The Liquidity Event Podcast: Episode 44
Episode 44: Talk to My Lawyer!
If you’ve ever worked at a start-up or are considering founding one, this episode is a must-listen. With Shane on vacation visiting our National Parks, we’ve got start-up lawyer extraordinaire Bobby Weinberger as a guest co-host. We talk through the ins and outs of being an employee at a startup and what to ask for when it comes to negotiating a new contract. Bobby’s got some sweet wisdom for founders as well. We can’t ignore that Brazilian-ish chain restaurant Fogo De Chao is going public (again). We do a deep dive on the S-1. We also chat through underwater stock options and what to do when you’re out of luck. This one is meaty.
Read the Full Transcript:
Speaker 1:
This podcast is for informational purposes only and should not be considered tax or investment advice.
Speaker 1:
Welcome to the Liquidity Event, a show about all things personal finance with a laser focus on equity compensation. Hosted by AJ and Shane of Brooklyn FI, each episode will take you through the week's news on FinTech, IPOs, SPACs, founder wins and fails, crypto and whatever else these nerds think is interesting. Learn more and subscribe today at Brooklynfi.com.
AJ:
Hello.
Bobby Weinberger:
Hello.
AJ:
Hello, and welcome to the liquidity event.
Bobby Weinberger:
Oh, great to be here. Long time listener, first time caller.
AJ:
Yeah, this is episode 44 being recorded on Wednesday, May 25th. I have a very, very special guest with me today, Mr. Bobby Weinberger. Welcome to the Liquidity Event.
Bobby Weinberger:
Hey AJ, great to be here.
AJ:
Could you please tell our listeners what our relationship is?
Bobby Weinberger:
I'd say first and foremost, we're friends. Secondary to that, I am the outside attorney to Brooklyn FI.
AJ:
Yes, you are my lawyer, for all intents and purposes. It's great to have you on the show. You have a rich background in not only law, but specifically startup law, you know a ton about equity compensation. A lot of our clients have become clients of yours as well, because you're really great at reading contracts and decoding legalese.
Bobby Weinberger:
Yeah. I think at the end of the day, it's about helping people understand their situation, understand their options, help put them in a position to make decisions, empower them to make decisions, and they kind of get out of the way.
AJ:
Yep. That's what good lawyers do, right? Get out of the way.
Bobby Weinberger:
Try to.
AJ:
Keep billable hours.
Bobby Weinberger:
Try to grease wheels.
AJ:
Awesome. So as we often do, we start off the show with some bullshit small talk. So I'd love to hear, are you reading anything good recently?
Bobby Weinberger:
Am I reading anything? I just finished up, in anticipation of coming to visit New York, I just finished a book. It was kind of a very light read. It was about the 1990s New York Nicks.
AJ:
Ooh. Okay.
Bobby Weinberger:
Yeah. It's called Blood in the Garden. Blood on the Garden, Blood in the Garden. Great fun book about an era of basketball that I love.
AJ:
Cool. Very cool.
Bobby Weinberger:
Yeah. What about you?
AJ:
Well, I haven't started it yet, but I picked it up. We were just, we did our all company retreat in Portland, Oregon last week. And we went to Powell's Bookstore, which is the best place.
Bobby Weinberger:
Oh yeah, love Powell's.
AJ:
I could spend hours in there. So I bought a huge stack, but the book I'm most excited about is called Wine and War. And it's about the Nazi resistance in France and how they tried to save all the vineyards and the wine. It's one of those stories that come out of World War II with the guys who save the art or whatever. So I don't know. Kind of a-
Bobby Weinberger:
Yeah. It sounds kind of a peak dad book.
AJ:
Oh, super peak book. I love war history, especially World War II, so I nerd out on that. And obviously wine.
Bobby Weinberger:
Yeah. I'm also working my way through very slowly this book called Postwar by Tony Jude. It's as devastating as it is good, so I can only do a couple pages at a time.
AJ:
That's one that it's that.
Bobby Weinberger:
Yeah. It'll probably take me a year.
AJ:
I think I have... I've never read it. I think it's a doorstop somewhere in this apartment. Drinking. It is what nine o'clock in the morning. Drinking some coffee.
Bobby Weinberger:
I had some coffee. Yeah. That's about it for the time being.
AJ:
Fair enough. Fair enough.
Bobby Weinberger:
But you and I both have... We both love natural wine though.
AJ:
It's true. And you have not only a law degree, but you also have a history in nightlife, right?
Bobby Weinberger:
Yes.
AJ:
Yeah. Tell me about that.
Bobby Weinberger:
So I graduated, I moved. Graduated from college in 2007. I graduated from law school in 2010. Something not awesome happened between 2007, 2010. Great Recession. So I graduated law school without a job and then sort of needing to make rent to continue to live in New York City, I worked as the doorman at a cocktail bar in New York City called Death and Company for about a year.
AJ:
Very, very cool. For those not in the know, that's a pretty cool bar. That's top 1% of bars in New York City, probably the world.
Bobby Weinberger:
It was a lot of fun. I what I do now, but that was way more fun.
AJ:
Yeah. And I imagine that you have good friends from that life.
Bobby Weinberger:
Still. When I decided to hang shingle and start my law firm, they were my first client. They remain a client to this day. Sort of related to, tie it back to financial planning, they just finished up a Reg A offering to raise $6 million to grow the brand nationwide.
AJ:
Can you explain to our listeners what a Reg A offering is, because it's pretty cool? I actually just, I got an Instagram ad for it to participate.
Bobby Weinberger:
Really?
AJ:
Yeah.
Bobby Weinberger:
Reg A, it's a way for, sort of a heightened filing requirements with the SEC, gets approved, you can go out and sell securities to the public markets, a mini IPO. Really small investor checks, unaccredited investors, giving broad access or to early stage companies.
AJ:
It's official SEC sanctioned crowd funding with a limit.
Bobby Weinberger:
Yes. With a limit. But it's very much just an IPO. You can freely trade the shares. You have to do full registration.
AJ:
Yeah. Really cool.
Bobby Weinberger:
Really cool.
AJ:
Very cool. So yeah, you can buy shares in Death & Co if you want to.
Bobby Weinberger:
On Seed Invest, sponsor of the podcast.
AJ:
On Seed Invest, yes. Sponsor. Seed Invest, if you're listening. Just kidding. And where are you?
Bobby Weinberger:
I'm in New York City. I'm in Brooklyn. I'm in your apartment and I'm in the same room as you right now.
AJ:
Yes, that is correct. That is correct. So we could talk about articles today. We could talk about equity compensation, but I'd actually rather spend the whole podcast talking about something that I struggle with all the time.
Bobby Weinberger:
Okay.
AJ:
What's better, New York City or Los Angeles?
Bobby Weinberger:
God, I'd say New York City. I don't even think it's that close.
AJ:
One reason. Doesn't have to be the best reason, but one reason why New York City is better.
Bobby Weinberger:
One reason why? Because you leave your house, and before... So you're day, you leave your house, you walk to the train, you cross paths with 20 different people. You go down on the train, you've got another kind of 50 people you just interact with, even if it's just walking by them. Go to your job, leave, go to the gym, go to the bar, go meet your friends. But throughout the course of the day, you've had three, 400 personal interactions.
Bobby Weinberger:
In Los Angeles, you wake up, you go to your car, drive to work, get in your car, drive to the gym, drive to bar with your friends, get back in your car, drive home. You probably have 15 actual real interactions with people. So I think that to me is the defining factor. Also, I think the city itself has much more spontaneity in your life.
AJ:
For sure. I agree.
Bobby Weinberger:
I have to plan a lot, but...
AJ:
I agree. I agree. A hundred percent. Yeah, we both grew up in Los Angeles and both spent all of our 20s in New York City. And so it's just interesting.
Bobby Weinberger:
Yeah. And I live in Los Angeles now for listeners. So I moved back in 2018.
AJ:
Okay. But you're considering a move back here.
Bobby Weinberger:
We'll see.
AJ:
Speaking of Los Angeles. So a big part of my childhood was these family dinners where we'd go out. Wasn't often, but I would say a few times a year, it's like, "Oh, I got to get the whole family together, and let's go to a nice restaurant." And my grandfather would always joke, we had a family business, he was a ear nose and throat doctor. And he made a device. It's called the nasal irrigator, but we called it affectionately the booger blaster in family. So we would always go out to these dinners and he would always say, "If we talk about the booger blaster, we can write off this dinner." So later I learned you can't really do that, but anyway.
AJ:
So one of the places that we would go on, these family dinners was a restaurant called Fogo de Chao.
Bobby Weinberger:
I'm familiar.
AJ:
Have you ever been?
Bobby Weinberger:
I've never been.
AJ:
Oh my God. So listeners, if you have never been, it looks Disneyland. It's this massive, cavernous, kind of cheesy, sort of high end, but also kind of feels a TGI Fridays.
Bobby Weinberger:
Especially if you have the card.
AJ:
Yes. And so it's a Brazilian churrascaria is the theme. So it's a international restaurant, and all the waiters dress up gauchos. So regardless of their ethnicity, they're all dressed like...
Bobby Weinberger:
Like big hats?
AJ:
Big hats, mustache. I think they have fake mustaches. I might have made that up in my memory. Big pillowy shirts, red flowy pants. Anyway, so they come around and they bring meat. So a guy will come around with a cart and he'll have these big hunks of steak. And you will have a card on your table. And it'll say green, which means keep the meat coming, or stop red, I'm full or I'm sitting this round.
Bobby Weinberger:
Oh God.
AJ:
Why are we talking about Fogo de Chao?
Bobby Weinberger:
Why? Why AJ?
AJ:
Well, just fucking awesome. Because they're going public, again.
Bobby Weinberger:
Again.
AJ:
So we've seen this trend a lot recently where these sort of household brands, we saw this with Steinway and Sons, the piano music company. They're public forever. They went public in some cases in the 30s, 40s, 50s, I think Fogo de Chao went public in the early 90s. 2018, they get taken private, right? They have this great PE deal. Super common. 2018 is not that long ago.
AJ:
So all of a sudden we've had a pandemic, which I can imagine was not great for restaurants. They're turning around, now they're going public. They haven't listed yet. They filed their S1 back in November, and we've seen some updates, which is why it's back on my radar. But I don't know, I find this very interesting that a big flashy, expensive for the average consumer chain restaurant, thinks that this is a good time to raise money from investors.
Bobby Weinberger:
Yeah. I guess... Look, if you don't have... So these PE deals are really interesting. Essentially they're five to eight year deals and the companies that take them private, they have to either cut costs or grow and then they have to flip the deal because they have to return money to their investors. So they probably are just running out of time and don't have another PE buyer. So just put it back in the public markets and hope for the best.
AJ:
Yeah. It's like stuff it in a box with some ribbon and tissue paper and hope investors are... The timing is really interesting because they filed back in November, which probably would've been a great time to go public. But who knows why these deals get delayed and...
Bobby Weinberger:
Do they still run at just 10% margin like every other restaurant in the world?
AJ:
I think so. It seems the margins are not great. The growth has been huge. They're profitable. There's currently 60 restaurants and the IPO or the S1 tells us that they're hoping to expand to 300 in the next two years.
Bobby Weinberger:
That's a few in LA, a few in New York.
AJ:
In every city. It's extreme expansion.
Bobby Weinberger:
I'm going to go to the Fogo de Chao in Tulsa.
AJ:
It's Fogo.
Bobby Weinberger:
Fogo.
AJ:
Brazilian, remember? We're Speaking Portuguese.
Bobby Weinberger:
The Fogo de Chao in Tulsa is going to be lit.
AJ:
Yeah. I've seen them pop up around airports and things that. Anyway, that's nothing super exciting there. I wish them best in their public debut. We don't have a date yet.
Bobby Weinberger:
Wait, I want to go back. What do you think is better LA or New York?
AJ:
Oh, I think New York is better. I don't get a tingly feeling when I go to LA. I'm like, "Oh, this is a really nice life. And the weather's nice." When I fly into New York or drive into New York, I'm like, "The city is so magical."
Bobby Weinberger:
Totally understand. Completely agree.
AJ:
And I think that has to do with the highs and the lows, because it's hard to live here. But you were talking about the spontaneity, there's nothing a New York city night where you start out doing one thing, and then you run into these people, and they sweep you to this party, and then-
Bobby Weinberger:
It's the best.
AJ:
COVID killed most of that, but I think it's coming back. It feels it's coming back.
Bobby Weinberger:
I think we're going to spend a couple months here next year and feel it out.
AJ:
Nice. Nice. Nice. Yeah. You work on both coasts. Did you have to pass the bar in both California and New York?
Bobby Weinberger:
Yes. I am licensed in New York and California.
AJ:
If one wanted to get a law degree, asking for a friend, what would be the absolute fastest path of least resistance to become a lawyer?
Bobby Weinberger:
Okay. I'd say just enroll in law school, show up on the first day of class to get the syllabus, take your finals, and aim for general person C's. And after three years, maybe with summer classes two and a half years, you have a degree. You take the bar exam. Bar exam's tough, but I'd say with any bright person who studies for it should be able to pass it on the first time. It's a minimum competency exam.
AJ:
So two and a half years for school and then pass the bar.
Bobby Weinberger:
Yeah.
AJ:
But full time you couldn't do that half classes?
Bobby Weinberger:
Like I said, full time. I don't think it's... The first year of law school's tough. After that it's just, in my opinion, kind of a cash grab. Schools, need to go.
AJ:
Good to know. Good to know. I think we deal a lot. You and I talk all the time because we have client issues that come up that I don't know the answer to because it's a question about a contract or an equity award agreement. So you we've had so many conversations and you do... How many deals a year are you doing at your firm that you're personally involved in?
Bobby Weinberger:
How would you define a deal? It's a very lawyer response.
AJ:
Right. It depends is the financial planner response. A contract where you have to make a decision about changing the terms.
Bobby Weinberger:
I probably do that some days, eight to 10 times a day.
AJ:
Wow. Okay. So a lot?
Bobby Weinberger:
Yeah. So yeah, it can be as small as Brooklyn FI is hiring me to review a contract from a podcast producer. I'm like, "Okay. Here's four things to think about in this contract," Or you're hiring a new employee and you want to do something creative with comp. That happens, probably 10 times a day I have a conversation that.
Bobby Weinberger:
Then there are bigger projects that we'll work on where it'll be a company that just will raise... We just had a deal close a couple weeks ago where a company raised $12 million in their seed round as- They're impressive, impressive company, impressive founders. But that's a project that takes, it started in February when we have a term sheet signed, and then we don't close till mid-May and that's probably 200 hours of attorney work.
AJ:
Nice. You're getting paid. Pretty good. Pretty good.
Bobby Weinberger:
We probably have 10 of those a year.
AJ:
Okay. All right. Nice. In terms of these contr- Look, our audience and I'm most interested in these equity deals, employee versus employer. Employer sets up an equity plan, employees are given-
Bobby Weinberger:
This is the goods. This is the crown, this is the family jewels here.
AJ:
Yeah. They're given this agreement and there's no negotiation, right? These are-
Bobby Weinberger:
There's room to negotiate.
AJ:
So what are the things that... So you're a new employee. You're employed let's say 10 at a startup and you're handed an equity award agreement and you're issued some ISOs. And those ISOs, standard 10 year expiration, standard for your vesting, 10,000 shares. What are the things that you can negotiate for?
Bobby Weinberger:
Oh, good question. Okay, so we're going to make a couple assumptions here. First is we're going to make an assumption that this is, I say run of the mill, but fairly mid-level employee. So we're not talking about C-suite executive. Those deals are much more heavily negotiated, right? So this is someone who's coming in as mid-level product manager.
AJ:
Manager, but not executive. Yeah.
Bobby Weinberger:
I'd say the point of negotiation where you're probably getting the most leverage as an employee is negotiating for some kind of not for cause termination protection in your vesting schedule. It's completely free today for your employer to just... There's no extra money for them. They don't cost anything. If it's a startup, probably pretty cash conscious. So that's a nice way for you to get a little bit extra without the company having to bear any extra cost. And would've helped to explain what not for cost termination protection actually is.
AJ:
Yeah. It's funny. This actually came up yesterday in a person I was talking to who's not a client yet. And I was like, "What's keeping you up at night?" Well that I could get fired any day and I would lose all of my options.
Bobby Weinberger:
Yeah, right. Well, that's actually not... That situation wouldn't be protected by not for cause termination. So basically for a standard four year vest, you have a one year cliff. So people don't actually vest any options until they've hit a year. So what you're essentially asking your employer to say is like, "How about this boss? If you fire me in the first year, not for something I did, you just want to change directions or layoffs, let's treat it as if I got to a full year. And if I want to exercise my options for that full year, I'll have the opportunity to."
Bobby Weinberger:
It's a way for people to get a little bit extra protection from just arbitrary and capricious firings. Now, if someone does something bad, steals from the company, breaches a contract, does something embarrassing, you don't get that kind of protection. But it's really from just your company treating you as expendable.
AJ:
And I would call that a no brainer if you're negotiating a contract.
Bobby Weinberger:
I think it's a no brainer to ask. So I actually think it's really important to negotiate your contracts for a few reasons. One is you just, you might get a better deal. If the other side of the other side of the negotiation says, "Yeah, cool. Happy to give you not for cause termination protection, but instead of a full year we'll give you six months." Great, your deal got marginally better.
Bobby Weinberger:
But the other side of it is it's important to kind of kick the tires on a relationship where you see how the counterparty will be with you in this relationship. So now say you send some red lines, and you have to be respectful. You don't want to tear up the contract. If you do that, you're disrespecting the people who might be hiring you. They're going to look into the contract like, "What's this?"
AJ:
It's a two way street, right? If you're going to be that in every interaction, they don't want to work with you either. But if you have a few major points that are important to you...
Bobby Weinberger:
You bring them up. You bring them up with good reasons, so you're principled in how you bring them up. You get to see how your supervisor's going to respond when you bring up other issues. Maybe they're thoughtful, and pay attention, and give you time, but ultimately reject every single one of your asks. Well, you just found out that this person will likely be thoughtful, and have good reasons of why they might do or say things, someone who you could probably go in trusting that you'll be treated fairly in future issues. But if they respond way out, maybe they kind of respond to you and you're like, "Whoa, whoa, whoa. That was way bigger than I realized it was going to be," maybe that's not a job you want to take.
AJ:
Right. If they're going to react to you asking for something that is perfectly reasonable, right? You're not asking for a double salary or twice the options or anything that. And if they're going to react and shut you down immediately, then you know that's probably not an organization you want to be in. That's a great point.
Bobby Weinberger:
Exactly. You're kicking the tires on the relationship as much as asking for the stuff. The information ends up being much more valuable than the stock options you get, probably.
AJ:
Yeah. I think we've talked with clients all the time about negotiating for more and what you can negotiate. And I've found that when we ask for things about the equity agreement, especially the earlier the company, the response is generally like, "I wish I could help you, but that agreement is closed. It's set in stone. We can't change it." And that, the reason for giving out ISOs instead of non-quals, is that it's just hard. They hired a lawyer once in the beginning to draft their equity plan, and if need to make changes to it, it's just like, "Oh God, we don't have time to do this. We're growing."
Bobby Weinberger:
How much money do you want us to spend to change, to make this one change?
AJ:
Exactly. So it's more of a, "Mm yeah. Good point. Let's revisit this in a year," or something like that. But definitely worth asking for. What about on the way out? What about, let's use our same example. Now we had our cliff vest, everything's great. It's year two. Person got a better job. They're leaving. What are some things that they can negotiate on the way out in terms of options that are still vesting?
Bobby Weinberger:
Sometimes I've seen people negotiate longer terms to exercise their options. Obviously that has implications with ISOs become NSOs type thing, but I've seen that happen. And I think that's... If you want to have a little bit more optionality on your options, I've seen that one.
AJ:
Right. And that just gives you, because typically you have three months is the statute, right? And then I've seen people negotiate for two years, I've seen people negotiate for 10 years. And sometimes employers will just be nice. Sometimes they'll just say like, "Sure. We'd love to. Thanks for your contribution. We're going to extend this for you for 10 years without even asking," which is cool.
Bobby Weinberger:
Yeah. I've seen one that come up a lot recently with everyone working from home is just keeping your laptop.
AJ:
Oh, yeah.
Bobby Weinberger:
Because that's company, right? If the company sent it you, they bought it fo you, that's the company's property. Including keeping your, your equipment as part of your severance package.
AJ:
Yeah. That's a good one. I'm sorry. I feel I'm peppering you with questions.
Bobby Weinberger:
Yeah. It's okay. It's good.
AJ:
It's supposed to be a discussion. No, I'm so glad you're here. You have all the answers.
Bobby Weinberger:
I guess Bobby's a wizard.
AJ:
You're a wizard, Bobby. What about underwater stock options? We're in this period right now where if you're a Meta employee or you are a Spotify employee, it is likely that you hold non-qualified stock options that have a grant price higher than what the stock is trading at right now. If I was a Meta employee right now, I would be going back to my superiors and saying, "You got to fix this." What are the things you can negotiate for at that point when you have a ton of underwater stock options that are essentially worthless?
Bobby Weinberger:
Yeah. I've seen companies reprice stock options. Public companies and private companies do it a little bit differently. So with private companies, the strike price is always based on that kind of mythical 409a valuation. And so if your company, and they have to renew it annually. So if the new annual 409a is lower than what yours is at, then I think it's completely reasonable to ask that the company reprice your stock options to the lower 409a.
AJ:
Yeah. I wonder if it's easier? It's probably easier at a private company at that point, but-
Bobby Weinberger:
Yeah, for sure.
AJ:
That's the less common scenario, because private companies, typically we see them grow, grow, grow, and then they go public. But it's these public companies that stock hasn't been doing so well.
Bobby Weinberger:
Probably don't have a lot of options. If you're going to exercise them, just buy in the public market.
AJ:
Right. Exactly. They're literally worthless.
Bobby Weinberger:
If you're going to spend your money to buy stock options, buy them at the price that is lower than what your option is. It would be the same number of shares, just less money.
AJ:
Yeah. It'd be going to a store and seeing an item on sale, but insisting that you pay the higher price for literally no reason.
Bobby Weinberger:
It's not even a dented can aisle.
AJ:
There's absolutely no reason to do that whatsoever.
Bobby Weinberger:
But I have my options, I should exercise them.
AJ:
I know. But to me, that's the point where you have, that's when it's really important to negotiate for that extended period. Because if you're leaving Facebook right now and you've got underwater options and you want to go somewhere else, I'm sorry, Meta. Kill me.
Bobby Weinberger:
No it's alphabet.
AJ:
Right. Whatever. It's Alphabet-Google-zon. If you're leaving right now, they're underwater now, but hopefully we should see the stock recover and in the future they could be worth something.
Bobby Weinberger:
So I don't do a ton of work with public company employees. We work pretty exclusively, early stage and employees are going to work at early stage companies. Do companies like Facebook reprice options for people. I cannot imagine a public company would. That's not the point.
AJ:
I've heard of it in terms of big corrections, like when a business has fundamentally changed, older businesses, the GEs of the world got and the car companies, but I have not heard of it. And I'm happy to be corrected, but I've not heard of it from a tech company. It's come up with our clients, "What do I do with these options?"
Bobby Weinberger:
Probably nothing. That's probably just the bargain.
AJ:
Yeah, and that's part of the term of the option, and that's part of the golden handcuffs. Which is like, "Okay, it's underwater today, but if you stick around for five years, you know our product roadmap, and we have plans to recover. We're just hitting a rough spot right now." The whole economy is sort of, so yeah.
Bobby Weinberger:
So anyway, high note there.
AJ:
Yeah. As a lawyer, you have an intimate understanding of the legalese that protects companies, right? And I feel when a new employee is negotiating for a contract, sure, they can go have a lawyer review it. But at the end of the day, the employer is often holding all the cards. What are things that employers can do if you're thinking of founding a company that are actually helpful to the employee that you can put in your stock planner, you can put in your employment contracts?
Bobby Weinberger:
Good question. From day one, you can bake in long exercise periods. So I have a client who, from the founding of their equity plan, said we want everyone to have 10 years to exercise their options no matter what.
AJ:
To me, that's-
Bobby Weinberger:
A no brainer. Would you say that's a no brainer?
AJ:
I would say it's a no- Well, it depends.
Bobby Weinberger:
Yeah.
AJ:
That also attaches you to these people for a long time. It's not a no-brainer for me, but I think in the column of if you want to do right by your employees, and that is one of your core values is do the best you possibly can and the most fair and the most equitable, absolutely. 10 years to exercise.
Bobby Weinberger:
I'm trying to think what else. I think for the most part equity comp... Actually, no, this is an interesting one. It gets fairly complicated when you're unwinding them, but occasionally you will see companies loan employees money, and then companies then use that loan to exercise their options. They start tracking long term capital gains on the stock faster. They can maybe get QSBS, qualified small business stock, on the stock if they hold it long enough. They'll use 50% of the stock to collateralize the loan. I'm sorry, they'll use the stock to collateralize 50% of the loan.
Bobby Weinberger:
So company, employee leaves after a year, company will take back the unvested stock, pay half the loan, and then the employee will have to either pay that half that's open or the company will forgive the loan. In which case there'll be income to the employee. But that's complicated and-
AJ:
Yeah, I've actually seen, we've seen that in practice and it's scary for the employee. It sounds great in practice of, sure, I just started here. I'd love to exercise my options at this really low for an NA and strike price. But to borrow $100,000 from your company is a terrifying endeavor.
Bobby Weinberger:
Right. And then know that at some point you're going to either have to pay them 50,000 or the IRS 20,000. Yeah, it's scary. I also think those deals are, they're just complicated. And a lot of times people think they're really smart and come up with these very complicated schemes and like, "Well, it makes sense and works for me." And on paper it kind of does, but every time you add something into a legal arrangement, you're just creating more room for things to get screwed up. As a very simple transaction, "Hey AJ, here's some money, give me your computer mess." One transaction. We know exactly what's going on. But I'm like, "Hey AJ, here's a dollar now. I'm going to come back and say, get the mouse in a week when I can give you another $10." Now say Shane was here, he bought the mouse in that week and I'm like, "Wait a second, where's the mouse?"
AJ:
He's already lost the mouse by now.
Bobby Weinberger:
Yeah. But before you know it, we're litigating over a mouse because I thought I could be smart by getting an option on the mouse.
AJ:
Yeah. Not to oversimplify everything, but when we're talking about compensation, when we're talking about equity compensation, when we're talking about investing in the markets, simplicity and understanding things wins the day every time.
Bobby Weinberger:
Every time,
AJ:
Every time, right?
Bobby Weinberger:
Yeah. Every single time.
AJ:
We talk about stock options as in employee equity compensation, but there's this whole other field of options trading, which we've just always said is just a really complicated way of saying, "Just sell the damn stock already." We're doing what?
AJ:
Well, we are almost at time. It has been such a pleasure having you and getting to chat. Always, always wise words from Bobby Weinberger. Thank you for listening to the Liquidity Event.
Bobby Weinberger:
Wait a second. I have a no brainer.
AJ:
Oh my God, you have a no brainer? You came so prepared.
Bobby Weinberger:
I came so prepared. I have a no brainer.
AJ:
Tell me your no brainer.
Bobby Weinberger:
The Los Angeles Public Library lets you borrow books on your e-readers. So you can do it for free, get books three weeks at a time. I have a big backlog of books for my Kindle that I'm always borrowing from the LA Public Library.
AJ:
Love it. The Brooklyn Public Library also has that feature as well, and probably yours in your town does as well.
Bobby Weinberger:
Awesome.
AJ:
Thanks for listening. If you love us, you can leave us a review on iTunes or wherever you listen to podcasts. Show notes at brooklyfi.com/episode 44. You've been great. Thanks for stopping by.
Bobby Weinberger:
Yeah. Pleasure AJ.
Speaker 1:
Thanks for listening to the Liquidity Event, hosted by AJ and Shane of Brooklyn FI. Head on over to Brooklynfi.com where you can subscribe to the podcast or YouTube channel, or if you want to learn about their full service financial planning tax and investment firm, specializing in tech professionals and creatives on the path to financial independence. We'll see you next time on the Liquidity Event.