The Derivative - What are the Options for tech employee Options, With Bryce Emo of Sidecar Financial

Episode Date: April 6, 2023

Today’s episode we are passengers on Bryce Emo’s rig, as we ride along and chat about how his company Sidecar Financial assists in providing private company shareholders the knowledge and network to find what can be life-changing liquidity. Bryce explains why stock option-based employees at big tech companies need the “lending hand”, and covers all the avenues available in helping navigate their journey to success with education on the options for their options. Bryce & Jeff are climbing the wealth ladder chatting about “unicorn” tech companies, what recent layoff’s in this space did to the buy and sell side of secondary markets last year, thoughts on the advancement in A.I., and also don’t miss both of their Half-baked investing ideas that are surprisingly not too shabby. So, take a seat next to us, hear about Bryce being a leprechaun at Notre Dame, and get ready for an entertaining discussion! SEND IT! Chapters: 00:00-02:23 = Intro 02:24-06:29 = Leprechauns to Unicorns? 06:30-18:24 = Public stock vs private stock & finding liquidity 18:25-34:00 = Why aren’t companies looking for the carrot themselves? 34:01-50:44 = Equity lending, Sellers, Institutional buyers & Secondary markets 50:45-57:12 = Companies biggest pitfalls & thoughts on A.I. 57:13-01:08:09 = Half-baked Ideas – what’s a drunk elevator? For more information please visit sidecarfinance.com or follow Bryce & Sidecar Finance on LinkedIn. Don't forget to subscribe to ⁠⁠⁠The Derivative⁠⁠⁠, follow us on Twitter at ⁠⁠⁠@rcmAlts⁠⁠⁠ and our host Jeff at ⁠⁠⁠@AttainCap2⁠⁠⁠, or ⁠⁠⁠LinkedIn⁠⁠⁠ , and ⁠⁠⁠Facebook⁠⁠⁠, and ⁠⁠⁠sign-up for our blog digest⁠⁠⁠. Disclaimer: This podcast is not an offer to buy or a solicitation to sell a security the podcast is a discussion pertaining to one or more investment strategies and or asset classes and is not a discussion of any specific offering past or present of securities. As a reminder, there is no guarantee that any investment or strategy will perform as targeted. Past performance is no guarantee of future performance and any investment involves risk of the loss of some or all principal invested. The podcast contains statements intended for educational and hypothetical purposes only, and is not to be construed as a primary as a promise of performance. information presented herein reflects the opinions of the speakers and is from sources believed to be reliable that all information is subject to change. You should always speak to your finance and or tax professional prior to investing Securities offered through Emerson Equity LLC Member FINRA coppice. Only available in states where Emerson equity LLC is registered Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Happy Master's Week for those that celebrate. You could be several holes to several days in by the time you listen this pod uh and i blew it i could have had the best golfer in the alts industry on or something like that this week except i don't know who that is uh most of the fun managers i

know don't golf wonder why that is too much time coding not enough time putting anyway if you know a manager who is a great golfer hit me up d, DM me, whatever, and we'll get them on. Figure out why that is. On to this episode. We're going back up the wealth ladder a step or two. Or is it down the wealth ladder? I'm not sure how that works. But talking not about the managers managing the wealthy's money, not even talking about the liquid wealthy.

We're talking with Bryce Emo, a longtime friend of mine and founder of Sidecar Finance, who helps the illiquid wealthy. What are those? Those are people with millions locked up in private stock and this or that unicorn tech company looking to get some liquidity. A cool concept and surprisingly one that touches on a lot of what's going on in markets today. SVB's effect on the secondary market, how private buyers and lenders in this space do markdowns and follow public markets down, even if the private equity and VC marks don't, and just what the tech rec last year did on both the buy and sell side of this market. Plus, we get to hear about Bryce talking about being a leprechaun and his own, and my own, half-baked ideas. It was fun. Send it.

This episode is brought to you by RCM's Managed Futures Group and the newly released Rankings White Paper, where we go through dozens of top performing funds. Go check it out at rcmalts.com slash rankings, rcmalts.com slash rankings. Now back to the show. Okay, everybody, we are here with my good friend,ryce emo what's up bryce what's up jeff good to be on the show bud yeah good to see you haven't seen you since sun valley idaho did some skiing it's been weeks weeks weeks uh and you're calling in are you calling in no you're calling in. Are you calling in? No, you're zooming in from beautiful where? Mill Valley, California, just over the Golden Gate Bridge here. And that's where you can get like a $5 million house that doesn't have air conditioning?

That's exactly right. It's a heck of a deal. Heck of a deal. Get them while they're hot. Get them while they're hot. It's because it's so nice there. it's like perfectly 65 all year round not this year it's been so in fact this morning there was frost on the uh the couch cushions outside so it's been a really cold wet winter which we've welcomed given the drought in recent past um but i think we've had enough

this is where the saying, and when it rains, it pours must've come from when it rains, it pours. Uh, so yeah, Bryce and I have known each other for 20 years, 15 years or so from when he used to live in Chicago. Uh, he's one of the most interesting guys I know, including a brief stint as the mascot as the leprechaun at Notre Dame. Tell us how that went down. Yes. There's very few people that are short enough to qualify. Really elite kind of position. But I spent my life, my early life as a gymnast and in kind of a yell leader, I guess, in high school, along with being a gymnast. And so when I ended up in Notre Dame, you know, my friends coaxed me into trying out for the leprechaun role and was thrilled to do it.

At that time, I was one of a couple of leprechauns. There's two every year then. And now I think there's six. There are so many different sports between men, women, basketball, volleyball, hockey, what have you, football, of course, to cover. So it was a great time. What? And it's name's just the leprechaun? There's no like lucky the leprechaun or anything fun like that? The leprechaun. That's it. That's it. And how many games did you get to go to? Football games?

So I covered women's sports mostly as the junior guy. So I did the blue gold game. And I can't say that I did a football game in Notre Dame Stadium, which is something I would like to, of course, have had the experience to do, but it wasn't in the cards. But if I look back, you know, clearly I love being in the world of finance, but perhaps I should have focused coming out of college just on women's athletics, given the crazy trajectory of growth that it's enjoyed and I think we'll continue to enjoy in the coming decades. Yeah. You could have been owning a couple WNBA teams, had a few women's soccer teams. That's right. Newly announced one here in San Francisco. What's the deal with San Francisco?

We just elected this new mayor last night. Everyone's immediately putting up their houses for sale and thinking all the talk is like, this is going to turn into San Francisco. Is it as bad as the national media portrays or still hanging in there? You know, I think that all cities are going through a point of change right now. You know, COVID exacerbated that just a little bit, but certainly, you know, San Francisco, it's not a place where I spend a lot of time downtown. Um, and, and it's had a number of issues, but I think, you know, we were in Baltimore over the weekend.

Baltimore is not a place where there's certain areas of downtown Baltimore. You don't want to live clearly. Um, so we'll, we'll see how San Francisco, uh, plays out with the new mayor. Um, but, uh, but yeah, it's tenuous for sure. Yeah. All right. Uh, and plus all the layoffs and all that we're always talking about people how they can invest hedge funds they invest in after they've made their millions you're sort of in this little in between phase where they're on their way to

making their millions or have their millions locked up right so uh tell us a little bit about what you're doing at sidecar and what the what the 30,000 foot elevator pitch to i had two uh different sayings in there mixed together 30,000 foot view and the elevator pitch which i made into give me the 30,000 foot view and the elevator pitch, which I made into, give me the 30,000 foot elevator. I like it. That's a hell of a pitch. You get a 30,000 foot trademark coming. Yes. So Sidecar Finance is a brokerage group. We're focused on helping private shareholders find buyers, find lenders, find financial groups that'll do structured financings against private shares in private companies. Largely, it's multi-billion dollar companies, but especially with the recent sell

off, of course, in technology and valuations being down from where they were, at least currently, more and more people are looking to do structured financings and what have you to find a way to get liquidity. So we're talking like Uber before it went public, Airbnb, these kind of things, pre-IPO. Correct. Correct. Correct. So, you know, Stripes of the World, what have you, are some examples of, you know, Flexport. Who else have we got? Discord is a popular name, these are companies that are worth billions and billions of dollars. You've got thousands, in some cases, of shareholders at those companies that are sitting on paper money the same way they would have in 1999. Millions of dollars in most cases.

And they're hoping the company might go public this year. They've got families. They've got different career goals, different life expectations and aspirations that they're trying to achieve. And largely they've got a very small salary, but millions of dollars in equity. So we help them find ways to get liquid on that equity so that they can achieve some of these milestones that they're trying to achieve in their lives. And what in the old days wouldn't have been like, well, you're stupid. You shouldn't have chosen that profession where you didn't get paid. Right. Where it's all locked up and illiquid. So that's always weird to me of like, OK, you chose this.

Why do you get to get it both ways? So what's the what's the downside? They have to pay to get that liquidity. Yeah. So, you know. It will be interesting to see in the coming years, right? As you have super talented engineers, salespeople, product people, operations folks, who have chosen to not go to large publicly traded companies and opted into startup companies with potentially more risk, right?

And potentially more upside. It'll be interesting to see if that career path continues to hold, especially as people see, you know, psychologically to go from having, let's say $10 million in equity to then not being able to find a buyer. They'll pay you $3 million for it, which can happen in some of these cases. Psychologically, that's really hard. And, you know, it's, what would they say, it's harder to have one. What is it? What is the same? Better to have loved and lost? Yeah, better to have loved and lost. On a 30,000 foot elevator?

From the 30,000 foot elevator. That's's right. It's psychologically difficult on these people. Again, they're signing up. They're coming from great schools. They have outstanding backgrounds. They're signing up for relatively low-paying salaries. They're living in a hyper-expensive area such as San Francisco many times. A good portion of the unicorn companies are out here, though certainly Silicon Beach and Silicon Valley and Austin, Texas are hotbeds for entrepreneurial activity and venture capital funded companies. But they're living in

hyper expensive places. And it's trying on these people, right? I have a guy that I spent some time with, let's say three years ago now, and he was sitting on a $5 million of stock and he would drive a Lyft car to and from the office to make money to send his son. Not take a Lyft. He was a Lyft driver. So be careful being mean to any Lyft or Uber drivers. You have no idea. There might be a multi-million dollar shareholder sitting in the front seat. And that person has been able to get some liquidity. So they've changed paths. They're not driving Lyfts anymore. But it's so often the case that these folks just don't have enough

funds to meet the needs of their daily lives. Which again, as part of me, it's like, well, you screwed up, but also not because you have this huge, big portion of the company. So what it... Right. And actually in that example, if we play that out, right, Jeff? And so this person, they spent 25 years in traditional industry and then kind of on a whim took this opportunity. And if they had continued down their career path, maybe they would have made 100 you know, a hundred to $150,000 a year for the next, um, you know, 15, 20 years of working, right. Versus they would, they went, they took a job, they're at a company for five years, then their shares were worth 5 million. Now, even with the, you know, sell-off in the tech market, those shares are still probably

worth, call it $10 million. So if it worked out, a lot of times it doesn't, right? More often than not, it doesn't. Being able to pick these companies takes, the companies you're going to go work for takes a very astute person and a lot of luck sometimes. Which I'm going to jump all around here because that's what I do. But so you kind of ended up in this role because some of the companies you'd been at didn't quite work out. Precisely. Well, they actually have worked out fine. The reason why I came to this space was 10 years ago, I needed, call it a few hundred thousand dollars to buy options in a company that I was leaving

where I'd been the head of sales. And then much more than that in tax. Tax is the greatest expense a shareholder will generally have when they're trying to exercise options. And many people, when they take these roles, don't understand just how expensive the tax and the cost of exercise is going to be. So 10 years ago, I needed a bunch of money. I had a choice to self-finance part of it or go to the secondary markets and find a lender or a buyer. At that point in time, 10 years ago, these markets were in their infancy infancy. I

mean, there were almost no players. And I actually ended up not finding anyone at all and ended up having to self-finance that exercise and the tax. But I was captivated by him. And so I stayed engaged with them. I stayed engaged with some of the players in the space. Four years ago, when the co-founder of MySpace, where I prior ran sales at MySpace as well, I can talk about that a bit. That's like a joke now, right? But yeah. It's a great joke. It was a social network for those of you who are 35 years old. And so four years ago, co-founder of MySpace starts a company called Quid, which provides limited recourse advances against private shares, asked me to come on board and build

and run the sales organization there. So that's what brought me into this space four years ago. And after speaking with a thousand shareholders a year and hearing from them, one, a lack of knowledge about this space, a lack of knowledge about their equity and the stress level in their voices and the conundrums that they had,

I knew there needed to be a third party who could sit with them alongside them and help them navigate this entire journey and figure out, should I do anything? Should I even buy these options? Can I get an extension? Should I sell shares? Should I take out a loan against my house? Can I get a limited recourse transaction, et cetera? And so that's where we are today. A lot of people in my mind will be like, oh, just call your financial advisor, but they're at maybe the stage where they don't yet have a financial advisor or have the need for one because they're not throwing off tons of cash that gets invested. Yeah. So there are financially, certainly, now we're going to talk about public stocks

versus private stocks. So these are private stocks. These are stocks that are illiquid for the most part. And so it makes it very hard for traditional banks to be able to give you any value or advance against that because there's so much risk. The folks who are able to get advances or loans against private shares are largely C-level executives, founders of companies. And the reason why these banks are willing to do it is they'll do it almost as a trade for winning their wealth advisory business, maybe the opportunity to take the company public, what have you. There's a number of groups.

It's going to be a $50 million client. Five years from now, I'm willing to take the risk on the loan. Yeah, we'll give you $3 million today. And the loan to value ratio is meaning how much they'll advance you against your shares. Let's say if you had $100 million, they might only advance you $5 or $10 million versus some of the other players in the space today might provide you 20 million or in the heyday, I don't know if it's heyday, but a year ago, maybe they would have provided you $30 million. And so traditional banks really aren't that active in this space for employees that aren't a owner of a company, a founder of a company, a very high level ranking person at the company. So when you even get into VPs of sales or VPs of legal or ops

people, a lot of those people can't get those loans from a traditional bank, and yet they might still have 10, 50, $100 million, $200 million of stock. And again, they've got milestones they're trying to achieve in their life that they don't have the resources to do. Trey Lockerbie So talking about the traditional banks, so Silicon Valley Bank, were people like that, these regionals, especially in that area of the world, more willing to do these loans? Yes, there's a number of people who, you know, in this space who were who are willing to do these loans. And I don't think it's definitely not isolated to, you know, Silicon Valley Bank. And again, these are relatively low loan to value loans. Right.

So there should be, you know, theoretically, there's a lot of coverage there. Theoretically. So, and tell me that level again, what was it? 5%? 5% to 10% kind of the value of the stock. And it's going to range certainly based on the person, based on the company. If you're dealing with a company that doesn't have any revenue, it's going to be really hard to get a loan anytime. If you're dealing with a company that has a billion dollars in revenue and growing by 50% year over year, that's theoretically going to be a company where lenders will be more active. Why aren't the companies themselves helping these people out? It seems like they're just kind of out on an island and trying to find people like you to be like, hey, somebody help

me figure all this out. Should I take these up? Should I not? It seems like the companies are a little at fault of like, hey, you're a billion dollar plus company. Help take care of your people and tell them what to do here. Yeah. So think about companies. They want people to work hard. They want people to be very tightly tethered to the success, the vision mission of these companies. And the way they do that is equity. That's why there's a, you know, the potential to, you know, have a win, a windfall of cash. Super big carrot. Yeah. If you can, super big carrots, good way to put it. Whether you can achieve that or not, it's uncertain.

And so that carrot, they'd rather, you know, it's like the dog track. You know, if the dogs ever get woody, the little guy who's running out in front of them, it's a disaster. Right. Dog never runs again. So I think that's what I think that's what companies are scared of. One, two, they're dealing with, you know, it's a little bit of a Pandora's box. Right. As soon as you say, hey, cool, you guys can go sell shares. Now the head of legal, the head of finance, the head of operations, the CEO, they're managing a lot of complexity. They've got to decide who they'll let in and who they won't. Now you have many more people to manage on the cap table. And so it just

adds to the complexity. It's a distraction, what have you. More companies, up until let's say a year ago in these markets, when the buyers started to be less active, more companies were starting to do tender offers, right? So, hey, it's sponsored by the company. Here's the price. We know the investor. You guys have 30 days, 60 days to decide if you want to participate or not. You can sell 10% of your shares, 15% of your shares, 25% of your shares and get enough funds to be able to either exercise your options. If that's something that you want to achieve, maybe you want to go to another company or maybe just want the peace of mind of owning your stock, maybe the 409A, or the fair market value is low, and so you want to take advantage of that. Or you want to buy a house,

take care of a loved one, pay for school, what have you. So companies are more open to this than they've been in the past. This topic five years ago, if you brought up to a CFO or a head of legal, they had an allergic reaction, right? And I didn't want to hear about it, didn't want to deal with it. And now it's become something that companies are willing to discuss, which is great. And they're willing to act on so long as it's kind of within their parameters. And I think the reason why they're open to it is they've realized there's a competition for the best talent in the tech space, right? And engineers, product people, salespeople,

revenue people, ops folks, when they come to a company, they're saying, are there scheduled liquidity events? It's great. They're giving me all this stock. How am I going to realize the value? Or are you telling me that you're giving it to me now? I've got to earn it over four years and I'm probably not going to see a liquidity event for five or seven years. If so, I've got to plan my life around that. And so that's a question that these senior level people are asking when they go into companies. And of course, that's then causing the CEO to say to the CFO, hey, we got to come up

with a plan for this. We got to have a solution. How does the VC community feel about it? They're fine with it? Keep the employees happy? Like, to your point, and there were a few platforms that popped up where people could actually sell their shares in some of these, right? Right.

But that, as you're saying, required the company and legal, everyone to get involved, probably the VCs as well. Like, hey, don't dilute our shares. So most companies will have what's called a right of first refusal, a ROFR, right? So if I'm an employee at a company and I've got shares that I own, I want to sell them. I go to the company and they've got a 30-day right of first refusal often. It's become kind of standard language in a lot of different employment agreements. So standard, it has a little term, ROFR. Yeah, yeah. They've got an acronym for it. It's great. Al ROFR. And so they'll come to the company and they'll say, okay, Jane Doe wants to sell shares in XYZ company. The company says, okay, great. Let me figure out if we have the right to, let's say they're going to sell them at $10 a share.

The company has 30 days to decide if they or one of their investors essentially wants to buy them at $10. If not, then they say, no, you're good. They can say one of three things. Hey, you're not allowed to transfer these shares. Two, we're buying these shares. Or three, we're not going to buy them. You can transfer them. Go ahead and do this trade with this third party and we'll give you the forms and the legal docs that we have already approved that you'll fill out for that transaction. And that's part of your business can even do those, right? You're not just setting up the lending, but it's a whole suite of like, hey, what are the options that they could take? What

are the doors? Yeah. So 90% of people want to sell and we help them find buyers. And then we manage the paperwork around that transaction as well. That's interesting to me of like, why that seems like a super high number to me that they're not like, no, I want to stay invested and I believe in the future of the company. They're just like, get me out of here. Give me cash. Well, if you think many of these folks that I speak with, they've got 60, 70, 90% of their personal wealth tied up in these companies, right? They want diversification. They want to be, they want to, not just for financial purposes, almost for psychological purposes,

because they're seeing anytime you work at a company, whether it's a hyper successful company or not, there are bumps in the road. Right. And so when you hit those bumps, you hit those speed bumps, you know, you get a little rattled and when 95% of your wealth is in a company, you get even more rattled. And so mainly they want to diversify and just take the assets and put them in different asset classes or in different hyper growth companies.

There's exchange funds that are popping up where people can trade XYZ shares for ABC shares, which is something that- That a clever idea like hey two of these stressed out 95 percenters so let's swap some of our shares so we're diversifying ourselves i like that um so that's door number one door number two yeah door number two is there probably five or six groups in the in the space that will provide what's called limited recourse advances. The way they market them in the industry is non-recourse loans, but if you're talking to a lawyer, you'd probably call them a limited recourse advance for a couple of reasons. One, they're generally not loans. They're actually prepaid variable forward contracts. And there's a number of reasons why people do those. Uh, and so it's actually an

advance against your equity. So if you've got $10 million in a company, in a private company, these folks will provide you anywhere from 20%, call it the 30% of the value of your equity, um, at a price they deem year and a half ago, it was at the last preferred price, but with valuations in the public markets coming down, buyers are trying to comp against those public market stock prices to a certain degree in order to give themselves some advantage and to get it right for their LPs and for their investors. They have a fiduciary obligation to do that. And so long story short, against $10 million in shares, you'll be able to get, call it $2 to $3 million from one of these non-recourse or limited recourse financing.

And what's the... So just stick with the non-recourse for a second. They're basically saying, hey, even if the stock goes to zero, you only owe us the 2 million. That's right. Your recourse is limited to the value of your shares. Yeah. Right. The value of your shares. So if your shares are worth 100K, you pay back 100K. That's right.

On a $10 million piece of stock, if you get $10 million in equity, you get advanced $2.5 million if the stock goes to $100,000, so long as you don't violate any of their bad actor clauses in your contract, you owe them $100,000 back, not $2.5 million. So for people who are saying, look, I think this thing could increase tenfold or even twofold, but there's a chance it could go to zero. It's an interesting way to play the market. And you'll see people maybe not do this with all their shares, but as a strategy. So they might sell some shares. They might take a limited recourse transaction, advance against some of their shares to provide themselves optionality.

Preston Pysh, But then there's a yield on that? There is. So those companies aren't doing it for free, no doubt. That'd be a bad business. And most of them are backed by wealthy family offices, hedge funds, distressed credit groups, what have you. And so usually those folks are going to pay anywhere from a 8% to 12% annual rate, which is kind of a percentage. And then they'll also pay a percentage of their shares.

So against that $10 million of stock, they might relinquish 10% or 15% of that value. So if I get $10 million of stock at a $2.5 million advance, I might be paying $80,000 to $100,000 or $80,000 to $120,000 a year for the duration of the transaction. And then I might also be paying, if they're charging me 15% of my equity, I might be paying a million and a half in equity. So if that stock goes to being worth 20 million, I don't owe them a million and a half of equity. They actually get $3 million of equity. So it's a pretty unique space and the fees can be significant. But if you were to sell your shares at $10 million and the stock doubled,

you'd miss out on $10 million of upside. So you really have to weigh the pros and cons of both of those. And that's what we do at Sidecars. We'll build these financial models or retrofit them that looks at, and we'll look at what are the cost of these transactions? What are your exit expectations, time and price? And based on these variables, what might be interesting options for you? And then we'll go find lenders and buyers who will transact. Right. In that case, like, hey, I think we're going IPO-ing in 18 months.

Maybe I'm willing to pay 12%. If it's 60 months, probably not. Something like that of like, there's there's real time here now the nice thing that annual rate is uh and the equity fee um is pick so you pay that generally at the end so the design of these products the goal is hey we've got these people they've got a lot of equity they've got very little of their own funds, right? They can't be out of pocket during the course of this transaction because there's no money. Yeah, yeah. It's similar to how it works in the agriculture world, actually. Like, hey, these farmers don't have the money.

They planted their crops. They have everything. Advance them against when the crop comes in, when it sells. And instead of giving them $10 million for the crop, we give them $9 million and net out the financing and everything we did for them during that growing season. It's a great corollary. Yeah. Is there a door number three? How many doors?

Door number three is. And I say this to people all the time. If you're bullish on the trajectory of the company and where you think it's going to have an exit and you're going to be able to get liquid, and you have publicly traded stock, if you're sitting on $5 million worth of publicly traded stock, talk to your wealth advisor about taking out a margin loan. It's going to be your cheapest cost of capital so long as things go well for the company. So that's certainly an angle that we'll look at. There are groups that, you know, if you can't find a limited recourse provider, I have nontraditional lenders that I work with that if you've got, you know, 50 million dollars worth of stock, they'll provide you $10 to $15 million as a loan because you might not be able to get a loan from any of the traditional players. So there's groups-

And that's like private credit hedge funds and groups like that? That's exactly what it is. Yep. So that's another angle. And then there are even people that will do structured financing. So they'll say, okay, investors in this space are willing to pay $10. The last round of capital was raised at 20. We'll pay you 15, right? So you're getting a premium, but we want a guaranteed return. So we want 15% per year, 20% per year for the duration of the loan.

And we're going to have you collateralize additional shares in case you don't meet that, in case we don't get that return. And in that case, instead of delivering us the number of shares you're supposed to, they'll deliver us more. So there's a lot of different flavors of these prepaid variable forwards forward contracts structured financings uh in the space um that are floating around that's the need for someone to help them figure it all out exactly uh-huh anyone doing the mark cuban straddle basically are you familiar with what he did i i've heard of it but but maybe um you know he and this is third hand knowledge of reading it 20 years ago or whatever but in theory yahoo paid him a billion dollars for his am radio online broadcast company whatever it was called

and he was like well he bought a bunch of what what options right no he basically said these guys are idiots right if they think this thing is worth a billion dollars and he got it in yahoo stock so he went to goldman i believe and said hey um basically you can have everything over 1.1 billion dollars and i'll want nothing less than 900 million dollars yeah basically gave up all the upside and said, guarantee me $900 million. And they're like, right in the peak of the internet boom.

They're like sold idiot. You're giving up all your upside and locking in the downside. So, you know, I think a year later his stock was worth maybe like a hundred million dollars. Um, but he just left there with 900 million.

You know, I guess if you look at these limited recourse transactions, they're basically saying, hey, give us all the money today. Right? Yeah. And if stock goes to zero, we'll hand you the stock. Yeah. Right.

There you go. So similar. So something piqued my interest here, and this is a big debate currently in these, like as a general topic, let's dive into like how the market has changed over the last year with NASDAQ down, whatever it's down, 20%. Inside of that narrative is the other narrative like, hey, private equity hasn't marked down at all. And so I don't know in the venture capital world, if they're doing the same thing in terms of they're not really marking down these investments at all. But it seems like you're

saying inside these mechanisms, it's getting marked down a lot. So how does that jive with, hey, we're only going to lend to you at 10% of this because either the values come down, we can see it, even if the last sale, like you're saying, the last sale was at a billion dollar valuation. We think it's now 100 million valuation. So inside of these mechanisms, you have, I'd say a year and a half ago, the advance rates were 30% to 40% in some cases against high revenue, late stage companies that are well known, right? Today, they might be 20%. So you've just decreased your advance rate by call it 70%. And you've held your rates the same or increase them. So you've achieved the same thing you essentially would by marking down the stock. And you've done this so you can hopefully better protect your investors.

So clearly in the secondary markets, a year and a half ago, it was a firmly a seller's market. There are multiple buyers in many cases for sellers if they wanted to sell. There's a lot for, for sellers. Uh, if they wanted to sell, um, there's a lot of pressure on sellers as of last call it January, February, March, right.

As the NASDAQ started to sell off, um, buyers became much more quiet, uh, because they didn't know what the right price was. Right. Um, they just bought a bunch of shares theoretically over the

previous few years in companies and their LPs were looking at them and saying, whoa, did we way overpay there? And they're saying, we don't know yet. And so the secondary market was very quiet, I'd say last April, May, and really kind of May through December. And what happened was you got a big disconnect in the bid ask spread. So I saw a chart that said, generally the bid ask spreads 10 to 15% in secondary markets. It kind of spiked at like 40% last half of last year. And so just very few transactions were getting done. Sellers didn't believe that they should be selling at lower levels, even if they needed the money. Buyers were mostly just not in market. And if so- Hands in their pockets, we call it, right? Yeah. No bid. For a couple of reasons. One was they didn't know what the right price was, right?

The big institutions who might have, you know, they might have agreements with their LPs that they can only hold so much in private stock versus public stock. You know, they couldn't really add to their private positions aggressively because their public positions had sold off. So if I could have, you know, if I could only have 20% private and 80% public, if that 80% public was now worth 50% of what it was, then I can't add to my private position. So the institutions are really quiet in crossover funds. That's an interesting dynamic. Sorry, that I hadn't thought about. If private equity doesn't get marked down, you have this imbalance of when the liquid stuff gets marked down of like, now you're

overweight, the illiquid. Right. Sorry, I interrupted you, what you're saying? And so, you know, the institutions were certainly more quiet, though still selective, right? In companies at good prices, etc. Coming into this year, secondary markets uh really started to pick up in january february you saw more buyers more bids to found salaries that were willing to come down i think that they had you know uh drank some truth serum you know

the last half of last year because there were fewer buyers um And so things seem to be picking up and then you hit Silicon Valley Bank and the regional bank schmazzle, I'd say. I don't know. I mean, I don't know what a good word is for it. And so that's caused over the course of the last month, buyers to be taking their time, even if they were in advanced kind of discussions with sellers or in process, they're not saying no, they're just being more cautious. And, and also it's causing sellers to be more interested in selling, right? This added risk is creating some urgency for sellers to get liquid if they think they want liquidity to hit some of those milestones they're reaching for. And who are some of these institutional buyers? Without naming names, but large banks,

pensions, endowments large vcs who represent all those people right yeah generally speaking so there's a few different groups you've got um multi you know family offices multi-family offices could work with hundreds of millions billions of dollars what have you who are active in the space buying you have hedge funds that are active in the space you've got vcs that will have secondary desks that are actively buying and selling in the space, right? And same is true for every one of those groups is selling as well. And do they look at it as like, hey, I missed the last round, but here's a way to get in

at the same price or even better? Yeah, I think what you're seeing is some of these institutions who've already done diligence for the last several years, they know the company, right? They're still seeing marks, they're still seeing the progress of the company, company's still growing, right? They're still innovating. And they're like, well, you know, I paid $10 a year ago. Should I be willing to pay $5 or $6 now? And if they still like the company, they want to have those conversations. Yeah.

Two thoughts on all these. Do you feel like this is an indicator at all? Is it a leading or lagging indicator? I would say the secondary markets, in my opinion, lag the public markets by a month or more. And I'll give you an example. So last August, September, I feel like the market gained some ground. I think the market came up a little bit. And so then in September, you started to see buyers in the secondary market come back about three or four weeks later, right? And then the market sold off again. And then buyers were like, Oh, nevermind. Let me put my

hands back in my pockets. I was joking. No. And so, you know, I think, I don't know that, that it's a leading indication indicator per se, but I do think at some point we'll hit a place where these funds who like the secondary markets, who believe in the growth of these companies and believe that you've got what, 1200 unicorn companies plus now, that these are going to be the companies who continue to evolve and lead and change the world. And they want to be in these companies and they'll start to buy them again. It's so funny to me always, no matter how sophisticated the investor, how much money, they're still always performance chasing. So it's like, oh, we're starting to go up. I'm in,

I'm buying. Let me see me see it oh we went down i'm back scared um and so talk about that landscape is that is that the max number how many unicorns do we have right like i look at all these stocks right like peloton and snowflake and all these things they were down 80 percent at their lows right at some point last year right so part of me thinks like oh we the model broke and like this tech company innovator model is is overdone and everyone rushed in and got their faces ripped off so like what are your overall views of like that's just part of the process or are we going to keep going? Are there going to be 5,000 unicorns? Well, at some point, it all comes back to supply and demand, right? So if you have a great company, a great private company that's growing fast, that's doing a lot of revenue, that's just, it's a leader in the space, what have you.

If the company goes to raise capital, there might only be a few or maybe 10 people who get in on that round, right? So when there's such scarcity, your choice becomes, if you want access, you may have to pay up to get it. And theoretically, that occurs. And then I'd say in the secondary market, the same will theoretically be true as well. Right now, there's more salaries than buyers, but in a normal market or in a market like even a neutral market, there should be more of an equilibrium reached and you and you would um you would expect that if there's more demand right that

unless supply prices prices will change accordingly but yeah i'm asking more like ignore your business and just think of the whole tech industry as a whole right if we did we go too far in like oh we were growing users or we have this many app downloads and that's what our valuation is based on instead of actually revenues and profitability and and whatnot and did that get all these unicorns to their valuations which then got cut in half so like did we go too far in some of those metrics where it should have been different? Yeah. It's probably a better question for a person who's steeped in what the appropriate multiples are for different asset classes, right? So if you're steeped, the multiples on some of these companies were what, 80, 100x on what

existing or forward revenue. Yeah. If you look at the public markets, you have to say, has that, has that ever held for a long period of time? Is it sustainable? Will investors at large back that right. And you, and, and so I think the answer you find is it's unlikely that that can become steady state in the public markets. Right.

But the flip side, if I'm one of those investors or VCs, that doesn't apply because we're looking for the next unicorn. That's why they're named unicorn. And I think that's right. What's hard for these investors is, look, the company's growing at, let's say, 300x, right? Because there are companies that are growing that fast sometimes in the public markets. And then you try to figure out, okay, well, gosh, you start to look at TAM, total addressable market. This is a massive market. How big is the opportunity here? Okay. I can actually justify paying up right now or

paying a high multiple because I think there's an enormous TAM and the incumbents aren't kind of paying attention or they're not well-equipped to move in the way that this disruptor is going to move. And so in that case, these folks who spend a lot of time, right. I mean, these venture capitalists, they, they, they hire some of the best and brightest people, um, theoretically have done some of the top schools, um, uh, you know, to work for them and are looking at these nonstop. What, what's the, are the VCs? Uh, it wasn't.

I just want, like, part of me thinks, look, the system, it rolls and then it breaks. It rolls and it breaks. So we're like, if we're in a breaking period now, and then will the next level of all these employees not get the stock options because now they're scared or they heard a horror story of a, right? Like, oh, I got all those stock options. I had to pay a bunch of tax. And then a year later, it was worth zero or it was worth half. Yeah. Which is certainly, if you look at the bust in 1999, right? Or 2000 or whenever it happened, right? When all these folks, I talked to them weekly, people who are at very senior levels of these companies now who lived through 1999, 2000, who are like, oh my gosh, I bought my options. I paid the tax. The stock wasn't worth anything. I still have a carry forward, right? I'm at a loss. And so those people, what'd they do? They went to mainstream

companies for a while, right? They went to publicly traded companies and Microsoft and Apple and some of these groups who then by the way, had tremendous innovation. So it'll be interesting to follow. Preston Pysh, And tremendous start-up comp as well. David Sherman, MD, Yeah. I mean, it'll be interesting to follow. Where do these employees who've worked at these disruptor companies, if they've been let go or if they've decided to leave the company, what is the type of company they go to work for now? And which are the companies they go to work for now? And, and will they be able to cause the same kind of drive the same kind of innovation and growth at those companies? Or are those ecosystems, you know, not open to, you know, these types of

disruptors and, and, and so they'll become frustrated. And eventually they'll say, you know, what I worked at, I worked at this startup company. And even though I didn't make a lot of money, gosh, I had a lot of fun. It was a really cool experience. I felt like I was making a difference in doing something. And what, what, there's been tons of layoffs in the tech space. Do you talk to some of those people? How does that work? Do I lose my stock options? I keep them, they get marked down. What, how does that all look? Yeah, it's, it's different at every company. So when you, when you join a company, you know, you'll generally sign something like a stock option agreement. And so, or an equity plan. And that will say,

it'll talk about how long you have if you leave the company to purchase your options or purchase your equity. In some cases, that's only 90 days. So those are the people who come in like, okay, I got to do something fast. And actually a lot of those people come to us before they're leaving and say, I'm thinking a lot of people are reaching out to me. I'm kind of thinking about maybe leaving. What's the market like? What are my options? Can we start to have some of those conversations so that when I go to the company and resign, I know what I'm going to do. I know if I actually have golden handcuffs or not, right? Do I have to stay? I'm going to forfeit millions of dollars in equity, or is there an option to buy my options

and pay the tax? So standard, I wouldn't say standard. A lot of companies have 90 day policies. What I'm seeing is companies who are doing, you know, who are downsizing or letting some people go right sizing, however you want to, you know, term it based on the company. Um, some of them are extending the window. So instead of giving them 90 days, they're saying, we'll give you two years. We'll give you five years. We'll give you more than that to exercise your options, which hopefully means company can get public and they can do a cash exercise or something like this, where, um something like this where they don't come out of pocket

to buy the options and pay the tax. The company just keeps a portion of the shares to cover those expenses. And then in the case of a layoff, what does it look like? Who knows? Basically the same thing. They don't work for the company. Yeah, it's the same thing, right? So those companies that are doing some layoffs, some of them are saying, you know, we're going to, instead of 90 days, you got two years or you got five years. So as to not put pressure on the employees and also not put pressure on the market, right? If you all of a sudden have 400 or 300 employees that are coming to the market saying, you know, we want to sell shares or I need a loan to buy my options. There's not enough buyers in many names to support that. And so

the price goes down significantly or it can. You'd say anything funny when you talk about options on options? No, but it's something that I should add to my daily agenda. Yes. Add to your... My repertoire. Your repertoire. Wrap us up. What are some of the biggest pitfalls some of these people see? If you see a story and you're like, oh, I wish I could have talked to them. I could have saved them from doing X and screwing that up. Yeah.

One is they don't talk to, and this is just generally speaking, shareholders who haven't been through this before. Most who have been through it understand they think to themselves, yeah, I've got $10 million in stock, but I'm not wealthy yet. So I shouldn't engage a wealth advisor to help me plan for if the company is going public, or I shouldn't be talking to an accountant yet, or a lawyer yet, or I shouldn't be talking to someone in the secondary markets. And then they get to these critical points where it's like you got 90 days to exercise your options or companies go in public in a couple months, and I don't have a plan. And that creates a ton of stress for them. So I just say, you know, it's like get help early. These resources want to talk to you. They will take your phone calls. It will help you start to come up with the game plan.

So don't sell yourself short if you're an employee at one of these hyper growth unicorn companies, people will talk to you. So that's one. Two. Don't sell yourself short. You're an incredible slouch. You're an incredible slouch.

So two is, especially in this market, people are, they'll sit on decisions, right? Sellers, and I've seen this happen in the last month, financial markets are uncertain. And if the secondary market is going to follow the public markets, you have to realize that you may be considering a transaction and that a week later, the markets could significantly change and the risk profile could significantly change. And those buyers or lenders could go away. And so, you know, do your diligence, make sure you have the right resources to make an informed decision, but, you know, be aware that some of these options,

these liquidity options can come into play and disappear almost, you know, in some cases on a dime a dime. So stuff that's happened with the regional banks, for sure, there were people, buyers and lenders, who were willing to do transactions. And once those things happened, three days later, they're like, we got to wait. Yeah, we're out. We're at least on the sidelines for a little bit until we understand more of what's going on. We saw that in crypto back in the day when it was 50, 60 times, working with these groups like, hey, we're trying to, can you help us design an algorithm to get out of the crypto without paying too much in bid ask? And we were doing it and they're like, sure, but you just

waited five days for that and it fell $10,000, right? You would have been better just to hit the other side of the bid offer spread and not be at risk for five days while you're figuring it out. That's right. And the same thing happened in crypto. What's the big group that went out of business? A couple of them, right? Yeah.

Yeah. Just after that happened, I'm working with folks that work for crypto companies. Same thing, buyers and lenders are like, we got to wait. We don't know what's going to happen here. Investors don't like uncertainty, right? Generally speaking, unless that's the design of their structure. And while we mention it, how did that look with crypto? Was that part of the demand for a little while? And would those loans get paid out in crypto? No. Or in hard cash?

US dollars. Yeah. Or with many of these contracts, you can either pay in stock or cash, check your legal agreements because it's different for every vendor. But for sure, I mean, crypto, the secondary markets, as well as the financial markets at times can follow buzzwords, right? And so AI is super, you know, it's, I think I read an article recently that it's the most searched for, you know, keyword on Google or something, right? Investors are talking about AI.

When crypto is popular and in the news every day, investors are talking about crypto and they want to look at companies and opportunities in that space. And so you have to be aware of these cycles that they're not going to last. Oftentimes they don't last forever. And that the only certainty has changed generally. What's your thoughts on AI?

Have you used chat GPT? You know, it's interesting. So we were just, you know, we've got, I don't know if we talk about kids or not, but we've got, you know, kids that are the same age. And so, you know, I was going into high school and, and in touring schools the last couple months, every single school brought up AI, and how they're going to combat AI being used, you know, by students in ways that are allowed, that are not allowed? How is it going to change the face of education? It's interesting to me, they didn't say how they're going to embrace it, how they're going to combat it. Well, they did actually. They did say, they did say, they're looking to hire people that are consultants that are

experts in the space to help them figure out where it's going and how they might use it. I mean, AI, it could be a huge game changer. And it'll be interesting to see. When I look at it, I think, well, boy, that makes soft skills really important in life, right? It makes communication skills super important. A lot of the things you go, you know, we send our kids to good schools to learn, right? And to refine. But I think that AI, generally speaking, it could really be, you know.

Put you out of business. Hey, ingest my options, my stock contract. Tell me what the best solution is. Certainly there could be AI features built into that. But again, you know, any of these, it's tough to just go for a buzzword. You really have to understand what the pros and cons are to some of these movements and cycles.

I want to close out and do a segment that I didn't warn you for, half-baked ideas. You have some of the best half-baked ideas. I'm in second place um you were the first one to ever tell me like hey why doesn't uber just like have a red screen with the mcdonald's logo on it and then the driver's seat looks for red that was brilliant they never they did do the color but they didn't monetize it right they're not selling it right yeah so it's like hey i'm the guy with the purple phone right right? Come find me. Purple matches to Dunkin' or whatever brand, right? Yes, that's exactly right.

I can't remember. You had the brands. You had everything. That was brilliant. So give me your top three half-baked ideas. I think mine at the time, to counter your Uber one, was the foldable pocket helmet for when I'm riding on the divvy bikes and the shared bikes and in cities like this and i just want to pop it out and like a great idea yeah right because i want to wear a helmet i don't want to carry a helmet into the office around downtown um but then people like

how are you going to make it rigid i'm like i'm just the idea guy i don't right i'm not the execution guy you you guys figure out how to make it work so um i'll share a couple ideas one is um this is one actually you might use in some way shape or form if you can get it by compliance it's called drunk elevator okay yes yes so it's almost like can we change it to drunk 30,000 foot elevator drunk 30,000 foot elevator um so the idea is this is you get executives at companies or heads of sales in an elevator after they've had a few cocktails. And then they've got basically the elevator ride to give the pitch on their business because all of these companies make their businesses sound super complex. So nobody understands them. But if they could simplify it, then a lot more people would kind of get it.

So that's one. Well, that's the classic elevator, but they have to be drunk. So it has to be. And they're trying to sell each other. It's the same people in the company or from different companies? No, it's like you're recording it. Oh, it's like a show. Oh, I love it.

Yeah, like a show. Like here's a drunk elevator. Here's a one and a half minute video on all these different companies. The person's giving their elevator pitch. I don't know if you watch Drunk History, but it's a pretty entertaining show. This might be a new podcast. I do. I love it.

All right. Drunk Elevator. Done. Drunk Elevator. I and by the way, I'm working on a prototype of this. The first one wasn't great, but we're going to do another run um it is a motion activated speaker that sits on the back of your toilet so when you walk into a bathroom it just starts playing music and this already the device doesn't well the device probably isn't very

hard to create um when i went into a dairy queen we were in uh where was it uh i think central indiana i went to a dairy queen bathroom and warren buffett and i and i was and warren's in there and he says hey bryce take a seat i i got something to say no so um the experience of having music playing in the bathroom is so much more pleasant. Oh, yeah. Loosens the bowels. It does. You know, just like I think everyone's more comfortable with each other.

Maybe somebody is whistling, humming, what have you. So that's my second. I got to send you the link. We got stocking stuffer for Christmas. The kids bathroom has a little LED motion activated led light that goes like inside the bowl oh and it changes colors every time so one time it the water and everything's this nice blue then it's a pink then it's a yellow uh maybe there's not yellow because that has a different meaning in the bathroom but yeah on saint patty's day i assume that's green green yeah i don't know if

it's that smart i think it just randomly alternates but yeah wait for ai yes yes ai assisted light toilet all right what do you got next uh i don't know if i have a third off hand what have you got jeff you got any big ideas right now i and i stole this from the bill simmons podcast by the way he does one every year. I'll share the one his guest had, which was why in the NFL, a guy should catch the ball and say, like, I didn't catch it. I didn't catch it. Like, demonstrably do that. So the other team uses one of their challenges and challenges that he

didn't catch it. But the replay is like, oh, he definitely caught it. So a little gameplay, game theory to be like get rid of that um the only um mine would be that's a rain stupor i like that last time we were hanging out or not two times ago we were in napa with you and um i think i'd had too much wine because now all this wine keeps arriving at my house and i see on the credit card like this i'm like why i thought i paid for this at the time no that it keeps charging me so there needs to be some sort of half-baked idea on how to uh monitor and control the wine purchases while visiting

napa it's like um you know on your phone i think you can lock your phone after a certain point at night which was or would have been very helpful in our 20s probably. So you don't drunk dial people. And so this is almost like drunk purchases. You just let Amex know or Visa know, lock my card after 2 p.m. when I'm in this region. After 2 p.m. when I'm in this region. Yeah, exactly. That's a trader guy we used to know had that called the uh the trading platform called them

and said he did a lot of business he had them custom code his version of the software to not let him place any more trades after he lost three trades in a row oh and so that actually the software people were telling me of like and then he calls constantly like turn it back on i need one more yeah and they're like you told us to do this sorry so he would yell and scream for three hours but at the end of the day he was happy for him uh all right buddy this has been fun what's next what's on the agenda um spring break coming up spring break yeah you'll be there in cabo and i'll be right down the road in puerto vallarta so that's right let's come up

with a harebrained idea how we can meet at sea what i was going to say we'll just um uh i'll take a tin can you'll take a tin can and we'll just find a string that's long enough and do it old school i'm gonna rent a hobie cat and sail up there that's what i'm gonna do instead you paddleboard you're in better shape than me. You paddleboard down all searching for Marlon. Yeah. Searching for Marlon. All right. Tell everyone where they can find your good stuff. Yeah. Sidecarfinance.com or you can follow me or, or find me on LinkedIn, Bryce emo sidecar finance. Thank you so much.

Where did the sidecar name come from? Okay. Sidecar came from my good friend, Marty, from college, actually. We lived together in our 20s. We were out one night in Chicago, as one does, bar to bar, what have you. And I passed by a motorcycle and a sidecar. And I said, Marty, one day I'm going to buy a motorcycle with a sidecar and he's short like I am. And I'm like, we're going to tour the countryside. And so over the course of the last 15 years, one of us would have a rough day or I would call him and say, Bruce, never give up on the dream. We're going to have a motorcycle on a sidecar, right? Send him a picture. So being an entrepreneur has always been a dream of mine. And, uh, and so sidecar,

you know, clearly it's a great concept of, um, you know, working alongside someone, helping them, you know, toward the, the markets and navigate the space. And so it was, uh, I guess a double entendre. Is that right? Yeah. You need to go down to, uh, universal studios and they have the, uh, Hagrid ride. I think you ride in the sidecar oh the roller coaster is like a motorcycle and a sidecar on the roller coaster so get a picture of you doing that and put it up on the website that's a great idea thank you uh there's my harebrained i'll i'll come down there i enjoy myself a good coaster. As do we. As do we. All right. Bryce Emu, everybody.

We'll talk to him soon. Thank you, buddy. Thanks, pal. Talk to you soon. Okay, that's it for the pod. Thanks to Bryce. Thanks to Jeff Berger for producing. Enjoy the Masters.

Get ready for Novol on Thursday and Friday as traders are staring at that screen versus the trading screen. We'll see you next week where we have Totem Assets' Andrew Strassman coming on Talkin' Trend. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you.

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