The recent blow up at the crypto firm FTX provides an important lesson for employees of publicly traded companies or start-ups: you have to deleverage from your employer. Your employer impacts so many aspects of your life: income, health care, and free time, to name a few. So why let them control even more than they already do? But when you take extra compensation in the form of company stock you’re adding even more company-based leverage to your net worth. How do you deleverage this extra risk? You sell the stock.
Thinking in terms of win/win
The key to deleveraging from your employer is to think in terms of a win/win scenario. For example, let’s consider an employee working for publicly traded company ABC who also receives stock in said company. We always encourage our clients to sell company stock as a means of deleveraging from their employer. Usually, we’ll get initial pushback of, “but what if the stock goes up?”
Well, let’s think about what’s going to cause your company stock to go up… it’s likely one of the following two reasons:
- Solid corporate execution resulting in increased profitability
- plug any number of fundamental reasons here: higher sales, new product line, increased gross margins, etc.
- An overall rising trend in the market or your company’s sector as a whole (rising tide lifts all boats)
- Even in a down market this year, most oil stocks are higher.
So, now let’s go back to our initial advice to sell your company stock, and then assume the stock price does indeed go higher after you sell. This higher stock price is a result of company success, whether directly due to the company’s execution or indirectly due to market conditions. Either way, allow us to paint a broad stroke in using the words “company success.”
This success for the company could lead to increased compensation for yourself. Such as a year-end bonus, a salary raise, and/or additional stock compensation. Or, it could result in a more flexible work policy. Take the pandemic, for example, many companies, seeing their employees execute at a high level while working remotely, opted to allow for some type of remote working conditions even after the economy had opened back up.
So you got a win when you sold the stock (liquidity) and you got a win when the stock went higher (company success is good for future you). That’s a win/win.
Horror stories from FTX
A recent article in the Wall Street Journal highlighted some of the horror stories for employees at FTX. Let’s look at some exerts below which detail the importance of deleveraging from your employer.
When FTX offered employees the chance to participate in a fundraising round, any employee who did so immediately leveraged themselves more fully to their employer. The smarter thing for employees to do would have been to use the liquidity from the fundraising round to cash out of any vested equity stakes. Or, renegotiate the strike prices of already vested equity. But to participate in a company fundraising round, even at a discount, isn’t a good idea for the average employee.
This is a natural place where FOMO and peer pressure can take over… what if you’re the only employee not participating? Who cares! You have to do what’s best for you. We’ve seen this with our own clients who have admitted to being ashamed to sell stock in their employer, as if it represents a betrayal against the company’s culture. Well guess what, you already dedicate blood, sweat, and tears to company culture, isn’t that enough?
The employee keeping 80% of his net worth on the FTX exchange was just asking for trouble. But it’s not uncommon for employees to build up large stakes in their employer’s stock through vested stock options. Many employees sit on vested stock instead of selling it, to the point where it can end up representing more than half of their liquid investments. Such concentration risk is a red flag and should be dealt with immediately by selling stock.
Examples of deleveraging from your employer
Here are some common ways that employees are leveraged to their employer, and how they can deleverage themselves:
- Employee is offered base salary with a portion of compensation to be paid out in equity over a vesting schedule
- Negotiate for a higher base salary in lieu of equity compensation, or request a cash bonus incentive structure
- Employers will typically use equity incentives as a part of promotion… but if you’re getting promoted, it needs to come with a PAY raise, not just increased equity.
- (I can’t tell you how many people took 80/20 salary/equity splits during tech hiring rounds in 2020-2021 and now 1-2 years later the equity they received is totally worthless!)
- Employee is offered RSUs or stock options as a part of their employee compensation package
- Always sell RSUs as soon as they vest, especially because you pay taxes on them as soon as they vest.
- If it’s a choice of RSUs or stock options, negotiate for RSUs instead. RSUs will typically always be worth something, but stock options can stay underwater and may have zero intrinsic value.
- Don’t be afraid to ask for accelerated vesting schedules. If your employer offers you 300 RSUs with 100 vesting each year, ask for them to vest every 6 months. Or ask for a larger tranche up front (200 vest in year 1)
- Employee participates in employee stock purchase program (ESPP) which allows them to buy company stock at a discount
- Such programs should be viewed as savings vehicles in that you can sell discounted stock as soon as you acquire it. If your employer has rules against immediately selling, then do not participate in the ESPP!
- Employee is an equity owner of a closely held start up
- Instead of equity, ask for profit rights instead. Or, if the company does a fundraising round, cash out a portion of your equity during the fundraising round.
A lot of people lost a lot of money at the FTX collapse, but there’s a valuable lesson for employees of publicly traded companies or start ups…
DELEVERAGE YOURSELF FROM YOUR EMPLOYER.
But what if the value of my company rises? Well, what do you think will happen to your overall compensation if the company’s value is rising? Your compensation has a good chance of rising too. That’s a win/win situation for you.
But what if your company fails and you’ve got a chunk of your net worth tied up in it? Poof, it’s gone! Now your unemployed with no income and you just lost additional funds as well. That’s a lose/lose. You’ve gotta think in terms of win/win and avoid lose/lose situations. As the old saying goes, it’s much easier to avoid bad decisions then it is to make good ones.
Unfortunately, many employees of FTX learned this lesson the hard way. Learn from their mistakes.
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