At The Money: Getting Paid in Company Stock

Summary

Masters in Business: At The Money – Getting Paid in Company Stock

Release Date: July 23, 2025

In this episode of Bloomberg’s "Masters in Business," host Barry Ritholtz delves into the intricate world of equity-based compensation with Joey Fishman, a seasoned expert in the field. As companies increasingly offer stock options and other forms of equity to attract and retain talent, understanding the nuances of these compensation packages becomes essential for both employers and employees. This comprehensive discussion unpacks the types of equity compensation, their advantages and disadvantages, tax implications, vesting schedules, and the psychological factors influencing employee decisions.

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1. Introduction to Equity-Based Compensation

Barry Ritholtz opens the conversation by highlighting the rising prevalence of equity-based compensation in the U.S., particularly within the technology and high-growth venture capital-funded sectors. He shares insights from a recent employee benefits conference in Silicon Valley, noting that many employees fail to capitalize on their stock options and equity packages effectively.

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2. Types of Equity Compensation

Joey Fishman explains the most common forms of equity compensation:

• Restricted Stock Units (RSUs)
• Non-Qualified Stock Options (NQSOs)
• Incentive Stock Options (ISOs)

“The most comprehensive or the one that we see the most is restricted stock units, then followed by non-qualified stock options and incentive stock options.” [03:35]

Barry further clarifies:

“The main difference between the two [ISOs and NQSOs] is that incentive stock options, if you thread the needle appropriately or correctly, you avail yourself to long term capital gains tax treatment.” [04:07]

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3. Corporate vs. Cash Compensation

When discussing why companies opt for equity over cash compensation, Joey emphasizes the cultural and financial incentives:

“They set the right tone from the beginning. Employees are incentivized to grow the business, feel like active participants, and are financially rewarded for their contributions.” [05:43]

However, he also points out corporate challenges:

“They are complex to administer. The regulatory environment is kind of a beast.” [05:46]

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4. Determining the Right Mix of Equity and Cash

Joey describes the balancing act companies face in offering equity and cash:

“It's more art than science. Each company is going to have its own version of an equity comp stock plan.” [06:16]

Different industries adopt varied approaches:

• Tech companies often start with stock options and transition to RSUs as they mature.
• Oil and gas sectors typically prefer RSUs.
• Financial firms lean towards restricted stock awards (RSAs) with deferred compensation packages.

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5. Tax Implications of Equity Compensation

Navigating the tax landscape is a significant challenge for employees. Joey outlines the complexities:

“The goal is to get yourself to a place where realized gains receive long-term capital gains tax treatment.” [07:33]

He warns of potential pitfalls:

• ISOs may trigger Alternative Minimum Tax (AMT), which can be costly.
• NQSOs might result in ordinary income tax rates, significantly reducing net gains, especially in high-tax states like California.

“In non qualified stock options, you may just find yourself completely in ordinary capital gain or ordinary income tax rates.” [07:45]

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6. Understanding Vesting Schedules

Joey explains vesting schedules, typically a four-year period with a one-year cliff:

“After the cliff is met, you then get 25% of your shares. From there on out for the next 36 months, you're going to get quarterly vesting of a fractional percentage.” [09:08]

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7. Selling Equity: Public vs. Private Companies

Barry discusses the differences in liquidity between public and private companies:

• Public Companies: Easier to sell shares post-IPO, subject to a six-month lockup period which often sees stock prices dip.

  “You're subject first after IPO... there's a six-month lockup period where you can't touch your shares.” [10:09]

• Private Companies: Require double-trigger events (vesting and a liquidity event) to realize gains, often leaving employees with illiquid assets.

  “If there's no transaction where somebody buys shares or liquidity exchanges, you're stuck until something happens.” [11:22]

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8. Common Mistakes in Equity Compensation

Joey identifies prevalent errors made by both employers and employees:

• Employees: Tend to be overconfident, resulting in insufficient diversification of their investment portfolios.

  “Overconfidence tends to run rampant... resistance to diversifying away from what they've attached themselves to.” [12:51]

• Employers: Struggle with the complexity of administering equity plans and navigating regulatory requirements, often risking legal complications.

  “It's a landmine if you don't know what you're doing.” [13:00]

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9. Psychological Factors and Risk Management

Addressing the psychological aspect, Joey stresses the importance of diversification to mitigate risks associated with concentrated stock holdings:

“Volatility is a tax on returns. Locking in your quality of life by diversifying is less expensive than maintaining a concentrated risk.” [14:46]

He urges employees to recognize the risks of holding too much equity in a single company, regardless of its current success.

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10. Recent Trends in Equity Compensation

Joey observes a shift towards simpler equity compensation forms like RSUs, which are easier to administer and more straightforward for employees to understand:

“Everyone's trying to find a way to simplify all this. RSUs are considerably easier than navigating ISOs and NQSOs.” [15:58]

He notes that after a prolonged bull market, companies are moving towards more mature and less volatile methods of distributing equity.

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Conclusion

Barry Ritholtz wraps up the episode by emphasizing the importance of employees understanding their equity compensation packages. He advises:

“Explore it. Speak to your financial advisor, speak to your accountant or tax professional. Understand the risks. De-risk and diversify your portfolio.” [17:00]

By doing so, employees can maximize the benefits of their equity compensation while mitigating potential financial pitfalls.

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This episode serves as an invaluable resource for anyone navigating the complexities of equity-based compensation, offering expert insights and practical advice to make informed financial decisions.

Transcript

[Barry Ritholtz]

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[Nathan Hager]

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[Nathan Hager]

Bloomberg Audio Studios Podcasts Radio News.

[Joey Fishman]

Look.

[Barry Ritholtz]

At them yo yos that's the way you do it.

[Joey Fishman]

You play the guitar on the MTV.

[Barry Ritholtz]

That ain't working that's the way you do it. Money for nothing and your cheeks for free now that ain't working, that's the way you do it.

[Unknown Speaker]

Equity based compensation has become an increasingly large part of the US labor landscape, especially in technology and high growth venture capital funded companies. I was at a recent employee benefits conference in Silicon Valley and I was shocked to hear from so many corporate benefit managers that a lot of their employees neglect to capitalize on tom, on their stock options or other types of equity compensation. To help us unpack all of this and what it means for your compensation let's bring in Joey Fishman. He's an expert in equity based compensation in Bends, previously Portland, Oregon, and he has clients ranging from Seattle and Redmond down to San Francisco and Silicon Valley. Full disclosure. Joey is the equity compensation expert at my firm and he's one of my partners. So, Joey, let's start with the basics. What are the most common types of equity compensation plans today that companies are offering and how do these differ?

[Barry Ritholtz]

Thank you so much, Barry. The most comprehensive or the one that we see the most is restricted stock units, then followed by non qualified stock option and incentive stock options. Those three things tend to be the most frequent forms of equity compensation that we see these days.

[Unknown Speaker]

So RSU, ESOPs, what are the difference between this? Alphabet soup.

[Barry Ritholtz]

Alphabet. Yeah, yeah. So ESOP actually is the employee stock option plan. And so that can include non qualified stock options or incentive stock options.

[Unknown Speaker]

What are the difference between those two?

[Barry Ritholtz]

The main difference between the two is that incentive stock options, if you thread the needle appropriately or correctly, you avail yourself to long term capital gains tax treatment. Non qualified stock options are a little bit different where you have to meet two different thresholds in order to avail yourself to long term capital gains tax treatment. One basic primary way, and that is incentive stock options are reserved only for employees. That comes from the treasury account. The non qualified stock options, that's typically given to board members, consultants, other folks that have a participating activity within the firm itself, but they're not necessarily an employee.

[Unknown Speaker]

I kind of remember a story about a guy who designed a logo for Facebook and they paid them in stock and it ends up being worth millions of dollars. I don't know if that sounds familiar. So look, my firm is an employer. We issue equity participation. We have about 30 out of nearly 80 employees are partners. I understand the advantage of offering equity compensation, but I want to hear it in your terms. What are the advantages of equity versus cash from a corporate perspective?

[Barry Ritholtz]

I mean, not to sound cliche, but we've all heard the term that like culture each strategy. That is very much the case in this endeavor. So like it sets the tone, the right tone, from the beginning. Employees are incentivized to grow the business, you know, put their heads down and get after it with less friction between, you know, management and themselves. So they, they feel like they're active participants in growing the business and they'll be financially rewarded for doing so.

[Unknown Speaker]

What are the disadvantages from a corporate perspective?

[Barry Ritholtz]

They are complex to administer. The regulatory environment is kind of a beast. And you do have to spend money on compliance to make sure that you're threading the needle of all the various rules that apply depending on the various stock plan that you choose to employ.

[Unknown Speaker]

So let's say both a company and an employee say, hey, this equity thing sounds attractive. How do you go about figuring out what's the right mix of equity and actual cash compensation? How does this differ for employees at different levels within the company?

[Barry Ritholtz]

It's more art than science. And so each company is going to have its own version of an equity comp stock plan. The Nikes of the world, they tend to get folks that are athletes and like to push themselves. So in some cases they'll offer these employees incentive stock options which have a lot of leverage up front. They also have the ability to choose RSUs or restricted stock units for folks that want to at least at the end of the day guarantee that they're going to have something tangible. Other firms like Netflix, they give you the option to determine how much of your actual compensation that we're going to give you each year can be dedicated to buy non qualified stock options. Broadly speaking, oil and gas typically uses RSUs. Financials typically use RSA's restricted stock awards with healthy or juicy deferred comp packages. And then tech is very much reliant on options at the beginning and then as the company grows and becomes more establish, it switches to RSUs.

[Unknown Speaker]

So we're talking about a variety of different ways to implement an equity based compensation. What does this mean for taxes? It sounds like each one of these has its own set of tax ramifications for the employee.

[Barry Ritholtz]

They do. And it's very hard, it's very challenging to navigate all of it. It's like playing a game of financial twister. The goal at the end of the day is to get yourself available so that any realized gains from here on out or long term capital gains tax treatment. Because at least there within the spirit and intent of the law, you have the ability or at least some options to beat back that tax liability. So ideally you're getting yourself to that place, the ones that end up being most punishing, which relatively speaking is folks that have non qualified stock options or ISOs. In the incentive stock option case, they may fall under what's called AMT taxes, which incredibly expensive tax that's levied on folks that is not always recoupable down the road. And in non qualified stock options you may just find yourself completely in ordinary capital gain or ordinary income tax rates. And you know, in some cases, you know, if you're realizing a couple million dollars worth of non qualified stock options and you live in the state of California. At the end of the day, you're walking home with maybe 50 cents on the dollar. The the needles that have to be threaded to make yourself available for long term capital gains tax treatment are hard, but if you can do it correctly, then the window opens up for your ability to at least chip away at that tax liability and keep more of that gain. When all is said and done.

[Unknown Speaker]

Huh, really interesting. Let's talk about vesting schedules and the difference between a cliff or a graded vesting. When do these option plans actually show up as real assets to the employee?

[Barry Ritholtz]

To the employee? That's a good question. Okay, so to the employee they have to follow a vesting schedule. And most work under a four year vesting schedule with a one year cliff, which simply means that you need to stick around for the next four years and your shares are going to invest in equal amounts. However, nothing is going to invest or invest for the first 12 months. That's called a cliff. After the cliff is met, the first 12 months is met, you then get 25% of your shares. From there on out for the next 36 months, you're going to get quarterly divestitures or vesting of a fractional percentage of the total until that remainder period is up and the equity is all yours.

[Unknown Speaker]

So someone who has opted for a high equity portion of their compensation and their company does really well and let's just say they've won. What's the procedures from there? How do they take full advantage, minimize their taxes and reduce some of their concentrated wealth in a single holder?

[Barry Ritholtz]

Here's where things really get complex and it's going to depend on if the company is publicly traded or if they're privately. So if they're publicly, that's the easier of the two because there's liquidity when you need it. However, as an employee, you're going to be subject first after ipo, assuming that you're going through the process, there's going to be a six month lockup period where you can't touch your shares. And so typically, I mean what generally happens is that the stock's going to sell off, it's going to get shellacked for the next six months and it's going to look terrible and it's going to feel awful. But eventually, once that six month lockup period is over and all of the insiders have divested their share, then it's put up or shut up time. So usually that six month period is really grueling for a lot of folks to endure. There's going to be trading blackout periods that surround earnings releases. If you're in the C suite, you're going to need to file specific forms to make sure that there's no whiff of insider trading. So there's a whole patchwork of laws and rules that you have to follow in order to sell these shares. And so it's not as easy as saying, hey, when it hits this price point, I'm going to sell everything and just live off the, you know, the interest for the rest of my life. It's not that easy, unfortunately.

[Unknown Speaker]

You mentioned private versus public. Obviously it's easy if the company goes public or if they're purchased in an M and A transaction. But what happens with private companies where there isn't necessarily a broad deep market that's very liquid?

[Barry Ritholtz]

They call these double trigger events. So in a privately traded market, essentially two things need to occur. One is you need to vest. So that's the first trigger. And the second trigger is there needs to be a liquidity event. So if there's no transaction where somebody buys shares or liquidity exchanges, you're kind of stuck there until something happens, if at all. You could theoretically just have a bunch of net worth on paper that's captive and never gets realized because there's just no market for it.

[Unknown Speaker]

Really, really interesting. But other than that, there really is no difference between various stock option plans for a publicly traded company or for a private company. It's just what the exit looks like.

[Barry Ritholtz]

It's mostly the liquidity constraints that are challenging for privately traded firms. And being able to realize that gain within at least the timeframe that you hope, sometimes it's just not available to you until a fluke happens.

[Unknown Speaker]

Understood. So what are some of the biggest mistakes you see that either corporate offerors of equity compensation make or employees who receive equity compensation also engage in?

[Barry Ritholtz]

On the employee side, overconfidence tends to run rampant. And I say this because, like with our firm, like they're coming to us after already having won the game. So like the, the, the world with which we see is through survivorship bias. I should say that at the, at the forefront. But no, they've already won it. So they're coming to us. And among the things that they need to immediately wr heads around is the uncertainty of having to navigate the various rules. There's a degree of overconfidence which, you know, has its own challenges that need to be dealt with and usually like through strategic planning and showing them, you know, Sequence of risk and how this can all play out helps, you know, dampen that down and you know, there's resistance to diversifying away from, you know, what they've attached themselves to for, for so many years. So overcoming those things is definitely challenging on the, on the employers, on the employee side, on the employer side, it's the regulatory needles that have to be threaded. It's a beast. There's this fraught with litigation even on the advisory side because it involves taxes. You have to be very careful in how you communicate things and display things so that you're not giving tax advice when you should be strictly relegated to financial advice. And so the employer is also straddling that very same line. It's very unclear. Sometimes even attorneys don't want to talk touch this stuff. So it's a, it's, it's a landmine if you don't know what you're doing.

[Unknown Speaker]

Let's talk a little bit about psychology. You know, every employee seems to think their stock is the next Nvidia when it could just easily be the next Lehman or GE or Enron for all we know. How do you as an advisor work with employees at hot companies, letting them understand all of the risks and potential risks they're looking at?

[Barry Ritholtz]

At the end of the day, it is considerably less expensive to lock in your quality of life by diversifying than it is to maintain a concentrated risk in a single security. So and the, the other way to say that is that volatility is a tax on returns. And so once you get to a place where, look, there's 35 times your burn rate net of taxes that are sitting in your equity comp. If you're not de risking and locking in your quality of life now, you are missing the opportunity of a lifetime. Getting them to understand what they don't want to happen and what they want to avoid is absolutely tantamount. And when you show them the, the difference between hey, it's going to cost you this much to lock in your quality of life with a diversified portfolio versus if you continue to maintain this course, it's going to cost you 30 to 40% more to ensure that you're never going to run out of money again because of the associated volatility with that single security.

[Unknown Speaker]

Huh? Really interesting last question. Tell us about the most recent trends you see in equity compensation. What is going on, especially at tech companies and high growth firms, they are.

[Barry Ritholtz]

Switching to RSUs which are the easier of the equity comp forms to administer. And it's a very simple process. You're going to have a vesting schedule. It's most likely going to have a one year cliff. It'll unfold over four years. But you know, in each portion or each vesting schedule, you'll be allotted a set of shares. Whatever the value is or the trading price is at the time that you're vesting. That's what, that's what your, your amount is going to be. There will be taxes owed, but it's, it's considerably easier than having to navigate, you know, incentive stock options and AMT tax or non qualified stock options and the bargain element and all the various tax treatments that go along with it. And so the bottom is that everyone's trying to find a way to simplify all this. You know, after a 15, 16 year bull market, you know, a lot of the money has been made in the option space and now they're, they're settling in for, I would say, a more mature way of distributing income because, or distributing equity compensation. Because with RSU's, at least at the end of the day, you're going to.

[Unknown Speaker]

Have something really, really interesting. So to sum up, if you're an employee at a company that offers you an equity part of compensation, you should very much explore it. Speak to your financial advisor, speak to your accountant or tax professional. Make sure you understand the risks. But if you've won this game, don't hesitate to de risk. Have a more broadly diversified portfolio. Don't have 90% of your entire net worth tied up in a single stock. It's just way too much risky and potentially creates a lot of downside. I'm Barry Ritholtz. You're listening to Bloomberg's at the Money.

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[Joey Fishman]

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