Executive Comp. Series Part III: Executive Equity Compensation and Stock Options

Mary Russell: M.

Narrator: You're listening to Get Hired up, the podcast for next level executives and board nominees. The fun and informative podcast with host Maureen Farmer, CEO and founder of Westgate Executive Branding and Career Consulting. Westgate is a 100% independent premier executive branding and career services firm for high profile leaders who are serious about navigating the hidden job market to get hired up. And we especially love helping successful executives make exciting career moves that let them be leading heroes at home, not just at the office. So if any of these challenges are ahead for you, Visit us@westgatebranding.com Welcome back

Maureen Farmer: to the Get Hired up podcast. This series was inspired by the questions our clients ask every day. If there is a compensation, governance or executive career topic you would like us to address in a future episode, we invite you to contact our producer Madison Shears at madisonestgatebranding.com M A D D I S O N. We read every submission and use your questions to shape our future conversations. I'm your host Maureen Farmer, CEO of Westgate Executive Branding and Career Consulting and

Mattie Sheares: I'm Mattie Sheares, the podcast producer.

Maureen Farmer: Over the years, one of the most common questions our clients ask is how should I negotiate executive compensation? Whether they are pursuing a public company role, joining a private equity backed business or considering a venture backed startup, executives want to understand how to protect and maximize their compensation while maintaining strong relationships with recruiters, boards and hiring leaders.

Mattie Sheares: To answer these questions, we are delighted to present a special three part series on executive compensation. In Part one we speak with Scott Calderwood who shares the executive recruiter's perspective including how compensation discussions unfold during retained search and and the mistakes candidates often make. In part two we speak with Ezra Singer who shares the frameworks he uses to help senior leaders maximize compensation while maintaining trust with recruiters, boards and hiring managers. If you missed either of these episodes, they'll be available in the show Notes. In today's episode, which is the third and final episode of the series, we speak with Mary Russell.

Maureen Farmer: Mary Russell will guide us through one of the most misunderstood aspects of executive compensation, equity stock options and the legal and tax implications of startup and private company offers.

Mattie Sheares: We are very pleased to bring this series to our audience because it addresses some of the most important and frequently misunderstood aspects of executive career transitions. Now let's jump into today's episode.

Maureen Farmer: Mary welcome to the Get Hired up podcast.

Mary Russell: Thank you Maureen for having me.

Maureen Farmer: You're welcome. It's my pleasure and I would love if you could just give us a brief overview of what you do, who you Serve how? And we'll start from there.

Mary Russell: Okay, well thanks so much. I'm an attorney and I work with individuals who have equity as part of their compensation. It's primarily people who are joining venture capital backed companies or brand new startups that want to raise venture capital. So it's a pretty specific type of company that people are joining. I also work with public company executives and people from the world of private equity, which is a different kind of private company. My sort of sweet spot is, or what makes me unique is my expertise about venture capital backed startups and their equity. My background is I started my legal career working on the company and venture capitalist side on stock matters for startups. And so I used to be literally making these types of shares and options and equity compensation instruments in my office. And so it's a very unusual perspective for this world because I'm a stock lawyer. But now for the last decade or so I've been advising individuals. So that's my day to day. I work with all of my clients on the legal and the tax structure of the grant and I work with some of my clients on the question of how much equity makes sense for this position at this company. What's a little bit unusual, I'd say really unusual about my practice is that I'm almost always behind the scenes. I'm much more of a teacher than I am a lawyer and that I'm helping to empower individuals so they really understand what they have in front of them, what they're asking for and why so that they can be effective in their one on ones in their negotiations or their evaluation conversations because they really know what they're talking about. They don't just sort of mimic what I'm saying or have me speak on their behalf. I'm here to set them up for success. If in a uh, negotiation situation where it would be really off culture or ineffective to say my lawyer thinks I should get this or I read I think maybe I should get this. People really need to be coming from that grounding in really knowing what they're talking about and why they're asking for it and what's important to them, um, so they can be effective in their conversations.

Maureen Farmer: That's excellent. Thank you for sharing that background. And you're right, it is a truly unique and niched professional services firm that you are leading. And m, um, one question that pops into mind is when do these individuals typically engage with you and how do they know about you?

Mary Russell: Well, I've been doing this for 14 years now, almost so it tends to be word of mouth. A lot of times people who work with me have never worked with an attorney before and so they might not even realize that they want to work with a professional in this area. The very best type of client for me is someone who's very curious about the topic and wanting to learn more. And so they might be researching within their network and asking questions within their network about this topic. They might be doing some reading. In the early days they would find their way to my blog. More modern ways people are in Claude or checking, you know, and uh, some other AI source and trying to understand the topic and then wanting to go deeper and ask the question of what? Well it seems like that's a lot of information. What's really important about this? Um, because sometimes having more information is not necessarily better. And so they're thinking, what should I be focusing on here? There's only so much attention I have, there's only so many, so much negotiation capital I have or time in the back and forth. What's the most important thing? And so that's what I try to focus on in my writing. So a lot of people will find their way to my writing. That's what I try to focus on with my clients. And so word of mouth people say, oh no, you're off track. You're thinking about things that are, maybe would be relevant if you were in a different situation, but not here. So it's people who are curious and learning and learning more and then wondering of everything I've learned, what's the most important? And that's uh, how people end up talking to me in a lot of cases.

Maureen Farmer: Well, this is an excellent segue into some of my questions here and I would imagine that, you know, you would be a very valuable resource to someone who is about to embark in a startup or a VC backed organization. So that leads me to my first question. What would you say are the most common mistakes executives make when evaluating uh, a startup or a VC equity offer?

Mary Russell: I don't want to frame it as a mistake because I think people are coming from where they're coming from. And I think it's very normal for people to be thinking about it in one way early in their career and then in another way with a little bit more nuance later in their career. So you know, I don't want to give the impression that everybody needs to be thinking about this at the same level of depth. Uh, on every occasion, you know, we have to be realistic about how things work in the real world. When people have a lot on their mind. But I would say one thing that makes us very unique, and Ezra touched on this, I think really well in his conversation with you, is that the first grant that's made to you when you join a startup is likely to be the lion's share of the equity that you earn at the startup over your whole tenure there. And that's different than public companies where you're expecting a grant each year. The reason for that is that the way an offer is made is based on the value of the equity when you join, whether they're calling it a number of shares or a percentage ownership or a value on the date that you join. That all boils down to the right offer, boils down to how has it been valued by investors most recently. And if you're joining a startup, you're joining, uh, by definition a high growth company, a company that is intending to grow in their metrics and therefore their value dramatically over the next few years that you're there at the company. And so since that's the case, and we hope that's the case, if, let's say they grant you 1,000 shares when you join and the company grows dramatically in value over two years, they're not going to grant you another thousand shares in two years or four years after a classic vesting schedule. So that first grant really matters. And so a, uh, place where I see a sort of clash of cultures lead to an unfavorable result is when people are expecting, okay, I'm going to come in and, and prove myself, and then a couple years or a year or so I'm going to get more stock that can be effective. And sometimes you do see that work. But it's more often than not you're going to be disadvantaged if you go in with that strategy. The, the key is to negotiate for enough shares to make this worth your while for four years or whatever the vesting schedule is when you join, not be waiting for more substantial grants later. So that's one you asked about sort of three. The second is that the tax structure is really important and getting that right, or at least understanding it really makes a difference. And here's why that matters at startups is traditionally these shares are not going to be liquid. You can't sell them while it's a private company. There are some exceptions to that, but as a rule you should be planning to if you can defer taxes on the grants until you can sell the shares, because without a market for that, you for the shares to cover the tax bill you're going to end, uh, up with, they call it in, in the uk, they call it a dry tax charge, which means there's no liquidity or no money to cover it. So you're going to have to pay out of pocket for taxes. Is, or perhaps the strike price of your options or purchase price for the shares before you have money to cover it. And the more successful the startup is, the higher that tax bill gets because it's based on, uh, some metric of value based on the tax code rules. And so that seems premature to people to be thinking about tax structure when they're evaluating a grant, because why would I worry about taxes when there's no money involved? Well, unfortunately, the tax code isn't written that way. You, in many cases do have to think about paying taxes before you have a sale of stock. And so that can be a bad news for people if they haven't thought about it in advance.

Maureen Farmer: Do you find that people are coming to you at that point to say, hey, Mary, how do I deal with that? Or is this something that you help them mitigate up front or, or both? I'm just thinking about, I can imagine someone getting a tax bill and being very surprised about that.

Mary Russell: Yeah. So that's something people think about on the way into the company. And that's primarily my practice is working with people who are evaluating their offers. And so they will certainly know what's coming once they worked with me, if not designed around it. Ideally, those surprises, I think, are less common than they used to be because there's just more information out there. But you do, you do see that happening just because people have a lot on their mind and they're not tuned into this and, you know, we have to be realistic about. We're in the real world here. And these offers are not necessarily designed for the individual's benefit. There's, you know, decisions made on the company side that could be made more favorably than they are, uh, because the company is thinking about things besides what's in the best interest of these people that they're hiring in some cases. And so sometimes it just doesn't, um, get addressed on the way in and then people are surprised down the road. So the third sort of misconception that people have about startups when they're joining is that the company is going to automatically disclose everything the individual needs to know to evaluate the offer. And that's not true in my experience. It's certainly true that companies will answer questions to help their new hires or their candidates understand and, uh, get comfortable with the equity offer so that, you know, so they can evaluate it thoughtfully. But it's not really in the company's interest to lead with a lot of information on that. And that's because most candidates don't ask a lot of questions around the equity. And so it would be sort of unnecessarily confusing for the company to make a lot of disclosures around that, around a topic that a lot of hires aren't going to be well versed in. So for instance, if the company leads with that information about their last round or about the fine print terms of the equity, or God forbid, the tax structure of the equity grant, and the individual wasn't thinking about that already, it will sort of unnecessarily clutter or cloud the conversation and lead to complexity that the individual wasn't even really looking for. So sometimes I get people who come to me and say, well, they only told me the number of shares in the offer letter, isn't that a red flag? And I'll say, even though I'm as pro executive or pro employee as they come, because that's my whole practice. If I had a startup, I would only put the number of shares in the offer letter in the vesting schedule. I wouldn't put anything else in the offer letter and I wouldn't put anything else in the email unless someone asked about it. So the sort of responsibility for that is on the individual. And then the next question you might ask, or you know, people really often ask is, well, what should I ask? What should I ask about? And then I'm a little bit, you know, facetious in this, but um, I'm serious too, is, well then I'll say, well, what do you want to know? So it's up to the individual to know how am I going to evaluate this offer? What is important to me in this context at this company, from the number of shares evaluation standpoint to the fine print legal terms to the tax structure, how am I evaluating this offer? And there from there, whatever questions you need to ask to get comfortable with the offer that's in front of you are fair game. If you know what you're asking and why you're asking it, you'll be a lot more effective in the conversation than if you start with a list of questions that you pulled from the Internet or chatgpt or something and then start peppering questions and then if you don't get a good response or it seems like they're not being very responsive to your questions, then that will turn into sort of a power struggle over information like I can't believe they didn't tell me this or why are they being shady about that? Well, it's like you can't really have an intelligent conversation about a nuanced, um, topic that is for good reason, not, you know, publicly available information unless you have a good sense of what you're asking and why.

Maureen Farmer: Well, that is completely fair. And I think it's relationship first, you know, if you're, you know, what is the purpose of, of asking the questions and if you don't know what the purpose is, that can, that can be a risk of possibly entering into an adversarial approach to the negotiation rather than a collaborative one, as in any negotiation. So that's a really good point.

Mary Russell: Yeah. And if you think about who's hiring an executive at a startup, well, it's the board of directors essentially and, or some representative of the board of directors, maybe the founder. And so every person who has a seat on that board and the founder is tuned into the equity of the company. That's why they're there, that's why they're on the board. They represent a VC firm or they have a lot of stock as a founder, you know, they're all there for the equity. And so if you have someone coming in who is all in on the equity and really valuing the equity, that's a great fit because they need their executives tuned into uh, the growing value of the company and getting towards an exit event, whatever that might be, an acquisition or an ipo. So interest and valuing this is essential in making the right hires because if they have somebody who's on their executive team who's not tuned into the growth in value of the company from an equity perspective or doesn't really believe in the stock or isn't interested in the stock, that would not be a good fit. And so, uh, uh, you know, interest and asking questions and things is not a bad thing at all. In fact, it's for some roles might be essential to knowing that you have the right person who has their head on their shoulders about this, but you need to be doing it in a diplomatic way and in a thoughtful way.

Maureen Farmer: So if we step back for a moment, you know, we've got the, the equity side of the offer. What in a startup, VC backed organization, compensation offer is negotiable and what's not, maybe you can talk a little bit about, you know, the total compensation. I mean I know it's, it's client specific, but just in general terms what

Mary Russell: you See, so the first thing people are thinking about is the number of shares. Is this enough equity to balance my risk in joining the company? When we are thinking about late stage startups where people are joining a company that is soon to be going public, people look at that very similarly to the way they would look at an offer from a public company. Only instead of using the most recent, you know, trading price of a public company, they're thinking about the most recent investor price per share and thinking about that as the value. So people are using dollar value at late stage companies and then at very early stage companies, dollar value isn't very relevant. Uh, we're talking about really early stages because the values are so low. In that case, the way people are evaluating it is based on the percentage of the company. And how does that compare to other similarly stage early stage companies? And how does that compare to other executives within the company from a sort of a fairness perspective? So if I'm coming in as a, you know, very early stage CTO at a company that's been founded a year before, and the other founders have, let's say 40% each and I'm being offered first off or 1% first, I'm going to compare that to market for CTOs at this early stage of a company in terms of, you know, data sets for market at this stage. And then I'm going to be thinking about internal equity. Do I feel good coming in a year in with 1/40 of the equity of one of the other founders? So thinking about it in that way. So there's sort of two extremes. At the very earliest stages it's percentage ownership and at the very latest stage it's dollar value. And then people on the in between there are going to be looking at it from both angles. So in a mid stage startup for an executive hire, you're going to be thinking in terms of percentage and dollar value. And so you can see those two extremes and then people might think about it in both ways, depending on where they are in that continuum between very early stage where only percentage ownership is relevant, to late stage where only dollar value would be relevant for most people.

Maureen Farmer: So what about cash compensation? Do you see wide variants of cash, uh, compensation in these early stage startups? That's a good question.

Mary Russell: I think one place where companies more than individuals, I think get off track is if they're trying to bring someone on before they have cash to pay them, which is a true startup.

Mattie Sheares: Right.

Mary Russell: We're talking about very founding stage or very early stage, they'll try to make an offer that says, you know, we'll pay you a salary after we raise money, but for now we'll pay you X percentage. And they're thinking about that percentage based on market data for early stage hires, when the market data assumes there's a something like a market rate salary and an equity offer. So that's one interesting thing that happens. But I would say 20 years ago you would see really low cash offers at uh, like a series seed or a series a startup, almost like a stipend and then a substantial equity offer that as money has started to flow more freely into this world, you don't see as low of cash offers as you used to. It should be something like a market rate salary as soon as the company has raised substantial venture capital. But that all plays into sort of how much equity makes sense. So if somebody's making a really low cash offer, they would need a lot more equity to make up the difference in terms of risk for people. So once people get close to comfortable on the number of shares, they think they're in the range of what they would accept on the how much equity side, then they start thinking about the fine print. And vesting is of course important over what period of time or performance metrics am I going to earn this equity? And I think that is very, you know, people understand that really well, classic is you earn it over four years. So I don't think there's that much complexity we need to go into there. But the real question then is once I have vested, um, this share or this portion of the company, what have I vested? What is my right to that? And one place where there's a lot of variation and not always a lot of thoughtfulness on the way in is what happens to my vested shares if I leave the company. Most people think if they're coming from a Silicon Valley or California based startup, if I leave the company, I keep what's vested when I leave. And then if they have an acquisition or an IPO down the road, then I'll get paid for that. Well that's because the stories you hear in the news about people getting huge payouts in an IPO or an acquisition, those very often include former employees or former founders of company who are no longer there. Well that's because if your documents say if you leave the company, you keep your vested shares and you get paid for them at an IPO or an acquisition, then you do. But there's some minority of venture capital backed startups where they have a, ah, clause that says uh, if you leave the company and you own the shares, we have the right to force you to sell those back to the company, usually at a discounted price. If you were to leave the company before an exit event. And you could see why that might be a rude awakening if you're having one expectation and then you see something else. Uh, so that's a good nuance to be tuned into. And that has to do with sort of a cultural expectation. It used to be the law in the state of California that for employee stock options or employee equity of any kind, it had to vest over a certain schedule and you were to keep what was vested under the law of the state of the California, because we had such a history in the state of being pro employee or employee protection. Well that is no longer the law in California and the securities laws. And so you can have uh, companies that have these repurchase rights or clawbacks for, for vested shares. So still culturally it's the expectation that uh, for a venture capital backed startup you keep what's vested. But you do see some outliers of company that put these fine print terms in the offers that come as a surprise to people and you almost never will see it in the offer letter is the tricky part. And so it makes sense if equity is highly valued by someone who's joining a company to ask to review the form version of the equity documents before they sign that offer letter so that they can identify these high dollar terms before they sign the offer letter. And they're not going to get the final equity document until after they join the company because they won't be officially granted the shares until the board meets after they're hired. And that's fine, that's expected. But they'll review those form versions of the documents or at least ask about these key high dollar terms before they sign. One place this comes into sort of a culture conflict is private equity backed companies very often have these clawback terms where if you don't stay all the way through an acquisition, then you don't get paid out of the acquisition. So if you leave before they have that exit event, then sorry, whatever you vested, if you, if you vested something while you were still there, it's going to get repurchased or clawed back at that time and then you won't have it down the road when there's an exit. And so people who are coming from one world or the other often have a sort of a culture shock and that's expectation. So it's good to just be aware of that. That that's something that comes up. Another thing that comes up is what happens to your unvested shares if the company is acquired. So let's say you are still an employee, uh, at the time of an acquisition or an executive, and you're 50% vested. What happens to those unvested shares? So let's say you have a million dollars worth of equity based on the acquisition price and you're 50% vested, uh, at closing. So you'd get $500,000 of the deal consideration, plus what happens to that invested equity? And the norm, if you don't negotiate for special protections or if the company isn't especially unusually employee friendly on this, the norm is that the company has the right to cancel the unvested shares without payment. And so this is a term that sort of collapses upon or interacts with the numbers evaluation. Because an offer of, uh, say 1% of the company, where you have protection for your unvested shares if the company is acquired, sort of a right to earn them over your original schedule, even if there's an acquisition, would be more valuable than one where they have the right to cancel your unvested shares. Because in a hypothetical here, what if the company is acquired in nine months, you have invested anything, then what would have been a million dollar package in one scenario is now a $0 package. And so that's one term that comes up and can be surprising for people because if they have had an experience where a company was generous in that regard, or they had negotiated special protections or in the past, in a past life, a past company, or they have a friend who had that experience, they might assume that that's just how stock works. And it sort of depends on what's in the fine print. So that's always interesting.

Maureen Farmer: In terms of special protection, is that like, for example, a severance, or is that some other provision during a change of control where their interests are protected?

Mary Russell: The magic word there is acceleration. When you join the company and you get the grant, you're agreeing that if certain things happen, they will speed up, accelerate the rate of your vesting schedule. So if it's a single trigger, one thing has to happen before they accelerate your vesting. In that case, it's a single trigger, is usually if the company is acquired, then you immediately vest in full. It's unusual in this market. But you should know what that means because a double trigger, which is more commonly negotiated by executives, is two things have to happen before they accelerate or speed up. Immediately vest all or some of your shares. Those two Things are an acquisition and then a termination or constructive termination happens as part of or following the change of control. So that's acceleration and it's called acceleration because it's speeding um, up of the vesting.

Maureen Farmer: Right. So interesting. I'll just let you go ahead and give us some of the most common scenarios just given, you know, your clients and the core courses you teach and the writing that you do.

Mary Russell: So I think what's really important for people is to have the basic premise that you're likely to get common stock when you join a startup or some version or some structure that in some scenario you'll end up with common stock. And that's uh, traditionally the stock used for founders and for employees and executives. Some people come in swinging and say, I want preferred stock stock. And that really clutters a conversation because it's actually not in someone's interest to get preferred stock because of the way the tax rules work. So that's the first thing is you're looking for common stock, that that's fine. And the next thing is there's the different tax structures for how you're going to receive your common stock in the hypothetical world where there is no tax code with, you know, taxes due before you have, uh, you know, that you receive cash in exchange for your stock. So because we live in a world where stock is taxable as compensation unless it's very thoughtfully designed, we have to have these interesting structures to provide for incentive benefits or uh, equity compensation without these dry tax charges. So how it's done at the very earliest stage, companies with the founding stage is what we call restricted stock. So you buy stock at the fair market value or tax value of those shares on the day the board grants you that right. So you buy the shares right away for a very low de minimis value, almost nothing value. You buy the shares and then you vest them over time. So if you leave, you have to return the unvested portion of the shares. So for tax purposes, you're considered the owner of the shares from day one. This is, you know, people talk about an 83B election in the U.S. this is the founder stock structure. And it's the ideal because you start your holding period for capital gains or QSBs in the US and it's very elegant. The problem is that the tax rules require that the purchase price of these shares be set at the fair market value. And as the company grows and is no longer a very early stage company, that gets really expensive really quickly. And so you may have heard of FMV or a 409A valuation in the US that's a section of the tax code that governs this. As that goes up, restricted stock is no longer an appealing instrument or way of receiving common stock because a grant to an executive might be a million dollar purchase price. And most people don't want to pay a million dollars out of pocket to, for the privilege of working at uh, a startup. And so some people do, you do see it. But, um, so they transition to stock options where the strike price is set at the fair market value on the date of grant. But you don't have to pay out of pocket for those shares until you choose to exercise your options at some point. And some people choose to exercise them early if that's available, like uh, immediately after grant, even before vesting. And that mimics M, the restricted stock structure. So if they do want to pay out of pocket for the shares, they can do that if they have the right to early exercise. More commonly, people will wait until they vested some of their shares and then exercise some of their options at that time or they wait until they leave the company. If they have a, uh, short post termination exercise period, they might have to exercise their options when they leave the company. Or if they have an extended period, they'll wait and exercise at the time of an IPO or after an IPO when they can exercise and sell, or on the day of an M and A event when they can exercise and get cashed out with the merger consideration on the same day. So if you have a stock option, you're always thinking about when am I going to exercise this? And uh, what's going to be the purchase price, that strike price that stays the same the whole time you have the option. But what is going to be the tax cost to exercise that option? Because the tax cost to exercise is based on the fair market value on the date that you exercise.

Maureen Farmer: Right?

Mary Russell: So this is where those dry tax charges come in, um, where you have to pay to exercise even though you can't sell the stock.

Maureen Farmer: Right?

Mary Russell: So that's where planning is really important. I have a post on my blog called the Menu of Stock Option Exercise Strategies. And the sooner you're thinking about this the better. Because if you come in and you realize, oh, you're joining a company and you think, I don't mind paying that strike price out of pocket up front because then I can start my holding period and I don't have to worry about this tax cost to exercise later because I'm going to be exercising immediately when there's no spread and so no tax. Then on the way into the company, you might be thinking about negotiating for the right to early exercise your stock options prior to vesting if the company doesn't already have that. If you look at that strike price and you think there's no way I can pay that today or anytime before there's an exit event, then it would make sense to be negotiating for an extended post termination exercise period. So if you think there's no way I can come up with a million dollars in strike price and the tax cost to exercise, then you need that extended post termination exercise period to make a stock option appealing to you. Because without that it's sort of like, well, how am I ever going to afford this? It's not realistically a part of my compensation because I can't come up with this money. So if I want to leave the company, I'm sort of stuck. That's one place where that's a heavily negotiated or at least part of an evaluation. So if you're like a lower level employee and you're not able to negotiate that change in your own offer, then at least you can know that's coming and either get ahead of it by exercising a little at the time, or just acknowledge that I'm kind of stuck here until I have an exit event or I'm going to have to walk away from this so that it comes into the calculus people are making when they join. And if you're joining as an executive and you have this stock options and a short post termination exercise period and you really can't get comfortable with it at all, they couldn't come up with enough shares to make this worth your while. Then at that point, if you are a heavily recruited executive, you might be in the position to negotiate for the company to start offering RSUs restricted stock units instead of stock options for you. So that's a different structure. So let me jump to that. So what are the very late stage startup restricted stock units are likely to be the equity compensation structure. And the way that works is instead of receiving shares upfront like in restricted stock where you buy them out of pocket, or stock, uh, options where you have to purchase or exercise the options, you have a sort of a delayed delivery of shares. So they give you a unit, a restricted stock unit where they promise to deliver you shares of common stock down the road when this company has a liquidity event. So it's sort of a delayed delivery so that you're not taxed on it until you actually can pay the taxes. On receiving the shares. So it's a very elegant type of instrument that's developed to avoid this sort of exercise problem with the options. What happens is if a company has never used restricted stock units before, it's often a senior executive hire who pushes them to do it for the first time. And then at some point they'll realize a m lot of companies realize we need to do this for everyone. And so it'll just be what they do for all their new hires and refresh grants and things. But the reason I mentioned that uh, for an executive who's evaluating an option offer that they just can't get comfortable with is that that's uh, a lever that you can move in the negotiation if you're being heavily recruited as a executive hire.

Maureen Farmer: Right.

Mary Russell: It's kind of a growing pains moment for a company. They'll say, well, we've always used options. Sure. And you'll say, well, not for an executive with a million dollar strike price and a 30 day post termination exercise period. Who could do that? You know, no one can do that. So.

Maureen Farmer: So this is very interesting and very complex. When an offer is presented to a person, an executive or other individual in this type of, uh, an early startup or early series startup, what period of time is there to typically to negotiate the offer? And the reason I ask is that a lot of executives often have a very limited window of time to make a decision on an offer. Is that your experience?

Mary Russell: Uh, I think there's a professional courtesy here that's extended to executives who are being thoughtful about this and as long as they're clearly engaged in the process and each day moving it forward, those deadlines are not top of mind. So when I work with individuals, I would say you should expect this to be wrapped up within a week period because after that it really starts to drag and people get negotiation fatigue and it's just like, why are we being so persnickety about this? But if you use that time well and each day are moving it forward first with questions, evaluation questions, than with, you know, once you get to the legal part, the review of the documents, and you're turning at an, you know, first, you know, next business day basis at each stage so they know you're engaged, you're involved in a back and forth that's sort of on culture to keep it moving. And like I said, people get tired after a week and that's perfectly fair. And that's just my number of time, you know, number of days I've come up with just as a shorthand sometimes people wrap it up in a couple days. But I think there's an expectation that since this is the primary reason for most people joining a startup is the equity compensation and that uh, potential there, then it makes sense to take the time to get it right. And there's also some time it takes to get in front of the person who actually knows the answers to your questions. So if you're asking questions about tax structure or value or things that are easily lost in translation between HR and recruiting, etc. A smart company will get you with the CFO or get you with the founder who can answer your questions and then negotiate person to person with the person who has the information and can make the decisions, rather than having this game of telephone with something of high complexity and easy to get lost in translation.

Maureen Farmer: Absolutely. So going back to the culture of, you know, negotiation and relationship building, you know, as long as the candidate is keeping, is being responsive and being uh, thoughtful in questions, there should be an appropriate period of time allocated to that candidate to make a, an informed decision. That's right.

Mary Russell: And that goes back to knowing what you're asking and why you're asking it. So let me give you an example of what's not, not a winner is, well, I couldn't even evaluate this number of shares unless you gave me the cap table.

Maureen Farmer: Right.

Mary Russell: It's like, well, you're not going to get the cap table. You know, 99 times out of 100. That's not even an appropriate question because you don't need the cap table to evaluate it. What do you need?

Maureen Farmer: Mhm.

Mary Russell: If you're thinking about the percentage ownership, you need to know what percentage ownership does this represent? If you're thinking about the dollar value, then you need to know how have investors valued these shares in recent history? What's the 409A? If that's going to be the strike price? Like how can I think about the difference between those two in terms of to think about giving this a dollar value and to compare to other opportunities or market data. So if you know what you're asking and why, and you kind of continue to ask until you get the answers you need, then it's going to be professional and you can feel confident even if you take heat on the back and forth. And the people you're most likely to take heat from if you're asking questions about these things are people who don't really understand it, whose job it is to close the deal. So you do the math there. That's recruiting teams or HR people or Even like somebody who's a finance person but not a decision maker in this regard, they might get frustrated because maybe they join the company without knowing. And why would you need to know. Yeah. Into that sometimes. Or, you know, people didn't ask that this at other companies. Well, maybe it wasn't relevant at other companies. Um, you see some really unusual structures lately with like OpenAI has a really unusual structure and some of these, like monstrous AI companies have a unusual structure. And so, you know, things might be relevant here that weren't relevant elsewhere. So if you get people who are just push, push, push to close the deal quickly, then that's when it makes sense to get in front of the person who's has the information and understands the importance of the question and can help you get comfortable with it in a professional manner.

Maureen Farmer: And I think it's important to take the time to be comfortable because as we all know, that doesn't always happen and it can have implications down the road, AKA the dry tax or a number of different scenarios that don't always present themselves as something important at the very beginning of that offer, in the beginning of engaging with that organization.

Mattie Sheares: Yeah.

Mary Russell: And to speak to an example of something you had mentioned to me before, that I think is really important. I think a thoughtful question you had and that is like, what if it's just a promise of equity in the offer letter?

Maureen Farmer: Hm.

Mary Russell: So even if you're diligent on the way in, you got to follow through and remember what we're talking about here is a stock instrument. If I don't have documentation that this has been granted to me and signed by both parties that I am the owner of the shares. If we're talking about restricted stock and. And then I filed my tax form for that, or stock options where I have a documentation, where I have an option granted on this state at the strike price and this vesting schedule and these documents, or a restricted stock unit granted with this vesting schedule and this tax structure and da, da, da. And if I signed by both parties, like, if I don't have that, I'm still in maybe land.

Maureen Farmer: Exactly.

Mary Russell: And I always put that on the individual and say. And they'll say, well, can't you put that in the offer letter where they promise to grant me the stock? And I'm like, I can, but if they don't, then there's no, uh. It's sort of a complicated legal point, but it's really on the individual to follow up. First of all, make sure they understand what, what's in front of them. And second of all, to follow up and make sure the company actually makes the grant because delays can be really costly to the individual in this situation. So it puts a burden on the individual. And yet it's also, I think, a good practice to be aware that we're talking about stock, we're not talking about dollars. Dollars are easy. They arrive in your bank account and they're yours. This is, you know, these types of structures have been developed over centuries, right? We talk about common and preferred, like classes in, you know, medieval England, because that's where these came from. And so we just have to be, uh, on our game and paying attention to it and not just assume that the company is going to do it with our best interest in mind. Because when talking about startups, a lot of times we're talking about people who are really, really busy solving really, really difficult problems in a sometimes chaotic environment. And so it takes the individual to tune into their own interest to make sure they're protected rather than relying on busy, chaotic situations to turn out for their benefit.

Maureen Farmer: So no maybe. No maybe Land. I like that. No, maybe.

Mary Russell: I didn't mean to say that, but now I'm laughing at my own.

Maureen Farmer: No, no, I love it. I love it. No name known. Maybe land. I think we've all been there from time to time. So Mary, this has been an amazing conversation. I would love to ask you a couple more questions just to round off the call. One of the questions we have is what has surprised you most in your career so far?

Mary Russell: Gosh, that's a great question. Uh, the dynamic of the individual hire, being in a teaching role with the person on the other side of the table is something I would have never expected because I came out of a law firm where, you know, I was very, had the very good fortune to be trained by high powered lawyers in a, you know, a very fast paced environment. And these people were beyond expert of what they were doing. And then to see the people who are sometimes managing these matters at a company are not from the law firm and real often they're not lawyers and, or not stock lawyers. And so sometimes I'll have clients who are asking questions or asking for changes or uh, negotiating these fine print terms and you really in very, uh, much more often than I would have ever expected. The individual who's asking for the change or asking for the information has to teach the person on the other side how it works. So not only do they have to get it themselves, but they also have to get it and understand it well enough to teach it and explain it to the other person. So for the most obvious example would be, you know, if you asked for what is the number of fully diluted shares outstanding to calculate your percentage ownership. It seems obvious, but sometimes you'll get an answer back like, well, we can't give you anti dilution protection. Like what? I'm not asking for anti dilution protection. I'm asking for how many shares are outstanding today on a fully diluted basis, which means including the option pool so that I can calculate my percentage ownership and then therefore compared to this market data that I'm using to give me a percentage ownership as my guide for where I should be at time, the same company. So it's like something just that, uh, simple gets lost in translation so quickly. And so when I was first getting started, I didn't know how good of a teacher I would need to be to make sure my clients understand to the point where not only they get it and know what they want, but they can also explain to the other person what they're asking for and why. Really interesting game of telephone and learning. And I used to teach seventh grade, so I think it's really interesting.

Maureen Farmer: Well, you never really know something completely until you teach it to someone. I, I always think. Or you don't, you know, you don't always know all of the, the nuances until you try to teach it. That's been my experience anyway. Well, that was an excellent answer. That it was.

Mary Russell: Well, thank you. And I've been lucky because my clients are beyond brilliant and so they can take a 10 minute course in this and get to that level and they do well. So, uh, I am very fortunate in that regard.

Maureen Farmer: That's awesome. Second last question. What is your favorite restaurant? Can you give us the name of a favorite restaurant that you like that we can share with the listeners? Sure, yeah.

Mary Russell: If you're in Palo Alto, you should go to Tamarind, which is on University Avenue. And they have like a Vietnamese fusion. It's the first place I ever had Vietnamese coffee. And it was life changing experience. And the food is great.

Maureen Farmer: My daughter brought home Vietnamese, uh, coffee, uh, a few years ago. The first time we had it too, it was absolutely delicious.

Mary Russell: Great. You've had that same experience. And I've since had it at much less sophisticated places. I mean you can get it like the side of the road place, you know, all sorts of places. But the first time I ever had it was in the most lovely dining experience of Tamarind and Palo Alto.

Maureen Farmer: That's awesome. Last question. Mary, how can people get in touch with you?

Mary Russell: So StockOptionCouncil.com is my website. If you go there, you will find my blog. And that's probably the best place to start. The very first thing on the blog is a, um, list of publicly available data sources for startup equity. And, uh, so if you're thinking, how much should I get? Go to the blog, go to that post, and that will at least give you a place to get started. And then you'll also see information about my services and, and different guides, sort of how to think about this situation or that situation. And hopefully you will find that helpful. And you will certainly find your way to get in touch with me, if that's what you're looking for.

Maureen Farmer: That's awesome. And that's how I found you. I found you on your website and your blog. So it's interesting how we've come together. It's been a few years. I've been following you and then we connected over the past six months. And I just want to say, Mary, thank you so much for joining the podcast and I look forward to continuing the conversation.

Mary Russell: Thank you so much for having me and I really feel honored to be among the group with Ezra and Scott and hope that everyone has found this series helpful.

Maureen Farmer: This has been so much fun. Thanks again. Thank you so much for joining us for this episode of the Get Hired up podcast. If you enjoyed today's conversation, please take a quick moment to subscribe, rate and review us on your favorite platform. It helps us to grow this community.

Narrator: Community.

Maureen Farmer: I'm, um, Maureen Farmer, founder and host of the Get Hired up podcast. Thank you for being a part of our journey. And here's to getting Hired up. This podcast is dedicated to the memory of my dad, Stuart Raven. This is for you, dad.

Narrator: Thanks for listening to Get Hired up with Maureen Farmer. If you enjoyed the show today, please tell a friend and leave a review for us on itunes, Spotify or wherever you listen for customized resources to help you you get hired up to your next C level position, win a paid board seat or attract a new investor, visit westgatebranding.com.