Afford Anything - The Overlooked Power of Stock-Based Compensation, with Brian Feroldi

Episode Date: August 12, 2024

#530: We sit down with financial educator Brian Feroldi to dive into the often-overlooked world of stock-based compensation. This form of compensation is becoming more common, especially in large companies, but many employees don’t fully understand how to make the most of it. Brian helps break down the basics, explaining what stock-based compensation is and why companies use it to attract and retain employees. We start by discussing why companies offer stock options or restricted stock units (RSUs) instead of just higher salaries or bonuses. Brian explains that stock-based compensation is a way for companies to align your interests with the success of the business. When you own a piece of the company, you’re more likely to care about its performance, which can drive you to work harder and stay longer. This also allows companies to conserve cash while still offering competitive compensation packages. Brian also highlights the importance of understanding the different types of stock-based compensation. He breaks down stock options, where you have the right to buy company stock at a set price, and RSUs, where you’re given shares of stock that vest over time. Each has its pros and cons, and understanding these differences can help you make better decisions about your compensation. One of the key takeaways from our discussion is the importance of negotiation. Brian emphasizes that the best time to negotiate stock-based compensation is when you’re first hired. Companies often have more flexibility with stock options than with salary, so it’s crucial to ask for more stock or a shorter vesting period upfront. This can make a big difference in your long-term financial gains, especially if the company’s stock value increases over time. We also touch on the tax implications of stock-based compensation. Brian explains that different types of stock options are taxed differently, and understanding these tax rules can help you minimize your tax bill. For instance, holding onto stock after exercising options can lead to lower taxes if the stock price rises and you qualify for long-term capital gains. Throughout the interview, Brian shares practical tips for you, such as targeting companies in industries like technology and healthcare that are known for generous stock-based compensation packages. He advises you to educate yourself on your company’s specific policies and to be proactive in managing your stock options to avoid leaving money on the table. By the end of the episode, you’ll have a clearer understanding of stock-based compensation and how to leverage it to build wealth. Brian’s insights are particularly valuable if you’re switching jobs and want to maximize your compensation package. Resource Mentioned: Finchat.io For more information, visit the show notes at https://affordanything.com/episode530 Timestamps: Note: Timestamps will vary on individual devices based on dynamic advertising run times. 2:16 - Explain why companies offer stock compensation over salaries 4:00 - Discuss how stock compensation aligns employee and company goals 7:28 - Introduce types of stock compensation: stock options vs. RSUs 12:24 - Explain the significance of vesting schedules 17:00 - Discuss tax implications of stock options and RSUs 28:00 - Emphasize the long-term impact of stock-based compensation on financial independence 34:00 - Identify industries with high stock compensation, like tech and healthcare 40:00 - Discuss benefits of Employee Stock Purchase Plans (ESPPs) Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today we're going to discuss the 270 billion that nobody is talking about. Welcome to the Afford Anything Podcast, the show that understands you can afford anything but not everything. Every choice that you make carries a trade-off, and that applies not just to your money, but your time, your focus, your energy, your attention to any limited resource that you need to manage. This is a show all about optimizing those limited resources, and we have five pillars. Financial Psychology, increasing your income, investing, real estate, and entrepreneurship. Today's episode is about the two eyes of that pillar, your income and your investments. It's sort of a combination of the two. Here with us today in Boise, Idaho, Brian Faroldy, he's a financial educator and the author of

the book Why Does the Stock Market Always Go Up? Brian joins us to discuss the $270 billion that nobody is talking about, which is stock-based compensation. Now, stock-based compensation, that $270 billion, 80% of it was paid to employees, not to executives, but to rank and file employees. So this is a major source of compensation, particularly for people who work for large companies. So if that's you or if you work for a big Fortune 500 company

and you are a W-2 employee, there's a decent chance that you get at least some part of your compensation as stock-based compensation. And today's episode is a deep dive into how to optimize that. Welcome, Brian. Paul, awesome to be here. Yeah, this is a topic that, I think is really important to talk about because a lot of people get paid stock-based compensation

or have the opportunity to get paid in stock-based compensation, especially if you move around jobs, it's offer a big way that employers attract in place to their company by giving them big stock option grants. But it's a very under-discussed topic, and I think there's a lot of confusion about it. So hopefully we can demystify it for listeners. Perfect. Let's start by defining it. What is stock-based compensation? As the name implies, it is when an employer, A part of their compensation comes in the form of equity, aka stock in the business that they are working for. So everyone's familiar with getting a salary, with getting a bonus, with getting benefits. This is another way that employees are compensated.

Okay. What incentive does a company have to offer stock-based compensation, particularly as compared with, let's say, a profit share or a bonus that's based on performance? That's actually a really good question. In essence, the reason that companies pay stock-based compensation is all about solving something called the principal agent problem. This is effectively when there's a principle, which is the owner of an asset, and then there's an agent, the person that is managing that asset. And unfortunately, those two entities often have conflicts of interest with each other, so they want different things. And stock-based compensation was invented to help kind of solve

that problem. As a real simple example, example, imagine that I came to you and I offered to mow your lawn for $20 an hour, and you said, great. You just want your lawn mode, right? But me, because of the compensation structure we have, where I'm getting $20 per hour, I actually have a disincentive to work efficiently, because the longer it takes me to do the task, the more money I make. Whereas you... Moking the clock. Exactly. You just want the lawn to be mowed. Well, you can take that out to the employee level. If an employee is just paid a salary, they have no financial incentive to work harder than they are required to. Or if you're the manager of a company, you have no financial incentive to do an extraordinary job because you don't see any more compensation for doing so.

It's like that famous quote in office space. That makes me work just hard enough to not get fired. That's exactly correct. So one way that companies can help to alleviate that is by making, the very people that are working at the company, part owners of the business. If you actually become a shareholder of the company, then you treat the company differently. Then you actually care about serving customers, growing revenue, increasing profits because you will make more money if the company becomes more valuable and you will lose money if it becomes less valuable.

But why not compensation that's tied to results or performance? Yep. That's absolutely something that you can do. And some companies only do that. They give you a bonus directly related to you achieving some specific task. That's absolutely a way to do it. And some companies do not pay stock-based compensation at all. However, you actually see stock-based compensation pretty regularly issued out for small companies for a few reasons. And the biggest reason that companies pay stock-based compensation, it does not consume cash. It is a way of compensating employees without actually having to take cash out. of their bank account. So paying a bonus, paying a salary, that consumes cash. If you are paying

out equity, it does not consume cash so you can actually be pretty generous with doing so. If it's not a publicly traded company, though, then that cash is illiquid, meaning it exists on paper, but the employee can't actually do anything with it. It's just theoretical money. Correct. So it's easiest to turn your stock-based compensation into actual cash that you can spend if you work for a publicly traded company because there's a liquid market for your stock. If you work for a private company, private companies also pay stock-based compensation. It is much harder to liquidate your stock. That doesn't mean you can't. Depending on the company, some company actually have internal stock markets that are run by companies like the NASDAQ,

for example, and they will allow employees to sell their stock to other employees or outside investors, and that is one way that they can do so. That does depend on the practices of that particular company. Another way that working for a private company, you could actually liquidate is if your company gets bought out. If you are a stockholder in that company and that company gets acquired, you actually will get paid out for the stock-based compensation that you hold. So there are ways that you can do it. It's just much harder if you don't look for a public company. Right, right. Because if you're an employee at a private company, you're basically either holding your breath waiting for a liquidation event, basically holding your breath waiting for a buyout

that may or may not come, or you're maybe going to the secondary market. But yeah, I can see how that would be a lot harder for employees at private companies that just have this theoretical money on paper. Yep. And some companies, like, for example, SpaceX, Tesla, Elon Musk's other massive company. The boring company. Yes, those companies actually have internal stock markets. So if you or a stockholder, even though they're not publicly traded, their employees can liquidate their assets. And it's typically done every, like, six months to year. So it's far less frequently than if it's publicly traded,

but there are ways to do so. It seems you would need some type of critical mass of employees before there would be enough people to form an internal stock market. Like SpaceX, I don't know how many employees they have, but they are a private company, but they're a huge, massive private company. 100 billion dollar company. Yeah, exactly, exactly. They're literally sending rockets to the ISS and then return.

turning those same rockets back to Earth, which has never been done before. So at a scale like that, it's a very different world. Yes. No pun intended. Tell me about the different types of stock-based compensation, because there are a few varieties that are out there. There are three major type of stock-based compensations, and of those three, there's two major structures that are worth knowing. The first structure is called a stock option. This is when you are given the right, but not the obligation to purchase your company's stock for a set price, for a set amount of time, usually over a period of 10 years. For example, let's say, Paula, you joined a company, and they said to you, Paula, we're going to give you the right, an option, the stock option,

the right to buy 1,000 shares of our stock for $10 per share, and you're going to claim that right for a period of 10 years. Okay. That is typically the price that you of the company's stock on the day that you joined. So it's an option for 10 years. Well, if the stock price

of the company goes to $20 per share a year for now, you have the right to buy it for 10. Perfect. So meaning that you could... Instant double your money. Yeah, you could pocket a spread on the right that you have to buy it

versus the actual market price of the stock and you can make money from the stock price appreciating above $10 per share. Now, on the flip side, if the stock price falls below $10 per share, that option is worthless. Because why would you buy a stock for $10 per share when the open market you can buy it for less than that? So stock options, you are very much betting on the price of the stock, increasing above your options price. That's the only way that you can make money on them. So that's one type.

Those are stock options. The second type is becoming far more common, and that's called restricted stock. That is quite literally when the employee is given the stock directly. Let's just say, again, same thing. Paul, you're hired and you getting the right to get restricted stock worth a thousand shares of that company's stock. Well, as those stock vests, and we can talk about what vesting means in a little bit, that stock literally just becomes yours.

So those thousand shares now just become owned by you, Paula, and it's 1,000 shares times whatever the current share price is of the company. If you're an employee, you should heavily favor restricted stock because that always has a value. Even if the stock falls substantially, that stock still has value. Where with the stock option, the stock value is dependent on the stock price increasing from when you start. Right. And so restricted stock, I often hear it by the acronym RSU, restricted stock units. So what are the drawbacks of getting compensated with RSUs? The biggest drawback would be you are on the hook.

for the stock price of the company. And as an employee, that is unfortunately something that you have no control over, right? The management team of the company will make decisions. Those decisions will impact the business and what the business does and how those results are interpretive with our investors. That's what determines the price of the stock today. You as an employee have no control over the stock price and yet the amount of compensation in dollars that you're receiving is directly impacted by what is the share price of a stock. That means that your compensation is often variable. When the stock price is going up, you're often making more money.

When the stock price is going down, you are making less money. So that would be the biggest drawback to restricted stock. There's also some things that can happen with taxes, depending on how long you hold the stock for, and if it qualifies for short-term gains or long-term games and things like that. But by far, the biggest disadvantage is if the company becomes less valuable over time, so does your compensation? Right. Does that mean that people in general are getting compensated a little bit

less in terms of salary because a portion of their compensation is through RSUs? It depends on the culture of the company. Some company cultures pay competitive salaries and market rates and then the stock that they receive is kind of like on top of that. And those companies don't consider that to be truly part of their salary. Other companies have different philosophies and they think that's absolutely part of your salary. And we consider the total amount of compensation you're getting, including that stock-based compensation to be important. Netflix, for example, is one of my favorite examples out there.

If you work for Netflix, they actually say, we're going to pay you some number, $100,000 per year. And they actually give you a slider. And they say, how much of that do you want in stock and how much of that do you want in salary? Wow. So it's up to the employee to determine what salary they get and what equity they get. So if you're the type of person that is scared of or doesn't understand stock-based compensation, you can accept higher cash, but then you get much lower or zero stock.

And I love that. I love that. I wish more companies did that because then it's up to the employee to determine how much risk they want to take on with their compensation. Wow. You mentioned vesting. Let's define vesting for anybody who hasn't heard it. Vesting is a really important thing to understand if you're going to get paid with stock-based compensation. It is simply the schedule where you gain full ownership of the stock-based compensation that you receive. A fairly typical vesting schedule that most companies go for is about a four-year vesting period. Meaning that if you sign up on day one and you're giving 1,000 shares of these restricted stocks, it's fairly typical that after one year, 250 of those shares would actually become yours. Another year later, another 250, three years, four years.

And by the fourth year, all 1,000 shares of that stock are yours. It's essentially a way for the employers to lock up the employees for a set amount of time so that if those employees choose to leave, they forfeit a portion. of their compensation. So it's kind of like the golden handcuffs that you hear about where people often say, I can't leave my employer until such and such a date, which is when my options are stock vest. Right, right. And the reason that I mentioned, oh, this is a fairly sophisticated audience is because vesting is also common in retirement accounts where people are given retirement matches, but they vest over a certain schedule. And so I think a lot of people who

listen to this podcast or watch this podcast on YouTube, who maybe even if you don't necessarily have stock options, you might have a vesting schedule associated with your retirement account. Yep, absolutely. And the way that the vesting schedule works also completely varies from company to company. As an employee, your goal should be to get the shortest vesting schedule that you possibly can, right? You want as much of that compensation to become yours as quickly as possible. So if you see a vesting schedule that's three years or less, boy, is that a generous vesting scheduled. I would say the industry standard that I mostly see is a four-year vesting schedule, which is also not that bad. But if you can get a shorter vesting schedule, that's a good thing.

Yeah. Can I tell you a quick story about vesting? I had a friend who got laid off before his vesting schedule was complete. As he was negotiating his departure package, he actually went to them and said, hey, wait a second, if I'd been allowed to stay at this job, I would have stayed and I would have received this entire, this vested retirement match, but you guys were the ones who laid me off. I didn't choose to leave. So could you give me a payout for the equivalent of this money that's in my retirement account? And they actually did.

Excellent. And that's a great example of showing you how much control companies actually have over these policies. And that should bring up another point, actually. All of this is negotiable. Right. If you are taking a job, you should actually. Absolutely, absolutely look into the details of your stock-based compensation package. And again, the philosophy varies from company to company.

So some companies might have a very tight band that they can negotiate on their benefits or their salary or their vacation schedule. But sometimes they have a lot of flexibility on their stock-based compensation. And if you believe in the company negotiating a couple thousand more shares or a short investing schedule, that can literally be tens of thousands or hundreds of thousands of dollars. So don't overlook that. Right, exactly. And I want to stay on that point for a moment because this idea of everything is negotiable is something that I really want the Afford Anything community to hear and to internalize.

Because particularly now, you know, we're living in this era of high inflation. We're living in an era where a lot of people feel like their wages, their salaries haven't kept up with rising prices. and it's more important than ever for people to really look at the compensation structure, whether it's at your current job or whether you're changing jobs. Hey, how am I getting compensated? What's my salary? What are my benefits? What's my retirement?

What are my stock options? Let's look at the total comprehensive package of how am I getting paid and figure out how to at least make everything catch up. That's a really critical point. In fact, that's the reason that I talk about the fire framework, the financial psychology. It used to just have one eye. It used to be financial psychology investing real estate entrepreneurship. The reason that I added that second and third eye, increasing income, is because of inflation, it's because of people feeling like their wages haven't kept pace. And it's because of the fact that just anecdotally from so many of the stories that I'm hearing from this community, it's quite clear that there's this need that people have for getting a raise. increasing your income is one of the most powerful things that you can do, especially if this is early in your career, because if you can bump up your salary by just a few more percent each year than you would have otherwise, or if you're willing to even better, be on the job market

and we're willing to change jobs every two or three years and really dramatically accelerate your income, that can have a massive, massive difference on the long-term value of your long-term net worth. So, yeah, it is something that I personally, overla, looked when I was in the working world, and man, that was just a massive mistake. Right. So then let's go back to that. Let's talk about there's three different kinds of vesting. And this is something that I want the audience to really understand because as you are going for that negotiation, it's important to understand, wait a minute, vesting is not a one-size fits all thing. There are different modalities of it. So let's understand that landscape.

Like, let's have the financial literacy to understand what the different styles are that are out there so that we are armed with information when we're going into this negotiation. Absolutely. Knowledge is power. So broadly speaking, there are three different vesting schedules that companies follow. The first is called cliff vesting. And that is simply there's a delay, a certain amount of time, and after a certain amount of time passes, you get the stock. For example, a lot of companies will have a one-year minimum, a cliff vesting period. So if you start at the company, you won't get any stock-based compensation vested for a, one year period. So if you leave 11 months in, you get zero. Nothing has been vested. But after that

year, a cliff vesting often kicks in and you get some portion or all of your stock-based compensation. So that's method number one. Way number two is the graded vest in period. So it's more gradual. Let's say it was over a three-year period, so 36 months in total. So every month, three percent of the compensation would become yours. And that would happen month after month after month. So that's called a graded vesting period. The final way would be a performance-based vested period where you achieve some specific outcome, you achieve some specific action, and there's no date associated with it. There's only, if this happens, this stock vests for you. That's fairly common for at the executive level where they have metrics they're trying to hit,

like if they get revenue to a certain point, or if they get operating margin to a certain point, or, you know, it varies from company to company. But if they do X, then their stock instantaneously vest. So those are the three main methods. Nice. You know, we talked a little bit about the importance of negotiation. How do you approach that conversation? So this goes back to just negotiation in general.

It's worth repeating. The philosophy, the literal philosophy of the company, dramatically differs from business to business to business. And the way that each individual company thinks about and treat stock-based compensation varies hugely. Some companies are extremely stingy with stock-based compensation, and they only pay out a little bit, and they have a very long vesting periods. Others are extremely lax with stock-based compensation, and the vesting periods are short, and they have lots of benefits about them. So, one, when you're negotiating with your employer,

you need to know generally what the philosophy of the company is itself. And you can do that by asking other employees if you have access to them or just seeing if you're being hired by our company, ask for more and see if they say, I'm sorry, I don't have the authority to do so, or if that's a relatively easy thing to do. But this just goes back to any standard negotiation. The more information you can get about the company and then get the package that they give you and always have the mindset, can I get more or can I get more favorable terms than they are offering me. What about taxes? What are the tax implications of these various types of packages. Yep. So this is actually really important to know. So broadly speaking, again,

there are three main types of stock-based compensation, and of those, there are two major subcategories. So the two types, again, are stock options. That's one type, and the second type is restricted stock. So let's dial in on the stock options. So there are two major types of stock options. The first is called incentive stock option, or I-S-O. When you exercise a stock, so again, you get some stock for saying you can buy it for $10 per share and the current share price is 20. When you actually exercise that option, meaning, okay, right now I want to buy that stock for 10, it's trading at 20. Well, you have some options that you can do. You could immediately sell that stock for $20 per share, or you could just take ownership of the stock at $10 per share.

So the taxes that you're going to pay depend on if you sell immediately. If you do so, you're going to own taxes on it right away. Or if you just exercise the option and then hold it, you won't pay taxes on it until you sell the stock, which could be at a later date. And it might even qualify for long-term gains if you hold for more than a year. So as a general statement, if you want to minimize your tax bill and you have incentive stock options, and you believe in the future potential of the company, you should exercise your options and then hold. That would be the way to minimize your tax bill.

You won't pay the tax bill until you sell. That's with incentive stock options, which are the most common type given to employees. Right. There's another type of stock options called non-qualified stock options, or N-S-Os. These are a little bit different. As soon as you exercise the option,

you immediately owe taxes on it, regardless of whether you hold the stock or not. Now, non-qualified stock options aren't typically paid to employees. They're typically paid to contractors or people on the board of directors or people that don't work at the company. But if they exercise their stock option, that is immediate compensation to them, immediate income to them, and they are taxed on it directly. The final one would be restricted stock options. Those are similar to the non-qualified stock options where as soon as that stock becomes yours, you take ownership of it.

You are typically taxed as ordinary income as soon as it vests. So if your goal is to delay your tax bill as long as possible, you should favor stock options, specifically incentive stock options or IISOs. just know that there are different tax consequences depending on what you have. Right, right. And with RSUs, it's taxed as ordinary income at the time that it vests, but after vesting, anything after that becomes capital gains. Correct, depending on the holding period again. That's an excellent point. So if I take ownership of a stock at RSU and it's trading at $10 per share, unless I add a thousand shares, that would be a $10,000 that I have to add to my income that particular year.

But to your point, if I don't sell it and then it appreciates the $20 per share so the total value becomes $20,000, well, that $10,000 gain that I got for the stock price appreciating, that could potentially qualify as long-term capital gains if I'm continuing to hold the stock. So to be clear, this can get complicated pretty quickly and the specifics actually matter a lot. So if you have questions about that, make sure you talk to a certified tax expert. Yes, absolutely. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

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Let's talk about some of the tax strategies. Now, of course, everyone should consult with a certified tax professional, but what are, broadly speaking, for educational purposes, what are some strategies that people, people sometimes use in order to soften the tax flow. There are a few things that you can do, although I don't think you have a tremendous amount of options. I mean, the taxman is the taxman and you have to pay it. However, there are a few things that you can do.

First off, with your incentive stock options, those ISOs, if you believe in the long-term potential of the company and you believe that it would be worth more in time, one strategy is to exercise those options as soon as you. you possibly can, as soon as they vest. If you believe the value of the stock is going to increase over time and you vest those stocks early, you take ownership of that stock right away, and that starts the clock for becoming long-term capital gains sooner rather than later. The downside to that strategy and with stock options in general is often a cash outlay that you have to make. So if I wanted to buy a thousand shares of that stock for $10 per share, that's $10,000 that I have to come up with

to actually buy that stock if I don't want to sell any portion of it. And that can be difficult for some people do depending on their short-term liquidity. Another thing that you can do is you can take the proceeds. You can sell the proceeds of a stock option or a restricted stock right away, and you can use those proceeds to fund a tax advantage account, such as a 401k or an IRA or a health savings account. So you can sell and generate income in one, and then you can immediately put that into something that reduces your income.

So that is another strategy you can do to kind of offset that. And then one final one I'll point out is, if you are going to be donating money to charity, you can actually just donate your stock directly to that charity, and then that kind of wipes it away from being income that comes to you. There are ways that you can do that. So if you're a charitable person and you donate a certain amount every year, you can actually just donate the stock that you get, remove that from your income altogether. Can you donate the stock into a donor advised fund? That is a fantastic question. The answer is probably, but I don't know for sure.

Okay, cool. All right, if somebody knows, go to afford anything.com slash community, and please drop a note inside the community if you can donate it into a donor advised fund or not. Tell me about how people can maximize their stock-based compensation. We've been talking so far about how to lower your tax bill, how to minimize the tax bill. But let's now talk about how to maximize the tax bill. But let's now talk about how to maximize the thing that you are getting taxed on. This is actually really important. I mean, this topic can literally be the difference between tens of thousands or hundreds of thousands or millions of dollars to your net worth.

So thinking through this is actually really important. First and most important, look for and target companies that have very generous stock-based compensation packages. There's a couple ways that you can do that. Some ways are easier than others. others, but the simplest way that I could think of is to target working for companies that are based in California. California companies as a general statement, the war for talent in California is extremely high. And the culture in California is very generous with stock-based compensation. So if you can

target working for companies that are headquartered in California and even better, headquartered in Silicon Valley, the odds that you can negotiate a very generous stock base compensation package for yourself are much, much higher than you can for a company that's, again, is a broad statement, based in the Midwest. So there are pockets of the United States that are known for paying very high amounts of stock-based compensation. So California, and I would include the Bay Area, Silicon Valley in there, Los Angeles or San Diego. Then there's some other cities that you can target, such as Washington, D.C., New York, Boston, and Seattle. It's not, of course, a perfect thing,

but target companies whose headquarters are in those highly populated areas where they are used to paying huge amounts of stock-based compensation. So that would be thing one. Thing two would be, when you are accepting a job at one of these companies, your strongest ability to negotiate is right up front.

It's very common for companies to give very large incentive packages on the date of your hire, and that is your opportunity to negotiate to really make sure that you try and maximize the amount of stock base compensation that you get. So that would be point number two. Point number three is if possible, try and get more restricted stock, R-SUs, as opposed to incentive stock options, ISOs. Restricted stock is the one that just becomes yours. So 1,000 shares of restricted stock, you should prize that higher than 1,000 shares of incentive stock.

Those things targeting companies that pay very high stock waste compensation, doing your best to negotiate right from the get-go, and asking for RSUs versus ISOs, those things alone can make a massive difference in your stock waste compensation. Does the California piece of it, is that a trend that will remain for the next several years as work becomes increasingly remote, as the distance between a company's headquarters and its employees locations tend to get greater and greater. That is certainly possible. Yeah, generally speaking, remote work is a blessing to so many people because you are no longer constrained by the employers that are in your immediate geography. This is why I'm saying it doesn't matter where in the world you live. You can still target getting a job at Facebook or Google or Invidia or a company that is located in the Bay Area, especially given the rise of remote teams. So that's why I specifically said to target those companies because you don't even have to live in the Bay Area. I'm especially given the rise of remote teams. So that's why I specifically said to target those companies because you don't even have to live in. those geographies to work for companies that are based in those geographies. And just it so depends on the company, from company to company, but as a good general statement, I would rather target a company based in Silicon Valley if I want to stock raise compensation than not.

But I guess what I'm asking is, are the culture of those companies changing as a result of the fact that their employees are becoming more geographically diverse? You mean are there compensation factors? Yeah, yeah. So, again, this depends on the culture of the company. broadly speaking, my hunch would be the culture that a company has matters more, and their stock-based compensations at the company matter more than necessarily the geography that you have. For example, I used to work at a company that was based around Boston. I was in sales, and I worked in a different

geography than the headquarters, as did everybody else that was in sales. We all had our geographies. The compensation that they paid was tied to not where the person was located, but it was tied to in benchmark against other Boston employers. So the stock base compensation that people get, the salary that people get, the bonuses that people get, it was agnostic to where you live. It was just based on the practices of the companies itself. Now, whether or not companies are adapting to say we pay different amounts depending on where you physically live, again, that depends on the culture of the company itself. But generally speaking, companies just want the best talent. And they are willing to pay for that talent regardless of where you live. So that might be a trend that's worth watching, but I have no

data to support that. Tell me about ESPPs. ESPPs are another common benefit that companies can have to help their employees to become shareholders. So ESPP, let's define what that means. That is employee stock purchase plan. This is a plan that is set up by a company that gives their employees the right and often an incentive to actually use a portion of their salary to become a shareholder in the business, effectively turning their employees into investors in the very company that they are working for. Now, as an incentive to get their employees to buy the company's stock, they often do so by allowing them to buy the stock at a discount to what the actual market price of the company stock is trading at. For example, I can speak intelligently about the company

that I used to work for. So I worked for a publicly traded company, and we had an employee stock purchase plan. And the way that it worked was every six months, you could contribute money to your employee stock purchase plan. And every six months, the pool of money that you contributed would go to the open market, whatever the stock price was trading on the end of that six month period. So let's just say June 30th, let's say the stock price was $20. Well, I would. would buy that stock at a 15% discount. The market price was 20, and I could actually buy the stock at $17.17. So I would pocket an immediate 15% return on my investment simply by buying the stock at a discount. And again, depending on the culture of the company, sometimes the ESPPs can be

far more generous than the one that I described. For example, one of my friends worked at a company that had an ESPP that was similar to mine. However, rather than buying it at a 15% discount to the closing price that the stock was trading at, his company allowed him to buy it at a 50% discount to the lowest stock price that that company traded at over that six-month period. So it was the absolute lowest price of the stock traded at minus 15% from there. So in some cases, he was buying at a 40 or 50% discount to the closing price of the stock, simply because he was buying at such a low price. Again, if that is a benefit that you have, you should seriously consider taking advantage of that because you can contribute a lot of money

to that. That stock instantaneously becomes yours. And not only could you hold it, but in some cases, you're earning an instant, instant 15% return on your money and you could sell right away. For those watching on YouTube, you should see Brian's face right now. I have known you for years. I've never seen you get so excited about a topic. I get very excited about ways to game the system to be able to out very quickly, Paula. All right. So then tell me more about how to exercise the ESPP option. Yeah. So this is going to depend, again, on the company you work for. Some have rules like you can't get access to an ESPP unless you've worked at the company for a year. And the unfortunate truth is so many of these programs, the details really matter.

Like the specific details about the vesting schedule, about the ESPP discount, whether you get RSUs versus ISOs, the details really matter. And those details can be the difference between tens or hundreds of thousands of dollars. So at the very least, if you work for a company or want to work for a company that plays stock-based compensation, understand the documents that you are reading and how they compare to other companies. And what are the elements that you need to understand or ask differently, What are the elements that people often misunderstand? First off, they don't understand what a stock is. So many people are just completely uneducated about what a stock is, how the company relates to the stock price, what stock-based compensation is.

Like the very basics that we're covering on this podcast, so many people don't know. So bookmark this episode. Yes, absolutely. In fact, I have a really sad statistic that I read. In 2022, stock options have a expiration period to them. and it's usually like a 10-year period. I read that half, half of stock options that were in the money were not exercised by the employees that had those, simply because those employees were confused, didn't know what the stock-based compensation was.

The company was giving them money. All they had to do was exercise it and they didn't. And that ended up being worth zero because, again, they didn't take advantage of the option. And I have to believe that is entirely due to just. not understanding, not understanding what they were actually doing. This is an important topic. It really can add tens of thousands of dollars to your annual compensation. So learning about the basics and making sure you understanding them is really critically important.

What you've just described, that's almost like people not taking their 401k employer match. Yeah, that's exactly right. I think the number was one out of five workers are not taking full advantage of their employer match, meaning their employer is literally saying to them, here is free money and those employees are saying, no thank you, I don't want that. Now, of course, they don't understand that they're saying, no, thank you, I don't want that. But it's just the same thing with these stock options that expire and aren't exercised by the employee. The employer is trying to give them money.

They don't understand that and they're saying no. So it's amazing how a little bit of education, just a little bit of education about these boring topics can make a huge difference. Right, exactly. And again, to emphasize, stock options only become valuable when the price of the stock is trading at higher than the option price. Yes, absolutely. So if that is happening, track your expiration dates. At the very least, if you have stock-based compensation, a takeaway right now should be to go to your company, pull up your stock-based compensation and see what the expiration date is. And make sure you don't let that go unexpired if you're going to make money on it. Wow. You talked earlier about companies that are headquartered in California or generally coastal companies, because you also mentioned Seattle, New York, Boston, D.C. What are some of the industries

that pay the most? It depends from company to company. There are, of course, examples of companies that are very generous and very stingy from industry to industry, but there are some general trends. This is going to surprise nobody, but the technology sector is the most generous when it comes to paying stock-based compensation, which makes total sense. When I think California, I think tech company, right? So the information technology sector, in general is very known for paying very high stock-based compensation. Another sector is communication, is the communication services, which you could kind of argue, well, that's kind of like tech communication companies

are often intertwined with technology. Another one that might surprise people. Healthcare. Healthcare companies actually often pay very high levels of stock-based compensation. So you can think of the big healthcare employers out there, whether those are insurers or medical device makers or drug makers, especially small drug makers or biofarmers, those typically pay very high levels of stock-based compensation. And then there's the financial industries. So your Goldman Sachs, your Morgan Stanley's, your JP Morgan's,

oftentimes the employees at those companies get very high levels of stock-based compensation. Now, on the flip side, there's a couple of industries that are typically known for not paying high levels of stock-based compensation. Those would be the material. industries, so makers of actual materials that are supplies to other industries. Lumber, things like that. Utilities, working for utilities, they typically don't pay high levels of stock base compensation. Restaurants and retailers, those don't pay high levels of stock-based compensation. And then your older, bigger, I would say more stodgy companies, like your Procter & Gamble's, your unilevers, your long-established companies, their compensation practices were set up decades ago,

Oftentimes those companies are very stingy with their stock-based compensation unless you're in the C-suite or at the executive a level. But if you're just a rank-and-file worker, you should definitely be targeting the healthcare industry and the tech industry. Those are your two industries that are most likely to pay high levels of stock-based comp. You actually ran an analysis of the companies, specific companies, that pay the highest levels of stock-based comp. Tell me about how you actually ran this. So first off, we should say, I'm an investment. I invest in individual companies. I analyze individual companies. So when it comes to stock-based compensation, everything we've said has been from the employees' perspective, how the employee

can maximize their compensation and how the fundamentals of the company matter for the employee. As an investor, I want the opposite of everything I just said. I want to invest in companies that do not pay high levels of stock-based compensation because that dilutes me, the investor. So using a tool that I love that's absolutely free, it's called finchat.io. It's a tool. It's a financial aggregator. And one simple screen that I ran on this financial aggregator is I compared the dollar amount of stock-based compensation that a company pays, which is a number you can look up, compared to the company's revenue. So how high is a stock-based compensation they pay compared to the company's revenue. And Finchat only has information on publicly traded companies. And from there,

I just sorted, who pays the highest amount of stock base compensation as a percent of revenue. So this screen identified companies like Ginkgo Biow Works, which I believe is a biotechnology company. It's got Maple Bear. Maple Bear is the corporate name for Instacart. So if you can get a job at Instacart, go for it. You can probably get a very good stock by compensation package. Another is called c3.aI or Confluent or FreshWorks or Sentinel 1 or Upstart or Asana or PagerDuty or HashiCorp if these companies mean anything to you. If you can get a job at these companies, your odds of getting a very generous stock-based compensation package are high. So as part of my research on any company, I'm always looking into how much stock-based compensation that they pay.

you can do that same level of research as an employee and specifically target publicly traded companies that have very generous stock-based compensation packets. And as you said, if you're interested in this list in the simple screen, simply click the link in the video description. Perfect. Well, thank you, Brian, for spending this time with us. Is there anything that I haven't asked about that you really want to emphasize? Well, I just re-emphasize it again. First off, just understand that stock-based compensation can be a dull topic that people don't think about. Employers typically don't do a good job of educating their employees about what stock-based compensation is, but it can be a massive, massive accelerant to your net worth. And if you're on the journey to FI, targeting companies

that pay high levels of stock-based compensation can save you years of savings because of the paydays that you can get. So like everything, I'm a massive believer in financial education. Educate yourself. Right. And because we're talking about tens of thousands of dollars of your net worth that could be affected by this, if not hundreds of thousands. Yep. I mean, personally, the company that I worked for right out of college, just sheer luck. This was not a plan that I have, but sheer luck, I was given some stock-based compensation in this company. And I was the lowest-ranked employee of this company, the absolute lowest-ranked of employee. And I only got a few thousand shares of stock-based compensation. That company

went on to be hugely successful, and that stock-based compensation for me added $50,000 to my personal net worth. And that was me selling many years ago. If I didn't sell at all, that would be worth $300,000 currently. And it was a benefit that I didn't even understand when I was signing up for it. And I didn't negotiate. I didn't negotiate any stock-based compensation at all. So that was just like, that just shows you how valuable this can be. And that was me doing it on accident without understanding it.

And yet it was hugely accelerate to my journey to FI. Right. You didn't negotiate. Let's just say hypothetically, you had negotiated. And rather than it being worth $50,000 to you, then it would have been worth. we'll just say even 10% more. So if you had negotiated and you had received an extra 10%, that would have been a difference of $5,000. And that was as a result of you selling when you did. If you hadn't sold when you did and it was 10% different, then rather than it being worth

$300,000, it would have been worth $330,000. That negotiation would have been a $30,000 difference. Yep. The leverage you can get from small differences in stock-based compensation, if the company work for a successful, can be worth huge amounts of money in the long term. term. So yeah, the details really matter. Yeah. Well, thank you for spending this time with us and really going through what stock-based compensation is, why it matters, and how it can make a difference of tens of thousands, if not hundreds of thousands, to your net worth. Happy to do so, Paul. Always to be here. Thank you, Brian. What are three key takeaways that we got from this conversation? Key takeaway number one. In your journey toward financial independence and growing your net worth,

Stock-based compensation can be a super powerful tool. It can be rocket fuel on your net worth. But it's often underutilized because a lot of people don't know to ask about it and don't know to negotiate for it, don't know to really think about it. It's a competitive job market today. And particularly in certain sectors like tech and healthcare, there are a lot of companies that are making offers, sometimes quite generous offers, around restricted stock units, RSUs or stock options.

And the better that you understand and optimize this form of compensation, the more that you can potentially grow your net worth in the best case scenario exponentially, especially if you align with companies that have a strong track record of stock appreciation. It can be a massive, massive accelerant to your net worth. And if you're on the journey to FI, targeting companies that pay high levels of stock-based compensation can save you years of savings because of the paydays that you can get. If you are applying for roles at companies that are known for generous stock compensation packages, particularly in the tech sector or in other high growth areas, you could significantly shorten

the timeline to achieving financial independence. All of that is to say, do not overlook stock-based compensation when you are negotiating with hiring managers and when you're negotiating for your next role at your next company. That is key takeaway number one. Key takeaway number two. We mentioned negotiating in the previous key takeaway. I really want to focus on it in this one because negotiation is not just a skill. It is an essential strategy when it comes to maximizing your compensation package.

The initial job offer that you get is your prime opportunity to influence the structure and the magnitude of your stock-based compensation. And in order to do that, in order to engage in this conversation effectively, you need to first understand the nuances between different types of equity, such as RSUs and ISOs. For example, RSUs offer guaranteed value as they convert into shares of the company's stock upon investing, whereas ISOs depend on the stock price rising above the exercise price. Those are the types of things that you need to know going into the conversation so that you can have an informed negotiation. When you are accepting a job at one of these companies, your strongest ability to negotiate is right up front. It's very common for companies to give very large incentive packages on the date of your hire, and that is your opportunity to negotiate, to really make sure that you try and maximize the amount of stock-based compensation that you get. So that would be point number two.

Point number three is, if possible, try and get more restricted stock, RSUs, as opposed to incentive stock options. ISOs. Restricted stock is the one that just becomes yours. So 1,000 shares of restricted stock, you should prize that higher than 1,000 shares of incentive stock. Those things, targeting companies that pay very high stock base compensation, doing your best to negotiate right from the get-go, and asking for RSUs versus ISOs, those things alone can make a massive difference in your stock waste compensation. Negotiation is important for everyone, no matter what type of job you're in. But in particular, if you are going into an industry that is known for high equity compensation, where the potential upside can be considerable, it is especially important to learn

how to negotiate for all forms of compensation, including stock-based compensation. So that is the second key takeaway. Finally, key takeaway number three, don't let complexity over you. The thing is the complexity of stock-based compensation, including the intricate details of vesting schedules and the nuances like we talked about previously between RSUs and ISOs and this and that and the other, right? The complexity, the tax implications, the vesting schedule, all of this can lead to a feeling of overwhelm, which then can lead you to kind of throw up your hands and say, you know what, I'm not going to even try to wrap my head around it and I'm not going to try to negotiate for the best offer, and that often leads to missed opportunities. If you don't have a

comprehensive understanding of how these mechanisms work, you might be leaving huge sums of money on the table, either by failing to exercise your options or by failing to negotiate for them properly in the first place at the time that you accept your job. Learning about stock-based compensation is absolutely crucial if you have a job or if you are applying to jobs in sectors or in companies that offer this type of compensation. Half of stock options that were in the money were not exercised by the employees that had those simply because those employees were confused, didn't know what the stock-based compensation was. So here's the bottom line.

lack of understanding can lead to huge financial losses because unexercised options can expire worthless. And of course, the options that you don't negotiate for, the options that are never included as part of your compensation package in the first place are options that never become part of your net worth. Allowing yourself to feel overwhelmed, deciding that you don't want to think about it because it feels too confusing or too daunting. I get the temptation, but But that can have a huge impact on your total net worth and a huge impact on your path to financial independence. So that's the third and final key takeaway is don't give in to this feeling of, oh, my gosh,

it's so complex, I don't want to deal with it. It's natural at the beginning to feel that way. But stick with it, learn about it. This is what financial literacy is. You approach a subject that initially feels really daunting, and you engage with it, you grapple with it, you learn it, and soon it becomes second nature. You get it. And once you get it, you can walk into a negotiation with confidence. Those are three key takeaways from this conversation with Brian Furoldi.

I've mentioned negotiation several times during these key takeaways. We are building a course right now on how to negotiate and specifically, you know, the course is about how to negotiate overall for anything, whether you're buying a couch on Facebook marketplace or buying a used car. But the specific focus of the course is how to negotiate your compensation, how to negotiate for the strongest possible pay package. The course is currently under construction. It is not available yet. It's not ready yet. but we are looking for beta testers.

So stay tuned. We're not ready to bring beta testers on board yet, but we are likely to be ready by the end of August, end of August beginning of September. Stay tuned for more information because we are going to be looking for beta testers for our course on how to get paid more, how to negotiate for a better pay package.

So again, there's no place I can send you right now other than generally sign up for our newsletter, afford anything.com slash newsletter, because we will be emailing this out. But there's no place I can send you right now. I can just let you know that this is in the background. I mean, I just flew back. I'm recording this right after stepping off the plane, having flown back from Boise, where I spent the whole last couple of days in a recording studio shooting material for this course. So, and last night, 1 a.m. I'm on WhatsApp with our development.

like this is deep in the throes of construction. And it's going to be an amazing course. It was scripted by the best negotiation teacher I have ever encountered. And she is incredible. She taught at Columbia. She wrote the script. She wrote the exercises. She's guided the entire outline and structure.

So we're really looking forward to it. I think it's going to be the most effective. course out there. I've taken a good look at some of the other courses that are out there on how to how to negotiate. They're nice in theory, but a lot of them really lack in interactivity, in exercises, in practice. Ours is designed to be incredibly interactive. So I think it's going to be one of the most effective, the most effective course out there in getting you to practice and getting you to build that muscle. At any rate, our whole team is working to get this to the point where we are going to be ready to take on a beta cohort. So stay subscribed to this podcast. We will announce on the

podcast when we're ready and sign up for our newsletter, which is free afford anything.com slash newsletter. We will also announce there when we're ready. And we're looking to be ready for the beta cohort at the end of August, beginning of September. And I hope to see you there. All right, well, thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. If you enjoy today's episode, please share it with a friend or a family member. That's the single most important thing that you can do to spread the message of great financial health.

Please sign up for our newsletter, afford anything.com slash newsletter. And please chat with other members of our community, afford anything.com slash community. Thank you again for tuning in. I'm Paula Pant. This is the Afford Anything podcast, and I will meet you in the next episode. episode.