S3E54 - Stock Options Straight Talk with Colin Cadmus

Richard and I are here.

Sorry.

We're ready to take anybody's questions about it. You can drop it in the chat, you can get a little queue going.

That kind of let me jump in on a couple of things. So go ahead, Scott, do me a favor, see if I made you the actual host and see if you can make me co host. Maybe that's why I can't see shit.

The one big shout out to our sponsors of Sendoso, Scratch Pad, Med rep meeting, Vidyard and Outreach. If you're looking for tools, please check them out as you go into grow into 23. We appreciate all their support. Just that curiosity, if people would go into the chat, where are you dialing in from? Just so we get a sense and context of where everybody is.

Here we go.

Sweet.

Big spread.

That is a good spread all over. Yep. How many people, just out of curiosity, how many people.

Have gotten, lack of a better phrase, screwed or didn't understand or got the oh my God, gotcha surprise of you didn't know this about your options?

Me, I'll go first.

Yes, absolutely screwed. Look at them. Yep, yep.

So.

And that's why we're here. Like, we're totally here to help support. So feel free to put questions in.

By the way, we'd love more people to come put their video on. I know we've all got kids and cats and dogs and all that shit, so by all means, you know, we get it. We just know to increase, create and encourage more engagement there. So. So Scott, let's. Let's just start at the very beginning, right? If you think about options, right, you're. You're going in and they bring it up in a. At a certain level, what's the difference between an RSU and traditional stock options? Is there a difference these days? Like, what do you know about all that kind of stuff?

Well, yes, there's a difference. There's a big difference also between actual equity, which they're giving you in a publicly traded company, and options, which they're giving you in the privately held, early stage kind of startup. So that's the first thing that you should know. If you're getting stock options, you're not getting actual anything of cash value right now. It's a hope and a prayer that it turns into cash value later on. And so you need to understand the differences there. You give the definition of RSUs, Richard, do you know the answer to that?

I actually don't. I just learned about this one like a year and a half ago. So this is the difference between me and Scott is that it's been a while since I've had, you know, a real job, as I like to say. So I want to make sure that, you know, I know to ask these questions. I'm definitely not necessarily the expert on it, so.

Well, RSU is essentially restricted versus unrestricted. Right. And.

It has to do with liquidation preferences.

I believe. I don't know that I know the exact definition, but I'm pretty sure it has to do with liquidation preferences. Once the sale or some type of liquidity event is made, and all of those people who have that restricted stock, which is usually the founders as well as the investors, they're getting paid out first. So here's an example. Couple companies ago, I had hundreds of thousands of shares, stock options, but the company sold for not enough for me to make anything. So I exercised those shares to the tune of about $64,000.

They were worth at the time, about 180,000. So I thought I was going to not only make a profit, but those would grow and the profit would get even bigger. I made nothing because the only people who got paid first were the investors got paid their returns, and the founder got paid their returns. And there was nothing left for any of the other executives, let alone anybody in a middle management or frontline level who had been there for a long period of time. I took this company from zero to $25 million, and I got a fat goose egg. And you could say that I actually lost money in the transaction, just as it pertains to stocks and stuff like that. So if you've got actual RSUs or actual equity, that's very different than having stock options. You're getting paid first is a little bit higher probability of success, let's say.

Got it. So do you. Let's go in. So you started talking. I think Colin just joined us. There he is.

Hey, guys. Sorry, I had my clock set incorrectly in the other room, and I was getting ready and didn't realize I was fine.

Yeah, yeah.

Nice to see everyone. Good turnout today.

Yeah, yeah. Good. Good deal. So we're just talking a little bit about RSUs, Colin, sort of what they are, what they aren't. And how, you know, is there a difference when you're interviewing at a place between them offering you RSUs and more traditional stock options, or if we just tried to perfume this pig of stock options to call them RSUs so they sound nicer and cooler.

So restricted stock options versus incentive stock options. That's the question.

Yeah.

I believe Scott might know more on this one than me. I've never had restricted. I believe it has to do with liquidation preferences and tax. I think those are the two areas that are different there.

Yeah, I left off the tax part. I talked about the liquidation preferences. Maybe you can talk to the tax part a little bit.

Yes.

I'm not sure I know the specific differences because it actually just like stock options, it's going to vary. Right. You could probably have RSUs at one company that are structured a certain way. You probably have RSUs in another company structured another way. But if I recall correctly, RSUs are going to have a higher preference in the liquidation tree. I'm not sure how that will affect your tax.

So there's a couple thoughts. So around RSU's too, is that, are.

You, when you say RSU, are you referring to non qualified stock options? Because that's separate.

Right.

That's also an.

So are your triggered RS the same thing? So, so restricted RSU is.

You know, you actually get it at that certain market price. Right. Which is different than if you get the actual option to buy at a strike price. Right. So let's say that's a big piece. So you have a higher propensity for some level of downturn. If you get the RSU is you get 2000 shares. RSU is it 22 bucks. If it goes down to 20, you're kind of screwed. Right. But I think they're still guaranteed at that level. So that's, that's one of the biggest deals and it has to do with the vesting on those pieces. But let's talk about.

There's another piece though that I think we should maybe not confuse because nsos I believe are different. NSO is what happens to your ISOs after you leave the company.

So I want to make sure we're not an ISO.

For those who don't know, say that again.

Define NSO and ISO, because we're using big fancy.

Yeah. Yeah. So. So ISO is incentive stock options. That's what you're going to get when you're employed at the company. Generally speaking, RSUs or RSO is what you're talking about, I believe is, is different. I think that those are often used perhaps for founders or different sort of stakeholders in the company. But at least from my experience, what I've seen for employees is generally you're going to get ISOs which are incentive stock options. They're going to vest over, you know, a period usually of four years. You'll prob some sort of a cliff. Like you have to be there for at least six months or you just lose them. Right. Because they don't want people who just are sort of in and out getting a piece of the company. When you leave the company, however, by law, you can no longer have ISOs. And so depending on what is written into the agreement, you may have 30 days to exercise them or you lose them or they, they will. Either way, if you're not exercising right away, like on the day you leave, they're going to convert to nsos, which is just a legal thing. Um, and again, I think the differences are a little bit to do with tax and that's where you end up getting hit with, you know, a tax bill, which I'm not sure if you got into, but we can get.

Yeah, we haven't done that yet. So, Scott. Yeah, Scott, tell people what happened when you got this one of your options and all of a sudden you had to pay the taxes because you didn't really get the cash yet.

Just happened to me too.

Yeah. Just having to come to. Well, when you, once you exercise, you're getting taxed as if it's actual income. So if I exercise, I don't know, $250,000 worth of options, that's what I have to pay in to exercise them. That 250k gets counted as income on my tax return. So I'm now paying 30 something percent taxes on that on top of the 250k I just paid to exercise them. And I don't have this actual money. So this is a bit of a trick and a trap. When you get lots of options sent your way and you own a significant chunk of a company, you better have the money socked away to exercise those options.

I want to pause there, so I want to make sure everybody understands you're granted the options when you become an employee and you vest them. So let's say you just go to your first year, vest 25% of those options, right? At that point you have the mo, you have the time, you could actually pay for those options. Right. Because sometimes you want to do that and the goal there is that theoretically you get. If it still has to take a couple years for something to happen, you could pay a long term capital gains tax versus a short term capital gains.

However, there's another advantage too.

Yeah, what's that price?

Well, that's the big one, the price. So if you get those options, I'm cutting you off just because it fits right in there. And then, and then I'll hand it back. But if you let's say you get those options at a dollar, your strike price is a dol. Okay. And when you go to exercise them, the company has raised another round. They've increased the valuation of the business. So the fair market value of those options, let's say, is now $2 or $4. What Scott's talking about, when you go to exercise those, they're considering that income. The difference there, right, you're just 3x. And so now you're going to pay taxes on that income. Now, this is not a bad thing per se. If the company's going to have a great exit, you're going to end up paying those taxes anyway someday. But it's a risk because if the company fails tomorrow, you have now just invested all of that money in the company. You're never getting it back. The taxes, you're never getting back. It's all gone. It's a wash. And so that's really, I think, the bulk of, like, where a lot of this comes from and why we have to have these conversations. As folks go into these jobs, they get these grants and they a, don't realize that it's going to cost them probably more money than they often have in their savings account to even really get them. And B, depending upon the timing of when you exercise them, you may end up paying a big tax bill that may or may not ever really amount to anything. Right. It could be money lost. And so for me personally, my example, air call right now is the biggest investment I've ever made in my life. And I got fired from the company. So how you like them apples, right? So that's the reality of it, right? Is you put in your time, you do your year, your two years, your three years, four years, whatever it is. And if you really want to capitalize on what was, quote, unquote given to you as, you know, part of your compensation package, you now have to give to the company and to the government if the, if the value has gone up. So you are now becoming an investor in that, in that business.

Yeah. So I want to go back because we got a couple of questions that I think matter.

On this. So the RSU is like, or any stock option if.

If you, once you leave, the options are gone and this becomes one of the challenges. If you're a VP of sales, right. We already know the tenure 16 months. So they're going to throw you, you know, 1%, hopefully, if you negotiate well. Well, they know that in 6, 16 months you may or may not be there. So, yeah, you may get 25% of your 1% and some monthly vesting, but not the whole thing. So be mindful of these kinds of things when you're running into this.

So and when you leave, they just go back to the pool? They just go back to the pool.

They get to give them to somebody else.

Yes.

Yeah.

So.

And they account for that too, by the way. They literally, in their, you know, closed door meetings, they expect a percentage of that to come back their way.

Yes.

Just to give you a framework of where, you know, their minds are at when these are being issued.

Yep. Yep. We got a question coming from our buddy Keith. So it says, I have a startup clients who are considering whether they should or could give up equity either to the investor or early key hire. I welcome any insights you may have that they or I may not have thought about. So again, the question is startup, you have startup clients who are considering whether they should give up equity to investor or an early key hire. So Keith, if you want to come off mute if Scott, you'll take them off. Is there more context before we jump into answering that that you want to make sure we understand?

Thanks, appreciate that. Actually, I'm going to leave it kind of high level because I just want to make certain if there's a couple different perspectives. So I have two clients that I'm talking to right now. Both are looking to make that do I get that VP of sales? Do I offer them trying to build that job description. And quite frankly, given the things we just talked about, I want to make sure that I and they understand all of the short term or long term implications of going down that path for their sake as well as this key hire.

So there's, so there's a couple thoughts. So one I'll give you is it depends on the belief in the company, which then becomes a question of whether or not they should be interviewing there in the first place. Like, do you really believe it? Because it's interesting that you say that if the founders are questioning whether they should give up equity to early hires, that's a big red flag to me, particularly a VP of sales, because it tells me they don't understand enough and they're just doing what their VCs are telling them, which may or may not be the right thing, that's a red flag. If I'm taking the job, I've taken that job and I, I got screwed on it. So that's my first thought on this topic. The second is if your VP of sales is going to do it, fight like hell for 2% 3%. We already know it's going to get tanked at 16 months or 18 months, particularly if they're the first VP of sales. Anybody here ever been the first VP of sales and it you made it three years? Anybody? Colin? Scott? I know y' all have. Not me, never. So that's something you got. So you got to fight tooth and nail. And it's hard to get, particularly if the founders don't know what they're doing. So I'll pause there and see what. What?

It's a. It's a recruiting question.

Primarily for me. Keith.

You'Re not going to get me to say yes to any head of sales role where there's no equity involved. None. You'd have to pay me a significantly more. A significantly larger sum. That would make no sense, frankly. Right. Because part of the bet and the mutually shared risk is I'm going to join your tiny, unknown little startup and try to make it something because I'm hoping that somehow it turns me into a millionaire. That's just the reality and that's the shared risk. You take that part away from me, why am I going to work there? You offer me, let's say, a $200,000 salary and a 400,000 on target earnings. Great. But this other company offers me the same thing, but gives me 1.5%. Why would I take your job? I would never. If I'm an early stage account executive, somebody who's like one of the first couple sales reps into the organization. Same thing. If the comp is equal, but one company is offering stock options and the company's like.

Product is equally good and sellable and all that kind of stuff. If all things being equal, I would never go to the company that didn't offer me stock options. So if you're not going to offer stock options, you better be offering a whole hell of a lot of something else.

Scott, I used to run into this. It's been a long time, but people would try to lure you with a lower base salary with more stock options. They would try to lure you with this. Oh, we got to take a smaller base, so. But your upside's here. Do either of you, Scott or Colin, see that still happening in the world?

I think that still happens. I think people have wisened up quite.

A bit.

To that and they don't fall for it as much, hopefully, because people are talking about these things and educating public, you know, more. But it does still happen, both on an accounting executive and a head of sales, you know, level. For sure. I Don't think that that's Keith's situation, though. This, to me just reads as like, founders are trying to decide whether or not to give up equity.

And when it comes to an investor, if you're not giving away equity to an investor, then the only person you're taking money to from is like a bank that's just a loan of some sort and you're paying back interest if you're not giving up ownership in the company at all. I've done a lot of angel investing in the last year and a half. I own fairly sizable chunks of a half dozen to a dozen companies. That's the exchange. That's the value exchange and the mutual risk. Colin, you want to add anything?

No, I think you hit the nail on the head.

Got the question right, was, are they offering less cash and more equity and how should you react to that?

Yeah, that's the question right in the recruiting process. Oh, Richard, you know, we know your base salary should be 200,000 because that's the market.

But, you know, don't, don't do it. And like Scott said, yeah, the market should be smarter now. I think people are crazy if they offer that. They just really aren't in tune with, with the market. Yeah, equity is. It's the cherry on top.

Right.

It's their way of saying, like, hey, we're taking a huge risk here. We want you to take one with us. But that does not negate the cash compensation. You're coming in and you're doing work every day, and the cherry on top may not be there. Right. And in most cases it's not. In most cases, it will not be there. So the equity should be the cherry on top. It should be the thing that is in addition to a very fair or generous compensation package. And it should be the thing that really wants to keep you kicking when things are getting really tough.

Right.

It's that extra thing that makes you hang on and have a little bit of, you know, sort of buy in to the, to the mission in the same sense that a founder should. I also shared a link. You don't need to go through it now, but it's a good breakdown of the difference of NSOs, RSUs and whatnot. The big difference between ISO and NSO is NSOs can be given to contractors like 1099s, whereas ISOs are going to be employee only. That's why when you leave the company, they will automatically convert to nso.

Cool.

Awesome. Thanks, gents.

This was very helpful. Yeah. So, Clay, I know I asked you to come off mute and we see your question, but why don't you go ahead and give us a little more context, like, are you. Are you looking for a gig? Are you. Are you a founder and you're trying to figure out what's appropriate to do for my team? Like.

Yeah, thanks, Richard. No, so I just actually landed an AE job at another Series A startup. Um, and I was curious. I know a lot of people on this call are either reps or sales managers, maybe a lot of VPs too. But if you're looking at a Series A, maybe even before that. How do you know what a fair amount of equity is when they say a number? Because.

Like, I, when I went through and got my offer, I went and did the math on the valuation, the outstanding shares.

What'S each share worth and stuff like that. Could you kind of walk through some examples, though, of what a good amount is? Is 5,000 a lot? Is 10,000 a lot? Is a thousand shares a lot?

I think it's hard to decipher that.

I'd be curious to get to walk through an example together. Yeah, it is hard. Colin, you want to go first on this one?

Yeah. I got excited because I love the way he asked the question. One thousand shares, 100 shares, a million shares, gazillion shares. It means nothing. You don't know how many shares that there are in total. You need to know what piece of the pie you're getting. This is a common thing to look out for, is. And sometimes it's unintentional, sometimes they're just doing it because it's really all they know is just to just tell you how many shares you're getting. But you need to know what percentage of the pie you're getting. Now, as an ae, you may not be able to really get into those details. You should, but it's almost not super important. But in the executive, what does that mean?

You should be. You want to get into what details? What details are you talking about, Colin?

Well, so in order to know what percentage of the company you're getting, right. Knowing how many, how many stock options they're going to give you doesn't tell you that. Right. You need to know how many there are in total. Right. And then that could be 4 million, 20 million. Like, they usually pick a number, right. And they may issue more and they may not. So the more information you can get on that, the more you can figure out what you have actually been given. So I try to dig in and first figure out how many options in total. Right. Have even been created. And then how many of those are set aside into an employee pool because they'll keep a pool of options that are basically sitting there to give out to different folks. And usually when they raise rounds of capital, they'll reset that or possibly add more to it. Sometimes they're taking some out of it. And so these are the things you want to look out for. But ultimately you need to figure out what percentage of the company you're getting. And you need to know the valuation of the company. And if you know those things, you can figure out really what's being offered to you rather than, you know, just a huge number, which is often, you know, it can sound like you're getting a lot because it's this big number. But again, if you cut a pizza into a hundred slices and I give you, you know, five of those slices, it's still not as much pizza, right. As five normal slices.

Here's a.

Sure.

Let me, let me give like a crude kind of way to think about this.

Okay, thought you're going to be crude. How shocking.

Not in the way that you're thinking of the word. If you're like a frontline employee, like an early stage ae, like you're talking about, if you have a really, really good outcome, congrats, you can probably buy yourself a new car.

That's about it. Seriously, if you're a sales manager.

And or even a director, somewhere in there, you can probably come up with a down payment on a new house. Maybe not in San Francisco or New York, but if you live in Cleveland, Ohio or someplace like that, I bet you can get a down payment on your house. If you're a VP, you should be getting enough that at $100 million exit plus there's a path there for you to make seven figures on that particular exit. That's a real rudimentary way to look at it.

It's almost like for non executives it's about a year salary. For executives it's maybe two.

Yeah, you could say it that way. I've made the joke sometimes with early stage AES trying to negotiate equity, I'm like, you're trying to upgrade from like a Nissan Leaf to like a Honda Civic. Like, who cares? It's like it's not going to make that much of a difference in your life. Really, it's not.

I will, I want to pause one thing. The one thing that it will make a difference is it that it does become your story. It does become something you can talk about that you were at a company At a certain stage that had an exit. That doesn't mean you go brag about the money.

Yeah.

When you are played, there is so that that is a underlying piece that could help your long term growth to get to that next level of manager or VP of sales, which then may turn you into something else but you know, and get you greater options. So as much as Scott likes to, you know, I know Scott likes to talk about the Leaf and the Civic and all those kinds of things, I want to make sure people do see that. Hey, there is a good story here for you.

I'm not saying there's no value value in it. I just want people to know what the value is. I can't tell you how Many early stage AES I talk to that think they're going to be a fucking millionaire because their company just sold for $100 million. Give me a break. You just got a $25,000 brand new car that you might not even want.

Scott, I got a question.

The expectations need to be set appropriately was my main point.

Yes. So, Scott, and I've heard you say this too, is. And can you do it right? Like, so you're an AE or an sdr. I've heard you talk about how do you optimize your salary versus option, Right. Because do you still preach that?

Well, yeah, I just had this conversation with somebody that we both know who will go nameless. But let's say you're an ae. And in Clay's little note, I think it was a typo, but he wrote 15,000 shares, for example, right? Let's say that he gets a liquidity event and all those shares. This is going to be really crappy napkin math without tax implications and all this stuff. But bear with me, let's say you sell those, those are worth like two bucks a pop. That's 30 grand.

You could get a raise to go work for Collins. New company that pays you 40 grand a year higher in base and potentially 80 grand a year higher in total compensation. So in that type of situation, you could leave, go to this new gig, get more guaranteed in one year than you would get from sticking around and trying to like make this work because you have equity. And I talk to people all the time who are like, well, I'm really only staying here, Scott, because, you know, of this equity. I'm like, how many options do you have? How much longer of the vest is there? You would have to stay here for two and a half more years to have the possibility of buying a Nissan Leaf. Or you could Go take this other job somewhere else and make more money now, guaranteed in cash. That's the type of math that you need to be doing in your head as you're. As you're weighing these things to see which one is worth it. That's what I was getting at. Or that's what you were getting at, I think, Richard.

Yeah, that's totally it. And to some extent, you know, it's the compounding interest.

Yeah. I would add in a piece. Am I on mute? Oh, no, I'm good. Yeah, I would add in that. And I think this is what you're sort of hinting at or alluding to, Richard, if you're not at the executive level. And this is not going to be something that's going to necessarily or potentially change your life.

Right.

Like, it's going to be an amount of money that might actually let you put that down payment on a house or something. Sure. Buying a car could change your life. Right. But what could change your life more is working for the right leaders at the right company that has the right mission. And you're going to be a part of a story, like Richard mentioned, that's going to. You're going to ride that coattail. Right. I was very fortunate that my first job was that single platform that got acquired in less than two years for 100 million bucks, which at the time was like these billion dollar acquisitions now. And I got to ride that coattail. Right. I got to piggyback on those introductions. And ultimately that led me to skipping over the director role and becoming a VP@doctor.com. and, you know, before I went to Single Platform, I had been offered a job at Yelp, and those were the two that it came or in zocdoc as well. So I had Zocdoc, Yelp, and Single Platform. Now, granted, Yelp and Zocdoc had already blown up. They had already, like, passed that. That stage of like, oh, I was part of getting them there. Right. But I was able to be part of that at Single Platform. And so that for me was. Was the right choice. I think that that's very important to think about even as an executive. But more so in those early years because to. To Scott's point, you know that that equity is an ae. It's not going to change your life. What's going to change your life more and your career more is working at the right place, the right people.

Yeah. Also I can throw in. I pulled up, we were talking before about what things to sort of ask for and what numbers you want to know? I pulled up my old spreadsheet. I can't show it to you, but I'll go through the different things that I used to calculate to try to figure out what am I really getting. Where is all this equity? What does it look like? So you want to find out first. How much capital have they raised? Do they have any debt? What's the current post money valuation of the business? How many authorized shares are there, how many issued shares are there, and how many outstanding shares are there? Issued shares is the total. Right. So that could be 50 million shares. That could be a million shares. Usually it's a big number and they do that because it, it feels bigger when you're distributing them. Right. And then you want to get a sense, and this is getting a little bit into the weeds, but this will give you a sense of what's out there and what people have. How many of those shares are preferred shares versus common shares. The preferred shares are like what investors are getting, which means they're going to get paid back first or they are going to maybe get paid back twice on their money before anyone else gets money in a liquidation event. And so asking these types of questions, some founders just may not want to get into it, some of them may not understand it. But the more you can get these answers, the better. Right? And you can have a sense. And usually you'll see something like, I don't know, 75% of the shares might be preferred and then 25% are common. And that's because the bulk of it is owned by investors.

Right.

So that would, would roughly make sense. You could also try to get a sense of what percentage of the business is owned by founders. Right. That's a very good thing to know because do the founders have control over the company or is it already controlled by the board of investors? And then that means that take what your founders tell you with a grain of salt.

Right.

Because they may be gone next quarter because they could be voted out. Right. And so what percentage of those options? The last two pieces are in the employee pool, which I mentioned earlier, and which percentage are investor owned, which you can kind of figure out from those numbers. Yeah, I will. While you guys are chatting, I'll put this list out here. I just can't put obviously my numbers in here, but I'll see if I can post a screenshot of that.

I'm trying to capture from a dictation piece.

So can I post an image into.

Yeah, knows what allows you to do these days.

Let's see. It does.

We got a couple similar questions. I wonder if Jafar can ask his last question is Clay and Jafar ask the same thing? It's essentially about optimizing for one type of compensation versus another, depending on the stage of your career. Jafar, you want to ask your question? Yes, of course. Thanks a lot, Scott. It was a general question.

I wanted to understand what is the.

Standard ratio between the base and. I'm talking right now about the sales in general base, OT and RCU or other stock options.

It doesn't really depend on the stage.

Of the company or there is some.

Standard basically formula that usually company follow.

Anybody want to take that one?

Sorry, I was copying this piece over here. I didn't go far, Richard.

So I, I think that depending on what role you're at, the ratio is kind of irrelevant.

Unless Scott or Colin want to correct me on that, because it's never going to be significant, right? There's kind of like, you know, I call it you money. When you get options, right? There's a seven figure, fuck you money, right? There's a six figure, fuck yeah money, right? There's a five figure, hey, cool. All right. That's cool, right? And then I've seen the, you know, four figure and I'm not kidding. Well, fuck you company money, right? Where it's kind of like you got really screwed by somebody. So from a ratio perspective, I think that's a hard answer because I don't see a standard.

Scott, see something different or what not as pertains to. There's no ratio or formula where it's like here's your compensation and therefore you get this amount of stock options that doesn't exist. The most common ratio for cash is 5050 or nowadays it's moving more towards 55% base, 45% variable to round out your on target earnings. Those are the most common ratios by far. There's other ones, of course, but those are the most common. There is no ratio for stock options like that. There are very common sort of benchmarks. So for example.

The most common kind of benchmark for a VP of sales is somewhere between 1 and 3%. 1% being far more common, 3% being reserved for somebody at an earlier stage who's been there and done this a few times and is kind of seen as like a. As close to a guarantee as there can be. An advisor or early engineer often gets a quarter percent. A director level sales leader often gets like a tenth of a point to a quarter point. So there's some of those benchmarks but there's no real good formula. But the second part of your question, which you didn't ask, which was a part of Clay's question, which was, is it better to negotiate wages or equity? How do I optimize and prioritize for that at different stages of our career? Colin, you want to try to take that one?

Yeah. I think that's going to come down to what your preference is. First of all. Right, this could be different for different folks, but let me make sure I'm getting the question right. I want to make sure the question is not should I do that? It is, how should I do it if I want to.

Oh, it's how. It's like how if I'm just getting started, I would optimize for this. If I'm old like Scott and Richard, I would optimize for this.

Okay, so again, I think this is circumstantial, right? Because I'm young, I have no kids, I'm not married, but I don't know, I could also be old with kids and still be really short on money, right. And maybe I need to optimize cash, but if I have a bunch of cash and I really am okay on the near term and I really believe in that company, well, then you might want to really try to optimize that equity. And I mean, if the question is how, this is just negotiation, right? I think it starts by just expressing that that's what you would like to do and get a sense if, if that's even possible. But again, I don't know that I'd play that angle. I think the angle to play is always to try to get as much of. Of both as possible. Because at least from my experience, if you're doing well, you can usually find ways to get more equity. I don't know if it's been different for you, Scott, but like, if you're really, really crushing it, and this is not. I'm just judging on my own performance, but just what I've seen and how it's been for other folks that like, if you're really crushing it and they don't want to lose you, there's nothing stopping you from one year into your vest, having a sit down with your manager or your CEO and saying, I really would like to stay here. And I'm thinking about how I can get more invested into the company. And some of the CEOs or founders will even give you chances to do this. I've been at companies where.

It would come time at the end of a quarter to pay commission or whatnot. And this is a bootstrapped company and they may say, hey, does anyone want to swap their commission for more equity? Right, you don't have to, but if you would like to, and perhaps they'll give you an extra $1.50 worth of equity for every dollar you would have gotten in commission or something like that. So you may have opportunities like that. It's not really answering your question, but I guess I'm not sure specifically what you're asking for. Is it a negotiation tactic or is it how to frame the conversation?

Well, I'll.

I'll try to. I'll try to answer it because I think I understand what they're. All right, go for it.

If I'm.

If I'm brand new in my career and I don't have.

A lot of entanglements or obligations or responsibilities.

I might take more equity and worry less about cash because I don't have an expensive lifestyle, I don't have a lot of. I don't mortgage payment, I don't have kids, going to school, all this kind of stuff. So I might take a big swing and say bucket. The difference here in what could be is more important to me than what I'm getting for sure right here and now. Opposite end of that. If I'm 45 years old, married, two kids, mortgage payment, all this kind of stuff, I might be very locked into a particular income level.

We lose. Scott.

The stock options, while nice, is less important to me now. I can do the opposite. Role play. I would argue that early in your career, the most important thing to optimize for is cash because you're really not going to make very much in equity anyways. Like I said, it's the difference between like a $30,000 car and a $50,000 car that you're going to make. Who cares? But optimizing for cash early on in your career gives you the opportunity every time you make a step up, to level up what you demand from the open market. So I started my career as a $30,000 base salary account executive, full cycle, okay. Then I became a sales manager and my base was 60. Then I moved up to senior sales manager and my base was like 75. Then I moved up to director and it was 90. Then I was a VP and it was 120. Then I was a VP again and it was this. I optimized for those things for the first five or six years of my career, less so than equity and stock options. And then it flipped. And later on I Started optimizing more for stock options, and now I've had a few exits. I run successful business. If I was going to be pulled out of retirement and go be a VP of sales again, the cash that you offer me now would be irrelevant to me because I can make more cash on my own. But if you tried to pull me in and offer me like 5, 6%, now, all of a sudden it gets interesting because now I have the opportunity to have this fuck you, money kind of moment. And so if you're really stable financially and you're later on in your career, you might not care as much about a $250,000 salary versus a $200,000 salary. You'd rather have an extra half percent in stock options. So it is very personal. But that's how I would kind of think about it and do my own kind of like mental gymnastics around what's the right move for me.

I want to make sure, in those scenarios, make sure that you make sure you see the initial offer first, like before getting into those details. Because you want to have that baseline of what they were going to offer you, right? So if you're going to go down that road of like having a conversation of should I go heavier on equity, heavier on cash, like get the base offer first before having that so that at least you have a baseline for both. Otherwise you may question, like, what would they, would they have given me that equity anyway? Right. Where I've seen that happen is particularly in Bootstrap company, where they were looking to bring in a sales leader and they couldn't really afford someone with a ton of experience, so they found someone who could probably do the job. And it was a bit of a risk. But they're like, look, you know, we're taking a risk on you. We don't have a ton of money to pay out. That's why we're looking at someone that's got less experience.

But we're, we'll, we're, we're willing to.

Load you up on equity. And this particular person chose to, to take that risk. It actually turned out really well for him. He would have probably taken years to get up to that, that level. And so in that case, it worked out well, but it could have just as easily not worked out well. So, yeah, a lot of it's got to do with just how much you believe in that, that business taking off and where you're at, where you're at in your life.

Got a couple of questions, Colin. 23 and a half people want to know why you got fired from here. No, I'm just kidding.

I'm happy to share.

But now the other question, which. It's interesting, Mike.

Or what? Wait, was it. Oh, Brian, sorry. Brian McCracken. If there's more context and you want to come off mute, let us know. We'll be, we'll be glad to have you do that. But it was a great question of what happens if I leave early? Can I sell my stock? Do I have to wait for something to happen?

Right.

So there's.

Great question.

So there's this thing called a secondary market.

And I'll let Scott and Colin jump in on that one. Either one have an answer?

Sure. You may or may not be able to sell in a secondary market. You will have to get approval from the company to do that, I believe.

When I left Air Call, I immediately had people sending me emails and reaching out to me trying to buy my equity. And their approach to you will be like, hey, we see that you left and you're probably going to lose your stock options if you don't exercise them and if you don't have the money, like, hey, we'll buy them from you type of thing. And what they're looking to do when you get offers like that, if you get one, maybe it's questionable if you get three, four, five. You probably know your equity is going to be worth something someday because these people are trying to buy it from you at a discount for a reason. So I would only do that if it's your only option or if you just actually think you know something about the company that they don't know, maybe you think it's not going to be worth it.

Where do you go, like, do you have to wait? Is there like a special website called the Secondary Options website?

Like there probably is. You probably Google companies that I don't know off. I forget the name of offhand who had reached out. But yeah, there's the companies or investors like they're, they're looking. Oftentimes it may even be people who already are investors in the company and they're looking to get more. They want, they want a bigger piece of that pie. So they're just watching people who leave the company. In that case, they probably have coordinated with the founders. In my particular case, the company did not want us selling them to, to third parties. Although I think there's probably some legal ways to, to maybe push through that. But Scott, you might know more on that.

It's just, it's really hard to do. Is the bottom line there's no easy place to go. There's no marketplace to be like, hey, I'm trying to sell all of my air call shares.

That's why if it's existing investors, there's usually a process for it.

Yeah, I've done it before. I sold a good chunk, six figure plus check got written to me that I sold back to current investors who.

Wanted more. That would be where I start. I'd ask the founders, say, hey, is there anybody on the current executive team or anybody in the current cap table and the investor group who's interested in more? I'd be interested in selling some or all of my shares. Beyond that, if your company's hot enough, it's crazy. People will just find you in the inbox.

Yep.

You know, you don't really have to go out there and prospect for it at all. So we had a question from Melanie about negotiating. Is Melanie able to come off? Yeah, I'm off mute. Thank you.

Great.

Yeah.

So, yeah, my question was just about.

The four year vesting period. That's pretty common in tech startups. I was just curious if anyone has ever had success negotiating for a quicker vesting period than four years or if it even makes sense to do that or maybe even any insight on why that's the existing model. Like why the. Obviously it's like for retention. Right. Wanting to retain people. But I don't know. I think people can make an impact in sooner than.

Than four years. So I'm just curious.

Amen.

Yeah. The four years came from the stock market. Right. That's the big downside on all of us. If you look at Sam Altman from Y Combinator, he's put together an incredible white paper on what he believes we should be moving towards. And shorter vesting for certain roles is definitely one of them. But if the question, or to answer the question of where all this came from, it came from the stock market companies that have been doing this, not startups. And that's why a lot of it feels out of place and it doesn't make a bunch of sense for us. I have never seen someone successfully get a shorter exercise or, sorry, vesting period. Scott, you've been in the game longer, you've probably done it or seen it, so hand it to you.

That will almost never happen. Almost never. There's no good reason why four years is the gold standard. Somebody just made it up.

Very well known VCs, people names you would know. We asked them where it came from and they're like, I don't know.

There's no, there's no good reason. Somebody just did it one day and decided it was four and not five and not three and all that. So okay, it's garbage. But I agree, nobody moves off of it.

Nobody. But people don't move off of it at all just because it's too much of like a disruption. Here's the, here's the one place that I've, I've seen success moving off of it. It's when you're an advisor to a company, not an operator of some sort and you're really only going to be an advisor when you have.

Decade, two decades worth of experience and you're saying to somebody, listen, it's a two year vest for an advisor, not a four year vest for an advisor. That for whatever reason is more of like the standard. And so you can push back on that. I've successfully pushed back on that before in some of my advisory work. People send me option agreements and it says four years and I'm like, nah, I'm not going to wait four years. I'm not an operator in the business, therefore I can't control anything happening there. All I can do is give advice and you have to execute. So again, the value exchange, to be fair, I'm pretty sure two years would work just fine. And I've pulled that off before. There's also outcomes based.

Vesting or milestone based vesting which I have not read Sam Alton's paper that Colin's talking about. But my guess would be that it's something like that because that's really what matters. Think about this, Melanie and everybody else. I get hired as a VP of sales, okay? I did it six times. The last company I was at, I was there for three years and one month I took them from no customers to 25 million plus in ARR and a billion dollar plus valuation at the.

Time.

I left without being fully vested. Can you imagine? Does that seem fair in the value exchange? Wouldn't it have made more sense if somebody said to me, Scott, I know what you do. You go into early stage companies, you get them from 0 to 20 million plus or whatever. Once you do that, you're fully vested.

Why would that not make sense? Why do I have to be there for four years? So instead I only got 75ish percent of what I should have, could have had in my original option grant, whereas they got the full benefit of what I built. You see what I'm saying? So hopefully.

Hopefully we can start to move the needle and make some changes around the vesting. Because it's bullshit. There's no real good reason for it.

There are a couple other options, too, by the way. I just found an article, VentureBeat, that says in the 90s, the average time to exit a startup was four to five years. And they say that's where that came from, but I'm pretty sure that's existed.

It's about seven, far before this world now. There is also seven to 10 years now, by the way.

Yeah. If not longer.

Right.

But there is also a concept called tiered vesting. I think that's what it's called. And what that is is maybe you're vesting over four years, but you have a different percentage of your equity that vests each year. So maybe more than 25% vests in the first year, and maybe it tears. It tailors off, which they're basically saying. And I love this, I would love to get this. I've tried to get this in all of my jobs because as a VP of sales, you're going to do most of the work in the first year. And if you do a great job, the second year should get easier. Right. Because your systems are working, the people you hired are working. And so you really do. There's no question. If you spend four years in a VP role, you worked harder in your first two years than your second two, assuming you did a good job. So I think tiered vesting is. I think that's one of the things Sam Altman proposes, but he also proposes longer vesting schedules for certain. For certain roles, which is interesting. So he's got some takes that I don't agree with necessarily.

So I want to jump in because we're coming up on time. There's one more question I want to bring up in a second, but again, thank you to Vidyard, Scratch Pad Outreach, Med Rep Meeting, and Sendosa. That's it. Right, Scott? Did I miss anybody? Nope.

You got it. You got it all.

By the way, if you don't know surf and sales is happening next week. Actually, Thursday, we leave Thursday. So if you surf and sales event, go register for a newsletter because we're going to announce our new one for spring in the next couple of days.

You might as well tell them right now, Richard, what the dates are.

Be the week of May 8th. All right, so Scott teased me, forced me to tease out of it. I'm trying to go get leads, Scott. Come on now. I'm trying to, you know, collect email addresses.

I don't believe in MQLs, dude. I just believe in deals.

So.

But there's. There's one last question. Thank you to our sponsors. We'd love for people to come to the event. If you haven't ever been, check out our podcast, surfingsales.com and then there's a great question that says, do you need to get some legal advice when you're going through all this stuff? Right. Mike asked this great question of before signing the deal, who do you go talk to? Right. Do you pick up the phone and call Scott and say, pick your brain, which is a tag of his from yesterday, because he loves you.

Send me a bottle of class Azul. I will definitely have a conversation with you.

But who do you go to?

I would say so. I have. There's two things here. One is in general, yes, you're seeking legal advice right now, technically, even though we're not lawyers and we're not giving you legal advice from legal perspective here. But. But yes. So I have sought legal advice from advisors, people who've been through this before. You can go to lawyers, right? You can go to a tax attorney who deals with this stuff. You're going to pay an hourly rate. I do recommend it at certain instances. Do you need that to figure out if you should sign an agreement or if an agreement's good? Probably not. Just if you're willing to spend the time to do the research and poke your network, I think the information is out there. The safest bet would, of course, be to consult a lawyer, especially if you're not familiar with reading through contracts and understanding how to actually interpret the verbiage. Because the hard part of really making sure you're not getting screwed here is not just understanding what all this stuff means, it's actually reading through the document. I think the most important point I'll put here and then I'll hand it off to Scott, is anything that you discuss or have in an email, or maybe an email could be used in court, but for the most part, if it's not clearly articulated in the contract, then it doesn't matter. And so you really have to know what you're reading and what you're signing in addition to just understanding all this stuff. Because you could go in and have a conversation with your CEO and they could make promises out the wazoo, but they may just hand you a document that was the same one they handed you the first time, and you may just click to sign it and you're screwed.

Right?

You didn't get anything you asked for, even though they may have told you they did. And then Maybe they'll be like, oh, I could have sworn that was edited. Or like, who knows?

Right?

So you have to really know how to interpret it. If you don't, you need a lawyer to do it or someone who can look through it for you. But I think probably the most likely time that I would maybe consider spending money is really at the exercise period. When you want to consult about taxes and really figure out the best way to reduce your tax bill, that's when a tax attorney will be helpful.

I think that's right. I don't think you need to seek. I personally don't think you need to seek legal advice before signing something. There's plenty of resources online and hopefully plenty of people in your network that you can say, hey, can you spend two minutes scanning this thing? Does anything look weird here? But I think it does make sense when there's money involved as far as exercising and the tax implications or a massive liquidity event. I mean, I don't know how many of us would be prepared for suddenly a million dollars hitting our bank account and what that means. It sounds nice, but it's not without entanglements. So, Richard throw it over to you?

Yeah, I'll let you know once, once I confirm that I won the lottery, what it's like to anticipate billions of dollars.

So.

But the last thing I want to. I want to bring up again, thanks to our. To everybody for joining us and go Google this in a second. But to Scott's point, over the years, Scott and I definitely bounced back and forth. Hey, what am I missing? Just ask someone. What am I missing?

Right.

Find those people who've done it that, you know, find people that you admire, and it's a great way to. To just continue to network in a lot of ways. The other thing we didn't get into. And I please Google this, particularly before you sign something. And it's only because Richard's the one who always freaks out about not. Scott is understanding what a double trigger is. Right. Sometimes things happen, and for you to get your exercise options, two things have to happen. It could be you're terminated because they were acquired kind of a thing. So there's little. It's a really important thing. So it's called a double trigger. So I know we're at time, so I don't want to make people sit around and listen, but definitely look that one up on. On Google and research that piece too.

So in the meantime, Richard, did you guys touch on when to exercise? That was. That's a big one. You might have touched before we got here. But whether to exercise as you're vesting or to exercise all at the end.

We talked about it briefly, but if you have a recommendation, go for it.

I just figured it's a good topic to make sure we have we're up on time. But. But, yeah, if you're concerned about when to exercise your options, I'll just throw in this. This quick tip again. It has to do with what we talked about when I first jumped on. But do you believe in the company? Are you really planning on this being a good exit? If so, there's benefits to vest or exercising as you go, because if you hold the asset for one year before you liquidate it, you will pay capital gains tax rather than regular tax. And so that is the advantage to exercising as soon as possible. So what some people may do is every quarter or every month, whatever their vesting period is, as soon as they're vesting a monthly accrument of options, they're going and exercising them right away. Again, if you're iffy about the company, you may not want to do that, but that's a good way to sort of do it as you go and not get hit with this big tax bill and then maybe reduce some taxes down to capital gains later.

Oh, all right. Colin, my man, thank you. I know Scott had to jump. Everybody else sticking around a few extra minutes, and thank you for your time and attention. We'll get the recording and stuff out shortly. Take care, everybody.

Bye, everyone.