Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Finding Value in Your Instincts
Published Date : March 26, 2014
With the employment market finally beginning to tighten, compensation and perks are increasingly in play. Cutting the right deal for yourself has a lot to do with your individual tolerance for risk, your overall financial condition and of course your relative position inside a company. But it also has to do with your instincts and your ability to create “optionality” in your future earnings potential.
Working for a Silicon Valley company can sometimes feel like playing in professional sports, with all the ups and downs – and potentially large windfalls that come with making it to the play-offs. If you are here you have selected yourself to play for the optionality of success and the ability to see farther and to change the world.
There are many considerations in the Valley for wealth creation that go way beyond salary, bonus and whether or not you can bring your dog to work: commission, profit sharing plans, stock options (ISOs and NQOs), Restricted Stock Units (RSUs), stock purchase plans, and the list goes on.
Implicit in deciding upon the right mix of these components is to consider the current and potential future value of your company. While it is true that insiders will have unique insights into the value of their company, it is also true that they will also harbor an emotional attachment to the company and biases that can get you into trouble.
At Sand Hill, our dedicated investment team specializes in helping our clients pinpoint the value of private and public company holdings. Having this information in your pocket will help you think through the best balance of risk and reward for your mix.
I once worked with a start-up employee who exemplified this concept. During annual review season, she was informed she had earned a $2,500 raise. Instead of accepting that raise for face value, she asked for 2,500 shares of stock in lieu of the cash. The company was still private, so she understood those 2,500 shares could possibly be worth nothing in the end. The company eventually went public and her original $2,500 raise is now worth far more.
Negotiating for a lower salary in exchange for higher potential upside on options, RSUs or outright stock grants, in a promising start-up and expanding economy, can often pay off down the line, assuming you can cover your monthly bills and savings goals. However, if you are unsure of the company’s potential success, and want to build your nest egg out of your monthly income, then negotiate for the high salary first.
Keep in mind, RSUs and stock options only show value upon vesting and after being exercised and/or sold. Also, don’t forget about your tax liability, which will eat away a chunk of the value. Here’s one strategy to avoid paying those taxes at vesting (and holding onto all your vested shares): Place those RSUs or stock options in your IRA or 401(k). When they vest and are ultimately sold, the taxes owed will be deferred, just like all other investment gains generated inside a tax deferred account. You will only be taxed when the funds are withdrawn (which you should not do until after you reach age 59½ to avoid a 10% early withdrawal penalty). Many established companies may not allow for this tactic, but if you find yourself at a smaller, more flexible company or start-up, it might be an option. It never hurts to ask!
If given the opportunity, it truly is in your best interest to negotiate how you want to be paid. No one can see into the future to know how successful your company will be, so only craft an equity compensation plan that will pay off big if you can handle the risk of it not paying off at all. Trust your instincts and don’t be afraid to ask for something that seems unorthodox for the average person. After all, you are not average, and following your instincts just might pay off in the end.
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