The Liquidity Event Podcast: Episode 60

 

Episode 60: The IPO is Dead, Long Live the Faux-P-O

Welcome to another episode of everyone’s favorite ramshackle financial podcast. Shane is out this week so we’ve got Mr. Kurtis in the hot seat. Big billionaire news this week as the founder of the puffy financial bro vest company Patagonia decides to give away his three billion dollar fortune. That’s nice of him. Speaking of nice billionaires, we’ve got the Adobe acquisition of Figma for a cool $20 billion. AJ has some thoughts about the transaction and how it will impact employees who have stock options. This one is priceless.

Read the Full Transcript:

Speaker 1:

This podcast is for informational purposes only and should not be considered tax or investment advice. 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 and welcome to The Liquidity Event. We're your hosts, AJ.

Kurtis:

And Kurtis.

AJ:

And this is episode 60 being recorded on September 21st, 2022 airing on Friday, September 23rd. We have a new host in the hot seat. How you doing Kurtis?

Kurtis:

I'm doing great long time listener first time cohost. So it's exciting to be here.

AJ:

I knew you were going to say that. I knew you were going to say that.

Kurtis:

Fun fact, I listen to every episode of The Liquidity Event that's been out.

AJ:

Wow. So huge. You and my mother, the biggest fans of the podcast.

Kurtis:

Absolutely.

AJ:

Actually don't think my mother has ever listened to an episode, but anyways, I bet your mother will be listening to this one.

Kurtis:

Oh my gosh. Yeah.

AJ:

Is she excited? Did you tell her?

Kurtis:

I haven't told her yet, but she'll be stoked when I let her know.

AJ:

Okay, awesome. Awesome. Yeah. Kurtis is an associate financial planner here at Brooklyn FI, and he's going to go through the weeks headlines with me. But before we get into that, are you reading, watching, or playing anything interesting these days?

Kurtis:

We've been trying to comb through our board game collection cause we have a rather large board game collection. We've been playing a lot of games there and we're playing a game tonight that most people probably wouldn't know called A Feast for Oden, but it's you're Vikings who raid and pillage and whale and build a farm and stuff. So it's more exciting sounding than it is playing it, but I'm excited to-

AJ:

It's a boring board game.

Kurtis:

It would be called a Euro game. Yeah. So it is-

AJ:

A bored game?

Kurtis:

Yeah. A bored game. Yeah.

AJ:

Got it. Got it. Got it. It's two o'clock in the after... What's that?

Kurtis:

What are you reading, watching, playing?

AJ:

Oh, I'm still watching Rings of Power and I'm still loving it.

Kurtis:

That's excellent.

AJ:

I don't know how caught up you are or how caught up our audience is, but episode four was a banger.

Kurtis:

Looking forward to it.

AJ:

Oh, you haven't seen it yet. Yeah. Well-

Kurtis:

I haven't no. I watched the first episode and my wife was interested and she likes to binge things not watch as they come out. So we have to wait till its all out.

AJ:

Understood. Understood. Yeah. I was hoping we get to Numenor and we did. That's kind of a spoiler, but it's fine. It's in the preview. So whatever. And where are you located? I imagine you're not drinking because it's 11:00 AM where you are.

Kurtis:

Yeah. It's 11:20 here in California. I'm drinking lukewarm coffee that I made earlier today.

AJ:

Perfect.

Kurtis:

Classy office drink. But yeah, I am in Northern California. West of Sacramento in Woodland, is the name of the city.

AJ:

Cool, cool. So this week, we always do our IPO deep dive. If there are any IPOs, as listeners will know, there have been very few IPOs. This week, we have Corebridge financial. This isn't really an IPO. This is basically just carving off. It's an AIG massive insurance company carving off a part of their business. This is a smart business plan that someone came up with this year and they're executing it. But the reason why I wanted to talk about this is because I was Googling it and I was like, what's going on with this? What is this? And the top stories on Google, the four headlines were, and the two headlines on top of each other from four days ago was, AIG's Corebridge slips after market debut an ominous sign for IPOs. And then just 48 hours later, we have Corebridge IPO shows appeal of crowd support for companies. So don't read the headlines folks, ignore the headlines. This is just a great example of ignore the headlines. The best thing you can do for your investment portfolio is to just put the money in there and wait it out.

Kurtis:

Exactly. Yeah. And if you were to look at this being three days old, the bottom is a dollar difference from the top. So those are the slipping and the support.

AJ:

Speaking of slipping and support, big news in crypto this week. We talk a lot about crypto on this show, but I actually found this very interesting. And I think when something like this happens and a success story, it's a nice entrance for people who aren't particularly familiar with crypto or how the actual blockchain works or the production of stored value works for these various currencies. So you had something in here, explain what's going on with this Ethereum merge. What the hell are we talking about here?

Kurtis:

So, with the Ethereum merge, and again, we're going to say a lot pf terms and I'm going to... The merge, which apparently Vitalik, the guy who created Ethereum said, this is step one. It's like merge, verge, purge, surge, and splurge. So this is step one of five of-

AJ:

Sounds like a 16 year old AJ.

Kurtis:

Oh my gosh, it's outrageous. Yeah it's hilarious. But what Ethereum did two days ago now, was they moved from proof of work to proof of stake. And so if you don't know what that means, which I never had a grasp on it until recently, is basically when they do crypto mining, you have these computers that do really complicated math problems to uncover the next block in the blockchain and proof of stake-

AJ:

You literally get rewarded for processing power, which is, take a lot of energy and is bad for the environment. So they made this move to change that.

Kurtis:

And then proof of stake is you have a staking pool, which is if you own enough Ethereum, which I learned that it was, you need 32 ether, which is $50,000 at the current price, to be an individual validator. And basically now you are entered in a lottery to get rewards if you are in a staking pool. And it's like, I think we noticed in here that there's a quote, it reduced Ethereum's energy consumption by 99.95%.

AJ:

Which is awesome, right?

Kurtis:

That's amazing.

AJ:

The main criticism we hear of specifically Ethereum and Bitcoin is that it costs a lot of energy to actually produce the stuff. And Ethereum made this move and it was very risky. It was taking a digital currency and basically redoing its entire infrastructure. I think it was at 6:32 AM on Wednesday or whatever. And it basically not completely eliminated, but very dramatically reduced the energy consumption of the entire token, which is cool. My favorite thing about this is that the project was called the Bellatrix upgrade, which is one of my favorite Harry Potter characters. Bellatrix Lestrange.

Kurtis:

Yeah.

AJ:

Kurtis, I know you're a fellow nerd. Are you a Slytherin? I always forget.

Kurtis:

I'm a Hufflepuff, AJ.

AJ:

You're a Hufflepuff. OK, cool. I'm obviously a Gryffindor. Know it all, goody two shoes.

Kurtis:

OK. Come on.

AJ:

A reluctant Gryffindor. Yeah. I mean, this is cool. I think Ethereum is... I don't know, my sister was excited about this situation. So yeah.

Kurtis:

I mean another quote I have in there is they've and again, they pushed this merge back several times, it's changing an engine on an airplane mid-flight.

AJ:

That was a great quote, right?

Kurtis:

Yeah, no, it was serious and it's amazing that it happened. And I think that some people had expectations that it'd be more exciting when it happened, but it's actually really good that it wasn't exciting.

AJ:

It's one of those things you want to be boring. A heart transplant should be really boring.

Kurtis:

Exactly. And this is a move for Ethereum away from the stored value like Bitcoin is. They're going to eventually be able to put more throughput on it. There's going to be able to more traffic without outages or hangups. It's going to allow them to scale better.

AJ:

It makes the network more secure and potentially more inviting for institutional or bigger investors. Cool. Great steps in the right direction. Speaking of great steps in the right direction. We've got a headline here from cnn.com, Bank of America to offer zero down payment mortgages in certain black and Hispanic communities. Excellent.

Kurtis:

I'm going to let you roll with this AJ, cause you're more optimistic than I am.

AJ:

Yeah. I was going to say, I'm going to have a pro and con debate with myself and I imagine you'll have some to add on both sides. I mean, look, here's some quotes in the article. Black home ownership stood at just 43.4% at the end of 2022. Hispanic ownership at 51% in comparison to white home ownership, which is at 72%, so huge gap. There's a lot of reasons for that. We can go all the way back to the end of slavery in America. We can even go more recently to post World War II with GI bills where a lot of white returning veterans were offered these incredible veterans affairs mortgages at very low rates. And unfortunately those mortgages were not actually administered by the government. They were actually administered by private mortgage lenders as they still are to this day, which gives lots of opportunity for racism. So lots of opportunity for lenders to say, you are a black homeowner and based on my internal racism, I'm not going to approve this mortgage or I'm going to give you a much higher rate than I would this white homeowner.

AJ:

And we're still seeing examples of that to this day. We talked about that a couple weeks ago, there was a professor who did an experiment and basically took all the photos in his home that he was showing to an appraiser and replaced them with his buddies who are white and it was appraised at a higher value. So we still see that, it's still alive and well. So generally we have to give communities of color a leg up because they already have a very significant leg down or systematic racism. So this is cool. I think this is a great step in the right direction. A little bit of actual information about the plan. The cities are going to be Charlotte, Dallas, Detroit, Los Angeles, and Miami. So these are hot housing markets. I can't buy a house on Los Angeles right now, or Miami or Charlotte.

AJ:

So these are competitive housing markets where there are likely going to be buyers who are going to come with all cash. I'm really curious how this is going to work and what other kind of support they're going to give. And this is Bank of America, private company. This isn't like a public government program that they're helping implement. That's my pessimism here is that great step in the right direction. Great, I don't want to say feel good PR piece because I do think there is, there's some corporate governance here going, we have a part in this, we got to change this. This is our first step in the right direction. But without government support or subsidy or something, I kind of feel like this is doomed to fail. That was my soapbox.

Kurtis:

No. And I'm right there on that soapbox with you, this seems wonderful. In the article, they mentioned that you don't have to be black or Hispanic to be able to get this. So. Cool. Fine.

AJ:

Great. Cool. More loopholes for white people. Great.

Kurtis:

Exactly. Yeah, you really mean it. But then they also mentioned what I'm looking back to is when Zillow and these banks six months ago were paying cash for houses and BlackRock was doing this too. The tin foil hat pessimists were going into a recession. Kurtis thinks. Are they trying to unload assets from their balance sheet onto expecting people who are going to get screwed over again? Just like in 2008 because people got greedy. I hope that's not the case because I agree, no down payment, looking at whether they can pay rent or not is I think a much more equitable way to be able to own a house than-

AJ:

And that's the idea here is instead of having to go through your typical FICO score, which if you grew up in a family where there wasn't always a $20,000 emergency fund in the bank, somebody probably missed a credit card payment at some point. And your credit score is not reflective of the fact that you've been gainfully employed for the past 10 years and paid your rent. But missteps way back in your history or even just little missteps, literally block you from ever becoming a homeowner. So I think generally a step in the right direction, need more. I mean, Bank of America's a huge player in this. It's not jankystartup.com, but just... Should we go buy jankystartup.com?

Kurtis:

You should go buy jankystartup.com for sure.

AJ:

Unfortunately onlyfounders.com was already taken. I tried. Someone must have heard me say that on the show and said. Speaking of huge, oh, you had a segue for me, Kurtis. This is your first-

Kurtis:

I'm trying think of a segue. There's not a great segue from this to the next one. Thinking of families. I mean, that's the closest one. It's mediocre. We'll let it slide. Speaking of climbing, blah, blah, blah, [inaudible 00:14:27]. So the owner of Patagonia has given away the company to a private trust and nonprofit that is run by his family.

AJ:

This is exactly what Bill gates did, which is like, we're going to the Bill and Melinda Gates Foundation, but this is even worse. This is even more closely held.

Kurtis:

Well, this is worse, because it's more closely held. Better because they're not getting... 'Cause Bill and Melinda get paid as presidents or chairs of the nonprofit. They're not getting paid anymore for this. Cause I mean they have crap, tons of money. I think this is nice. The way that this was done was the tax breaks weren't taken into consideration mostly, for the voting shares. They didn't take into considerations. Yeah. AJ's mming at me. So I'll let her [inaudible 00:15:30]

AJ:

My favorite thing about this story was like, yes, this New York Times article comes out was like last weekend, Billionaire no more. Patagonia founder gives away the company. It's a beautiful New York Times story. It's got beautiful photos, exclusive interview. Congratulations to me. And look, this guy has an interesting life. He was a mountain climber at heart who lived out of a truck, eating cat food, according to his origin story and built this, it's what $3 billion net worth. And his greatest passion is the planet, is preserving this planet. So humans come are coming and ruining it. And he loves the outdoors. His company Patagonia makes out outdoors equipment. I always find it ironic that Patagonia makes the tech bro vests, which must be like-

Kurtis:

You never been ice climbing in your life, dude.

AJ:

Yeah. You might have to fact check this. But I think there was a point at which Patagonia was like, we're not making your BlackRock vest anymore or whatever, until you sign a climate pledge or something.

Kurtis:

Cool way to do it.

AJ:

Anyway. Yeah. I need to be fact checked on that. But anyway, look, this beautiful piece comes out. Everyone goes, wow. I wish all billionaires were responsible like this. And look, I don't want to dis anybody. This is great. He clearly he wants to save the planet and this is the way that he's going to do it. He's got a lot of money and he could have kept it locked up in his family for another 10 or 20 years. But he knows that we're running out of time here to save our dear planet. Anyway, oh to be a publicist on this story is what I'm saying because this New York Times article comes out and everyone's like, yay, Patagonia. And then very quickly the tide, the tone starts to turn and all the analysts come out and go, well actually, if you look at the estate planning laws, this was actually really smart. And I think I saw one quote from a Washington Times article that essentially he avoided a $700 million tax hit in estate taxes and capital gains taxes. So that's a nice deal for the fam. Save $700 million.

Kurtis:

To avoid that. Absolutely.

AJ:

But yeah, I think this just comes back to our listeners know just why aren't we taxing corporations that have billions of dollars and why is it up to billionaires to decide at a certain point where it goes?

Kurtis:

And he's 82 or 83 now again, you're right, AJ, this does sound nice on the surface. And it's like, well you could have been doing something more sooner because basically the trust that's put in is it's going to be spitting out a $100 million in profit every year. That's going towards either this nonprofit, so either directly towards climate change stuff or it's also set up as a nonprofit to be able to make political contributions.

AJ:

Yeah, that was interesting. It's a 501 C4, not a 501 C3, which means that it can actually give to elections, which is if you are a believer in global warming and that we need to make some changes, that's where we need to start. This is great. Green Peace is an excellent organization, but at the end of the day we need laws that actually make systematic changes. So I think what he's kind of saying is, Hey other billionaires, follow my lead. We have the power right now because we have the billions.

Kurtis:

Exactly. And it's like, okay, maybe it'll be nice to have a $100 million on the side of climate change in the pockets of politicians to make a move in the right direction.

AJ:

But what scares me about this is like, oh great. This is awesome. Climate change is a worthy cause. But those on the far right have also done similar donations of this type to causes that they believe in, that are not necessarily aligned with my values. This happens to be aligned with my values and most of the readers of the New York Times, I would imagine. But there are other cases where that's not the case.

Kurtis:

Exactly. And your point of, if we tax the corporations, billionaires wouldn't be able to make this beautiful gesture. Right? Kind of thing when they're 83.

AJ:

Yeah, exactly. Yeah. It's like the grandpa who sat on the funds your entire life or your dad who says I walked seven miles uphill in the snow each way. And maybe the kid is struggling and at the end of their life, there's a big pile of money. And it's like, who knew? Couldn't we have enjoyed that together throughout our lives?

Kurtis:

It would've been helpful two decades ago. Cause I know you had it then also.

AJ:

Yeah. I would've made you a grandkid if you threw some money. I'm just laughing because we were chatting yesterday or on Monday. I was like, how the hell do you pronounce this name? And you posted a screenshot, Yvon Chouinard.

Kurtis:

That is.

AJ:

Speaking of unpronounceable names, Volkswagen targets up to a $75 billion valuation in an upcoming Porsche IPO. Oh we have some IPOs trickling through. Or in Porsche's case driving very fast through.

Kurtis:

Ooh. We've got re-IPO here. I guess. We're seeing spinoffs this week. The IPOs that are really just spinoffs. Cause Volkswagen bought Porsche.

AJ:

These are faux Pos. These are not IPOs. These are faux POs.

Kurtis:

Yeah. I think our most exciting IPO we may get by the end of the year is Instacart. But we'll see how that goes. There's been whisperings of it. But again, it's definitely-

AJ:

A lot of whisperings going on.

Kurtis:

Yeah. Lots of whisperings.

AJ:

Less whispers, more S-1's please folks.

Kurtis:

Yeah. Right, exactly. Yeah. No, this is a faux PO, Volkswagen bought Porsche in 2011 for $11.3 billion. Now they're trying to put it back out there for upwards of $75 billion. Not a bad return after a decade.

AJ:

I mean Volkswagen has had its own share of issues with the recall and-

Kurtis:

The emissions issue. The microchip that goes no, no, no. I'm not emitting bad things. That was fun.

AJ:

Just kidding. Just kidding. What else we got here? I think in this environment, what are our clients feeling right now? There's not no IPOs. There's very few IPOs that impact employees is kind of how we'll say it there's movement. There are mergers and acquisitions, but I think, yeah. What's your pulse from clients right now with the IPO market?

Kurtis:

I think it's funny. We see a lot of frustration from the failure of spacs mostly is what I get the most outward expression from clients. Because again, what was our last actual IPO that we had as a firm, that was Asana?

AJ:

No, honestly, it's been a while. I mean folks, it used to be every weekend we're going, let's go, who's going public. We're doing trading plans and exercising and-

Kurtis:

I haven't been a part of a true IPO weekend or week at BKFI yet. So I'm hankering for one, but yeah. Yeah. So I think there's a lot of regret for like, oh my gosh, my stock came out at 10, now it's at two, which sucks. And then I think there's a little frustration from folks who were supposed to see IPOs this year go, oh, I was in my head planning to buy a home with my windfall. I saw financial independence much more closer in reach. And then this market downturn and all the volatility, kind of a temporarily snatched away. My lottery ticket didn't pay off today. It's going to pay off in two years. I'm happy to wait out that win for two years.

AJ:

Yeah. I mean, we're happy to wait it out with them, but I get it.

Kurtis:

Exactly.

AJ:

So here's a really interesting example is that, I don't know if you heard about this, but Adobe acquired Figma or is acquiring Figma for $20 billion, which is really interesting because if this was a year ago and we had a red hot market, Figma would've gone public. Absolutely.

Kurtis:

Oh, absolutely.

AJ:

So what's going on here where Adobe's like, I need to take this... So for those who don't know, Figma is a web-based design tool that has some incredible, it's not just a web-based design tool, it's got lots of cool technology. I actually wrote a blog post about it today. So we'll link to that in the show notes. But Adobe was like, Hey, this is a really cool product that's potentially coming for our market share on design products. Let's eliminate the competition. And I mean, Figma has incredible numbers. They're growing what? Hundreds of percent each year and Adobe paid what? 50 times over annual recurring revenue.

Kurtis:

Annual recurring revenue.

AJ:

So yeah. I don't know how to analyze this transaction in this market. Other than we would've assumed an IPO that probably would've led to a larger valuation than 20 billion, but maybe investors needed liquidity. Maybe founders wanted... Who knows what's going on. Maybe it was a really good deal. I don't know.

Kurtis:

One of the, I mean, would say it's a really good deal. If someone wants an exit.

AJ:

It's a really good deal if you're the CEO.

Kurtis:

Yeah. One of the founders, his payout was like $2 billion and they mentioned that he's one of the folks from Peter Thiel's circle of dude.

AJ:

Yeah. He's what do they call it? It's the fellowship. It's the Thiel fellowship.

Kurtis:

The Thiel fellowship. Exactly. Yeah.

AJ:

As the Lord of the Rings fan, I'm not in good company with Peter Thiel, but yeah, it's cool. He's got a bunch of money and he's got a, I wouldn't really call it an incubator, but basically like a grant program, which is like, if you're a smart person with an idea, he'll give you some money. So CEO of Figma actually came out of that grant. Innovation, you got to have smart advisors who have built big companies before. So another success for Mr. Thiel.

AJ:

What's interesting, from our Liquidity Event, equity tax perspective here is it's an acquisition, which I prefer to an IPO for our clients often. Not all the time, but often just because there are fewer choices to make, right. An acquisition happens, it depends on the terms and we'll see what happens with the deal. I think it's set to close later this month, but employees who maybe ha, just started last year are probably going to walk away with a couple hundred thousand dollars because their grants are going to get paid out. As opposed to, if we were going public, they'd have to decide, do I want to exercise my shares? And then we kind of get in, we have to make all these choices that can be very stressful as we have seen in the past.

Kurtis:

Yes. Very stressful and very emotion laden as well. You know what to buy what? To keep, what to get rid of. Absolutely.

AJ:

Nightmare.

Kurtis:

And I'm going to ask a possibly naive question since I'm not as familiar with acquisitions yet. Does that always? Cause I know there's the band camp, epic acquisition. Acquisition payouts, do those always go through your W2 as ordinary income?

AJ:

It depends usually. I mean, if it's a cash payout? Typically, yeah. So if you've got vested options that just as part of the transaction are getting purchased for cash. Yes. Typically, that transaction is taxed it's income to you. This deal in particular is interesting because it's a mix of cash and stock. So my hypothesis is that some vested options or some already exercised options will get paid out in cash. But in the transaction employees who have unvested stock, that will likely just get converted into the acquiring company's stock. So it's a complex transaction. These don't just happen overnight. There's going to be lots of spreadsheets going on to figure out what everyone owns and employees will be.

AJ:

So if you're at Figma just be prepared to be frustrated with the information that you're going to get from your company throughout this or this acquisition. But yeah, it's ordinary income. I mean the best case scenario for someone who maybe got a job at Figma a couple of years ago, would've been to exercise their stock options when the strike price was less than a dollar, wait it out and now sell it for, I mean, many, many X.

Kurtis:

Whatever they're paying. Yeah.

AJ:

Whatever they're paying for and it's cash, right. Again, you don't have to make that decision. You don't have that stress of trying to figure out when to sell. Woof, lot of we had some heavy hitters this week. We did Figma. What else do we do? We did Yvon Chouinard. We did Bank of America trying to fix the racist housing market in this country. We'll and then we had the Ethereum merge. Kurtis, it's been great having you on the show. Yeah.

Kurtis:

It was a blast.

AJ:

Thank you for hosting.

Kurtis:

Thanks for having me. Yeah. I loved it.

AJ:

Poor Shane is at the doctor, so we wish him all the best. But yeah, if you would like to email us, you can do that at liquidityevent@brooklynfi.com. Our show notes can be found at brooklynfi.com/episode60. If you want to leave us a review, you enjoyed the show, please do so in the podcast app of your choice, I will see you next week. Thanks for hanging out with us. Take care.

Kurtis:

Okay. Bye guys.

AJ:

Bye.

Speaker 1:

Thanks for listening to The Liquidity Event posted 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.