a discount, which means that fundrise believes now is the time to expand the fundrise flagship fund's billion dollar real estate portfolio. You can add the fundrise flagship fund to your portfolio in just minutes and with as little as $10 by visiting fundrise.com moneyrehab. That's f u n dash e.com moneyrehab. Carefully consider investment objectives, risks, charges and expenses of the fundrise flagship fund before investing. This and other information can be found in the fund's prospectus@fundrise.com. flagship this is a paid advertisement. I'm Nicole Lapin, the only financial expert. You don't need a dictionary to understand. It's time for some money rehabilitive. When Facebook went public before it was called Meta, an estimated 88 employees saw the value of their holdings in the company exceed $30 million.

That is the dream, right? You get stock options in your company, your company goes public. You retire early and you're super rich. But not only is this dream rare, it can actually turn into a nightmare if you don't ask the company the right questions about the stock options are granted. Today I'm talking to Tracy D'Annunzio. Tracy is the most brilliant entrepreneur who built and sold the luxury resale company tradesy. And as you'll hear, she is also my bestie and the person that I turn to when I have questions about opportunities where options are involved. You're about to hear essentially all the questions I asked her when I was trying to figure this out myself. And I know it will help you just as much as it helped me. Tracy Denunzio, welcome to money rehab.

Thank you.

Best day ever.

We talk about so many things all the time. Stock options happens to be a thing that you and I just personally talk about a lot. And we were working on a deal and you helped me with all of your brilliance. And there was so much that came up that I was confused by, and I've been in this world for a while that I thought we should open up this conversation and just let everybody.

Else listen to it.

When you get equity from a company, if you go to a startup and they're like, here is magical equity, you're going to be on the Forbes list is maybe what you're thinking, but what does that actually mean?

Well, a lot of people don't know. So I had a startup, I grew it. I had hundreds of employees. And out of all these people who had worked at many, many companies, very few asked the right questions or knew much about the equity ownership that they had in the company. So you're not alone in being a little confused and out of the loop about this. So very simply put, when you go to work for a startup or an early stage company, many times as part of your compensation package, they will give you a little bit of ownership in the company. And that ownership is intended to grow in value over time as you and the other team members contribute to growing the company and making it really, really valuable and hopefully make you very, very rich one day. Oftentimes that's not what happens. We're going to talk about that. Oftentimes you're not getting the ownership or the due that you might think you're getting if you don't ask the right questions, we're going to talk about that, too. It's pretty complicated.

It's super complicated. I was so lucky to have you as my like business Cyrano to ask the right questions here that oftentimes people don't ask because they see equity and they're like, oh my gosh, already spending my millions that magically I'm going to get. Which, funnily enough, we called this just between us magical beans, because when I was looking at this deal that was offering me stock options, not a stock.

Grant, millions of dollars worth of stock options.

We just called them magical beans because, yes, there is a possibility that it could be super valuable, but more likely than not, it will be dog shit.

To put it gently. Yes. So we all hear stories about like the 10th employee at Facebook, and for every person who has that experience at a startup, there are tens of thousands of startup employees who end up going to zero, even sometimes having like, hefty tax bills for stock that didn't turn into money for them. So it is tricky. It is tricky.

Okay, so options and stock grants are forms of equity, but they're very, very different animals.

Yes, different animals. So most startups, especially early stage startups, will give you stock options, and a stock option is the right to buy a certain amount of stock at a certain price at any time in the future, usually up to a limit. Another form of stock that you might get at a startup is called an RSU, or restricted stock unit. And that's just we're giving you stock. So there are two different things we should talk about stock options, because stock options are the more risky, the more complicated, and the more common in early to mid stage startups.

Yes. And that's why the more I learned about these magical beans, I was like, oh, wait, I have to maybe buy them, or what the heck? This is not actual equity that I have in this company. And so the valuation was very confusing to me, which we can talk about, because you taught me about how these companies are valued and all of that good stuff. So if somebody is looking at an offer from a venture backed startup, and they get usually a lower cash salary and then the stock options, so how do I assess? So I am going to Silicon Valley and I get an offer to be somebody at some Sandhill Road backed company, and they are giving me $75,000 a year, but 3 million stock options or something like that.

Yes.

What do I even, where do I start?

Okay, so a good place to start when you're given an offer that includes stock options is to ask what is the current price per share? So you're getting 3 million stock options. What are they each worth today? And this is, this will kind of blow the minds of your hiring managers. How many fully diluted shares are outstanding. That sounds like a lot of words. It really just means how many shares are there?

Yeah.

So, like, how many am I getting of the full pie?

Right? If you give me 3 million, are there 30 million and I'm getting, or are there 300 million shares? Like what? And you're essentially trying to figure out what percent of today's pie is my piece. And so that's the question to ask.

So that you can go over them again.

Yeah.

The question is how many shares outstanding.

How many fully diluted shares are currently outstanding?

I love it.

Okay, so let's say you give me an offer to work@nicoleisamazing.com. and you say, I'm going to give you 10,000 shares. I say, what is the price per share? You tell me it's $1 per share to make it easy, right? So, okay, I'm getting 10,000 shares and they're worth 10,000 thousand dollars. But how much is the whole company worth today? So I ask you, how many shares, how many fully diluted shares are outstanding? And you say, oh, my goodness, you're so smart. I'm so glad I hired you because the way you phrase that question tells me that you know your stuff. And you tell me, well, the company's worth a million dollars and there are 1 million shares outstanding, each worth $1. Great. Now I know I own 1%. And today the value of my shares is $10,000. If I come and work for you, and I work really, really hard and so does everybody else on the team, and you're a great leader and we do well together, maybe that company is going to be worth 10 million and then 100 million and my shares become worth more.

But then there are different scenarios of what happens during your time at the company, right. The company could sell, and so then your options get exercised in a certain way, potentially, or explain it to me, or you leave and you're like, peace out. And then you have these magical beans and you then need to either buy them or extend them or something. So can you go through the scenarios of an exit, which is what a lot of these companies want to do? They want to sell for a gajillion dollars. So the million dollar company wants to be $100 million company. Right. And so then you would have like a 100 x of your.

Exactly.

Options.

Exactly. Exactly. If that happened, if the company went from being worth a million to being worth 100 million, now my $10,000 of stock is worth a million dollars. And that was a really good bet for me. That's like, better than any bonus I would have gotten at any other job. But in order for me to get paid to actually turn my stock into dollars, usually not all the time, but usually there has to be a liquidation event. And a liquidation event, also called an exit, is either the company, the private company selling to another private company or the private company going public on the stock exchange. And in either of those situations, all of the holders of stock and options get the option to sometimes have to turn their magical beans into real cash dollars. And so your question was about exercising. It's very simple. So when you're given stock options, you're given the right to buy a certain number of shares at a certain price far into the future. And when the company sells or exits or ipos, these are all sort of similar mechanisms for you, the option holder, you would be able to then buy the stock at the price that you were promised.

In our example, I have shares that are worth a dollar apiece. But now we're selling the company, and my shares are worth $10 a piece or $20 a piece, right? They're worth a lot more. So in order for me to be able to sell the shares, I first have to convert my options into shares. That's called exercising. I exercise my options to turn them from the option to buy a share into a share. And I get to do that at the price that you gave me years ago, before we got big, before we became so valuable. So I can exercise my options for $10,000. I have 10,000 options at a dollar apiece, and now I can turn around and sell them for a million dollars into that exit, into that sale event. So my profit is $990,000. And the reason that we get stock options instead of just getting shares, just getting stock, is that shares are taxable. So if I joined Nicolas amazing.com and you gave me $10,000 worth of shares instead of options, I might then owe taxes on those shares. But they're also not liquid. I don't have a way to sell them.

I don't have a way to turn them into cash. So I'm holding these illiquid assets that I'm being taxed on. That's not good for employees. And that's one of a few reasons that stock options were invented as the primary mechanism for giving ownership to employees.

And when that exit happens, you don't have to put up any cash. It's like a cashless exercise, right? Is that what it's called?

Sort of a cashless exercise, is a slightly different thing. So when that exit happens, you don't have to put up any net cash as long as it's a good exit. So if I bought my options for a dollar a piece and they're now worth a piece, I do have to spend the cash, the $1 per option to exercise, but I'm netting $99 per.

Share, but I'm out of pocket 10,000.

Or it all happens at once when there's an exit. What you hear people talking about when they talk about exercising and cashless exercise and all of that is a little trick. And one of the pitfalls of startup equity and that is that in most stock option plans, at most companies, if you quit or are fired, you have 90 days to exercise your options or you lose them. That is often in the fine print. It's something that most employees don't realize until the time comes that they're ready to leave the company. And they say, okay, well, how much ownership did I get? I can't wait to watch from the sidelines and see if the company ipos. And then it's like cold water in the face because they realize that they have to put money out of pocket in order to exercise those options or lose them. It's a very standard startup agreement. It's quite favorable to the founders and the investors, because when employees leave and they don't exercise that money, or those options go back into the option pool and can be reissued to a new employee.

So I left, obviously, I didn't get fired, but I left and did something else. I would need to give 10,000 cash money. Dollars.

That's right, yes.

Then the options, still not shares.

No. You would need to spend $10,000 to exercise the options and turn them into shares. And shares are just like pieces of the pie. No, no complication to that. Like, you own a piece of the pie. When you own a share, you can't hold on to options, typically after you're an employee. So you get 90 days to pay your option price to turn your option into a share, or you forfeit your options. Now that was controversial for many, many years. I'll say, as a startup founder, when I started my company and I had my first stock option plan, I didn't even realize that that was how it worked. And when I had my first disgruntled employee saying, hey, you know, you screwed me. I worked for years, and now I can't get my stock unless I pay you, I said, what are you talking about? I'd never do that. And then I read my charter and I understood that that was how it worked. And, and so there are a few things that you can do to avoid that issue. One is that some companies offer something called a cashless exercise, and you can ask upfront when you get your offer whether cashless exercise is an option at that company.

And that means that you essentially trade some of your options to pay for buying some of your options. It's like you're using magical beans to pay for magical beans to turn them into real shares. And so platforms like Carta that manage startup equity for employers and employees have a cashless exercise option. And if your company doesn't offer it, ask them why and pressure them to. And if you have a new job offer, this is one of the questions you can ask.

So this is in the couple of questions. How many fully diluted shares are outstanding? What is the share price? And is there a cashless exercise option?

Exactly. And what you're saying is if I leave this company because you or I decide that it's not a fit, am I going to have to walk away without my options or pay you a bunch of money? Because I don't want to do that. And that's very understandable. Now, another thing you can ask for, especially if you're in a high level position or if you're joining a very early stage company where the team is small, is that you can pre negotiate an exercise window extension. And all that means is that instead of having 90 days after you leave the company, I know we did. We negotiated hard for it. We got it right. Yeah.

So basically what happened? And in our scenario, we parted ways and I had magical beans options in this company. And I looked at Carta, the platform.

That they were managing on. Yes, totally.

And I was like, what the heck? Like, I need, like, the clock or the 90 days is now ticking to pay. I think it was like $40,000 or something. And like, there is no way in hell I am paying this company $40,000. And you, as my options whisperer, told me to ask for an extension, which I did, and I called the executives and I said, can I have an extension on my options for five years? And they gave it to me.

Yes. Yes. Now, if you don't have a very popular podcast about personal finance, you may have less leverage in that negotiation at the time of your departure. So it's the kind of thing you want to negotiate up front. If you're taking a job at a startup and you're not sure and there isn't a cashless exercise option. You want to go to the founder, the CEO or the hiring manager and say, can I get in my employment contract? A multi year extension on exercising my options?

What should you ask for five years?

You should ask for five. You may not get it. Five is generally considered the max. I've never heard of more than five. You might get three. Really, what you're trying to do is buy time to to gain more and more confidence that the company is likely to be successful enough so that you're willing to pay for your options, or it can exit.

And then you get all of this money.

And then you're essentially using all of your proceeds to pay for your exercise. And it doesn't actually cost you anything on a net basis.

Hold onto your wallets. Money rehab.

We'll be right back.

Buy low, sell high. It is such a simple concept, but not necessarily an easy concept. Right now, high interest rates have crushed the real estate market, prices are falling and properties are available at a discount, which means that fundrise believes now is the time to expand the fundrise flagship fund's billion dollar real estate portfolio. You can add the fundrise flagship fund to your portfolio in just minutes and with as little as $10 by visiting fundrise.com moneyrehab. That's f u n dash e.com moneyrehab. Carefully consider investment objectives, risks, charges and expenses of the fundrise flagship fund before investing. This and other information can be found in the fund's prospectus@fundrise.com. flagship this is a paid advertisement. So as you guys know, once upon a time I was in credit card debt, and once I realized how my debt would only snowball more out of control, I knew it was time to get serious about my finances. We have all hit a point where we've realized it was time to make more serious money moves. Take control of your finances by using a chime checking account with features like no maintenance fees, fee free overdraft up to $200, or getting paid up to two days early with direct deposit.

Learn more@chime.com mnn when you check out chime, you'll see that you can overdraft up to $200 with no fees. When I was in debt, I had my spending plan budgeted to the dollar. Literally. I had overdrafted once buying a coffee, and I blew past the $7 I had budgeted because of the $35 overdraft fee. If I had chime back then, it would have saved me. Make your fall finances a little greener by working toward your financial goals with Chime open your account in 2 minutes@chime.com. m and n that's chime.com Mnn Chime feels like progress banking services and debit card provided by the bank Corp Na or stride bank NA members FDIC spot me eligibility requirements and overdraft limits apply. Boosts are available to eligible chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to chime.com disclosures for details. And now for some more money. Rehab.

There's also a vesting schedule.

Yes, there is.

So can you explain, like, I've seen offers where, you know, they'll say x amount vests after this amount of years and whatever, and maybe you leave before then or not. Can you explain what vesting is and what is this vesting schedule business?

Totally. Okay, so let's go back to our example. I joined Nicole is amazing.com. i am the head of product and options knowledge and you've offered me these 10,000 options. You don't want to give me all 10,000 options on the day I start, because then in a month I'm going to be like, hey, Nicole, thanks for giving me the five years exercise window and the 10,000 options, and I'm going to leave. So instead you want to put me, the employee, on a schedule where I earn my options as I work. And in startups, there's a very, very typical standard agreement. It's called a four year vest with a one year cliff. And what that means is that your total number of stock options are being accrued to you monthly over four years. I believe that's 48 months. So every month that you work at the company, you earn 140 8th of the total options that you've been allocated. But you don't even really want to give me 140 8th in my first month or 248 in my second month. Because what if I totally suck and I'm the worst employee and I'm so destructive and all of my options knowledge is wrong?

So usually there's also a one year cliff on your four year vesting schedule. So in your first year as an employee, you are earning 140 8th of your options every month. But you don't get them vested, they don't officially accrue to you until the end of your 12th month, one year. So at the end of one year, one quarter, 25%, or twelve months of your options are yours. And then for every month thereafter, you get another 140 8th. That makes sense.

So the first year, all of the 1248 or whatever is just in a purgatory escrow land.

Purgatory escrow. Totally.

So they're somewhere waiting for you. And then if you make the one year mark and you stay at the company, then you get 1248. And then for each month after, you get whatever. And then let's say you leave the company after two years. So 24, 48.

So. Exactly, exactly. And you would think, like, so if you quit eleven months and 27 days into it or get fired, technically you get nothing. And that happens. But generally speaking, employers want to have a reputation of acting in good faith with their employees. Like, you don't see quite as much shenanigans around that cliff as one might expect. And I've seen a lot of times, even when employees are leaving they'll negotiate for part of that first year and oftentimes get it.

So if I leave after two years in our fictitious example, then I am half vested. So I have 5000 vegetable beans.

Exactly, exactly. Okay. Yes. And hopefully you've pre negotiated a five year exercise window extension so you don't actually have to pay any cash for those options to remain allocated to you.

And in those five years, hopefully it does. Great. But what if it doesn't?

Well, if it doesn't, you just have nothing. And what will happen is either the company will go to zero or it will have an outcome or it will still be operational at the end of those five years. And frankly, at that point, you're really left to do a little detective work to try to figure out if you can get enough information to decide if you want to exercise. And that's like a tough position to be in.

So that's where you're maybe reading headlines. If the company raised money and you're seeing like some published valuation, that's probably all you can do.

Yes, correct. That's all you can do. Unless you have a relationship with the executives or the founder. For early stage employees, that's often the case.

Can you sell them on a secondary market? Depending on the company, I guess. Like if you need cash and you have magical beans, do you take a credit card debt? Or you're like, oh, my carta thing says, I have millions of magical beans options. Can I do anything?

I would not count on it. It has been known to happen on occasion for very successful, mature private companies. But it is not the rule that you will have that opportunity.

So just assume that it's nothing.

Just assume that you will not have liquidity, that you will not be able to turn your options into cash until the company achieves some kind of an exit.

Something else you taught me was a 498 valuation.

Oh yeah, that's a whole thing. This is very in the weeds, so I'll try to make it shorter. The value of a stock option for an employee is not based on the same company valuation as the valuation you see in the headlines that investors pay. A company has two different valuations. A startup, specifically a tech startup. So nicolesamazing.com might go out and raise around at a billion dollar valuation. Your unicorn. It's incredible. You can take in $100 million and give investors 10% of your company because it's worth a billion dollars. But if I join your company as an employee and you give me stock options at that same time, my options are not valued. My common stock is not valued in the same way that that investor's preferred stock is valued. It is valued according to a 409, a valuation which calculates how much the company is worth in a very different way than investors do.

Investors are looking at fairy dust and dreams, and the 498 valuation is super barebones. It's like an appraisal of a house. It's like it's lower.

It's almost always lower. And you want it to be lower.

Because that's the one that you pay.

Well, that's the one that employees options are valued at. And you do want that to be as low as possible, so that when the company sells, the spread or the profit margin for the employees from options to shares is as optimal as possible. So investors pay, and sometimes it seems like they pay a crazy amount, but when a founder fundraises, they are selling a chunk of their company to the highest bidder, they're taking it to market, and they're telling a story about how valuable the company is going to be in the future. And investors are either saying, I believe that story so much I want to buy a piece of that future, or they're saying, I buy it, I pass. And depending on how well the founder does when they're fundraising, investors might start to compete to buy a piece of that company. And the valuation that an investor is willing to pay becomes based on the investors belief in the future. Value of the business has nothing to do necessarily with current revenues or current assets. It has to do with, I think this is going to be a $10 billion company, so I have no problem valuing it at a billion today, even though it has very little revenue.

Now, as an employee you're working on, you want your options to be cheap so that you can make as much money as possible. And so the company gets a 409 a evaluation to determine at what price it can issue options. And the 490 a is based on things like assets and revenues, which oftentimes in tech companies are not very valuable compared to so nicely. Yeah, well, you know, when you were.

First explaining it to me, I thought of a house analogy. So when you're getting your house appraised for property taxes, you want it to be low. So you can pay low property taxes, but you want to list it on zillow or whatever. And you want it to be so high.

Totally.

So with that discussion that we had about 498 valuations, there was also a strike price.

Yes.

I even forgot what the strike price is.

I know. I know. I know you did. Okay. It's just lingo. And this lingo is part of why I think employees get kind of intimidated, confused, and don't feel clear. Strike price is the same thing as exercise price. It's the same thing as what your options are worth at the time that they're issued. So Nicoles amazing.com gave me options for a dollar apiece. A dollar is my strike price.

So when we were asking the questions of the hiring manager early on, we wanted to know how much the shares are worth. That's the same as the strike price.

Yes, yes.

I'm sure that's like, asterisks.

Asterisks.

There's so many asterisks. Because what will happen is that you're getting your shares issued at the strike price, but the hiring manager will talk to you about more of the market valuation and the valuation that investors pay. So you have a really hot company, and it's worth $100 million to the investors, and I'm getting 1% of it. My strike price, my exercise price, my 490 evaluation, my option prices are all the same thing, is going to be low. It's not going to be as high as the price that investors are paying, but the price that investors are paying is an indication of what my shares would be worth if we exited today.

Got it. So the lower price that you want as the common stock person compared to the preferred stock is lower. But sometimes you get screwed if you're a common stockholder because there's a whole bunch of other people above you in line if something happens. Correct. Have been so surprised to see a ton of cases where you get completely fucked if you have common stock and there's an exit because there's a lot of fancy investors that are ahead of you in line. What kind of questions should you be asking about that? Or what can you ask.

So if we just cut to the chase, here's what I would ask. I would ask if the founder has common stock or preferred stock, and I would have significantly more confidence that the common stock will be treated fairly if the founder is only holding common stock and not preferred. And if they have preferred stock, it doesn't mean that you're going to get screwed or that there's any kind of fishy business going on, but it does make it a lot easier common to get crushed. The common stock. Preferred stock is what it sounds like. It comes with certain rights and preferences. Common stock is what it sounds like. It's for us commoners who work at the company, and there are cases where the preferred stockholders can request special privileges that make it harder for common stockholders to get value.

So in this example, there's an exit for $100 million, and then there's a bunch of fancy investors that put in money. And so what does that look like in an exit? How does the payout happen for preferred and common?

Yeah. So the questions you can ask are, does the founder hold only common, and is there any liquidation preference?

You taught me this.

Yeah. So let's say $50 million of investment had come into the company and it sold for 100 million. You would have investors holding a certain percent, they had put in $50 million, they would get back the relative percent, and then all the rest would go to the common. So typically, preferred stockholders get paid first.

So if the company only sold for 50, then all the fancy people get paid and the commoners get bought.

Correct. Now, if the preferred stockholders, the investors had negotiated a deal where they had a two X liquidation preference, which this happens sometimes, what that means is that the investors get, the preferred stockholders from that class, get two times their money back before anybody else gets their money, which can include common stockholders and previous investors who hold preferred stock classes that have less preference than these investors who have the two X or the three X liquidation preference. So you could have a scenario where the company sells for 100 million, investors put in 50, but they had a two X liquidation preference, and they get the whole hundred million.

Made me so sad when I heard about it.

I know, I know. But a good founder, and this is why the most important thing, I think, when you're joining a startup is, do you respect, admire and trust the founder who's leading the company? All kinds of things happen in startups. Nothing is ever guaranteed. But if you have a high integrity founder, and we've both known lots of high integrity and low integrity founders. If you have a high integrity founder, you are much more likely not to get caught in any kind of challenging situation with your stock.

Hold onto your wallets. Money rehab.

We'll be right back.

Professional investors like Ray Dalio and Warren Buffett are in agreement. Bonds are an important part of a healthy financial diet and the legit only place I buy bonds. This is 100% true. You can totally check my account is public the modern brokerage for investors looking to build an awesome multi asset portfolio and a quick moment of humility here. I have been trying to work with public for years now and low key stock them because I am such an avid public user and every other app or site I've tried to buy bonds on has actually made me want to rip my hair out. Public is so easy to use and has thousands of bonds to choose from. And not just us treasuries, but corporate bonds too. Like for the magnificent seven stocks like Apple beta and Nvidia. And you can use public for more than your bond investments. On public you can find all other major financial food groups, stocks, ETF's, high yield cash accounts, options and even music royalty. If you're looking for a simple yet sophisticated investing experience, go to public.com moneyrehab one more time because trust me, you will thank me. It is public.com moneyrehab.

This is a paid endorsement for public investing. Full disclosures and conditions can be found in the podcast description. And now for some more money rehab.

So what is fair to ask around liquidation preferences and an investor stack?

Technically speaking, you can ask anything and the company can answer or not answer. That's their right to. Private companies don't have to tell you or anybody anything. There's a fine line when you are getting a job where if you ask too many questions, you might be seen as a pain in the butt or you might be respected, right? You're taking a gamble. I would say the first set of questions we talked about how many shares are outstanding? What is the value, the price per share? Those are all standard questions, smart questions. You should ask them. You can also ask if there's any liquidation preference and if the founder only holds common. It's a little bit more getting up in people's business and they may or may not like it. But if you have leverage and you have any concerns about the company, ask away. And if they get spooked or have an aversion to it, it might just not be a fit.

I just feel like it's such an important thing to know because you could do all of these things, right, and still not get any magic from those beans.

It's true, and it happens all the time. Although in fairness, you could ask all of these questions, and then there are giant swings in the market and huge changes for individual companies that could change everything overnight. And there is no obligation of management to inform employees when things like that happen. So you can ask all the questions under the sun, and you'll only have the answers for that day, and then it might change again. And so you really have to trust your leadership.

And if you feel like they're not answering the questions or they're bristly, which I've experienced, then what? It's just like it's a yellow flag.

Maybe it could be a yellow flag. It could also be that they've never heard it before. Over a decade, I hired hundreds and hundreds of people, I would say less than ten asked me any of these questions. We gave classes. I gave classes to my team to educate them about their stock options. And even then, not everybody really asked or was interested. I had Harvard MBAs who didn't understand the structure of their equity compensation, even though the stock option compensation was a big part of the package. So all of that is to say, if they bristle, they might just be surprised and they might be impressed. So, not necessarily a yellow flag, but.

You are such an amazing and overly crazy generous founder that you helped people during these negotiations. You were like, you should maybe ask some of these things, or, here's more information than other founders are obligated to give.

I did. I don't know if that's advice I give to other founders or not, but I always felt that it was better for prospective hires and employees to know everything and to be given the information to negotiate fairly than to come in and six months or a year in learn something that surprised or disappointed them. And so I focused on building a very high trust culture, which served us very well, but it required extra effort to kind of give people information they weren't even asking for and didn't necessarily want, because I thought it was both in their best interest, but also in the best interest of the company to not have unpleasant surprises and bitterness towards the organization when people found out information that they didn't know.

You're a national treasure, Tracy Tinencia, you are.

And I think it's really few and far between that do that. There's way more questions than answers around this.

Yes.

I mean, I think in Wall street, in life now, I suppose I'll extend this to startups. It's always better to be low expectations.

Buy low, sell high. Do you listen to money?

But it's like, it's a truism for the companies, whether they're public or private. Like even when you're trying to signal earnings or you're trying to predict what's going to happen with the company, it's better to predict a little bit lower and to beat it than to be like, we're going to blow it out and then to disappoint.

The biggest thing about joining a startup is that you should never, ever count on your I stock options and your equity becoming valuable as part of your personal financial strategy. You have to be able to afford to go to zero, or it's not a great idea to take that risk. And I can tell you from having started a company that I spent over a decade at nine figures, for nine figures, we got to a very nice outcome. But many, many times throughout the journey, I sat and realized that I had put 99% of my net worth, my effort, my eggs, in one extremely high risk basket. And that is not for everybody. That is a life lived on the edge in terms of your own personal finance.

So assume that it's nothing until it is something. But also keep in mind when you're negotiating a new offer, that sometimes at.

Least, this has been my experience, the.

Cash is lower because of this equity package. And so sometimes you will work for lower than your worth or your fair market value in cash because of this dream of equity. And so I've learned this the hard way. What would you tell others negotiating, maybe a deal with a company as a contractor that also gets options, or an employee to think about the actual cash component of their comp package.

Yeah, you have to live.

You can't go to the grocery store with stock options.

They don't take them. I've tried. I think unless you're independently wealthy or you're the founder, usually not a good idea to take less money than you can afford to live on in exchange for stock options. Now that said, when you join a startup, you should only be joining one that you believe, for whatever reason, you believe it has an outsized chance of success, you're making a bet. So some people think that stock options are like a lottery ticket. I don't think so, because it's not random or like, you know, going to Vegas and betting. And it's a little bit like that because there's a little skill involved. But really, when you decide to accept stock options and less cash at a company, you're behaving like an investor, you're placing a bet on this company saying, I think it's going to be worth a lot, and I'm willing to make a sacrifice short term. In the case of an employee, it's some amount of cash compensation that you might be able to get at a different company because I think it's going to pay off. And so you have to have conviction and let the company tell you why you should bet your time on them and you should invest in them.

What are those types of questions that you should ask?

It's just that really, it's why are we, this company, the most likely to be successful in our category? Why is our category likely to have big companies that come out of it? Why now? Why this company right now? And why these leaders? So what makes this particular enterprise well timed, well led, and sell me the dream. And a founder should be able to talk to new hires in a very similar way that they speak with investors about the big vision. And if it doesn't give you goosebumps and make you feel like you're on a very special ride, then, you know, minus a few points, maybe it's not as likely to succeed.

Magical ride.

Magical beans. Magical ride. But sometimes you really, sometimes you make it all the way to the end.

That's why everybody does this.

Yeah. Yeah. You chase the dream. You chase it hard. You work. The other thing about joining a startup is that you are likely to work a lot harder and you're in for a much more volatile work experience than a corporation or small business. Startups are wild. Things change quickly. It's very challenging. You have to really believe and be committed. We used to joke at my company that it was like a cult, but the good kind and the best startups are kind of like that. Everybody shares the dream.

Can we, can we say what your employees called you?

You can say it. I can't say it.

It's what I call my husband.

Clues for the audience.

Listen to our help wanted episode where I reveal that Tracy. Daddy, you're a dream. You are magic. We end our episodes by asking, as you know, all of our guests for a tip that listeners can take straight to the bank. You've given so many, but do you have anything else that you would suggest for stock options?

My last tip that you can take to the bank is forget everything we said here. Sit still, listen to your gut, and if you believe that something is going to beat the odds and make it go chase it.

Money rehab is a production of Money News Network. I'm your host, Nicole Lapin.

Money.

Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money, rehab? And let's be honest, we all do. So email us your money questions moneyrehaboneyoneynewsnetwork.com to potentially have your questions answered on the show or even have a one on one intervention with me. And follow us on Instagram on TiktokoneyNewsNetwork.

For exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.