At The Cash: Getting Paid in Firm Inventory (July 23, 2025)
Fairness-based compensation has change into an more and more fashionable type of compensation in the US, particularly in Tech and high-growth, VC-funded corporations.
Full transcript beneath.
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About this week’s visitor:
Joey Fishman is a Senior Advisor at Ritholtz Wealth Administration (RWM), the place he assists purchasers with managing their inventory, choices, and fairness compensation.
For more information, see: Private Bio
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TRANSCRIPT: Understanding Fairness Comp Joey Fishman
Fairness based mostly compensation has change into an more and more massive a part of the US labor panorama, particularly in expertise and excessive progress enterprise capital-funded corporations.
I used to be at a latest worker advantages convention in Silicon Valley. I used to be shocked to listen to from so many company profit managers that numerous their staff neglect to capitalize on their inventory choices or different varieties of fairness compensation.
To assist us unpack all of this and what it means in your compensation. Let’s usher in Joey Fishman. He’s an professional in equity-based compensation and Bend (beforehand Portland) Oregon, and he has purchasers starting from Seattle and Redmond all the way down to San Francisco and Silicon Valley.
Full disclosure. Joey is the fairness compensation professional at my agency, and he’s one among my companions.
So Joey, let’s begin with the fundamentals. What are the most typical varieties of fairness compensation plans immediately that corporations are providing and the way do these differ?
Joey Fishman: Thanks a lot, Barry. Essentially the most complete, the one which we see probably the most is restricted inventory models.
Then adopted by non-qualified inventory possibility, it’s incentive inventory choices. These three issues are usually probably the most frequent types of fairness compensation that we see lately.
Barry Ritholtz: RSUs, ESOPs, what are the distinction between this alphabet soup of acronyms.
Joey Fishman: So ESOP truly is the worker inventory possibility plan. And so that may embrace non-qualified inventory choices or incentive inventory choices.
Barry Ritholtz: What are the distinction between these two?
Joey Fishman: The principle distinction between the 2 is that incentive inventory choices. When you thread the needle appropriately or accurately, you avail your self to long-term capital good points tax therapy. Non-qualified inventory choices are just a little bit completely different the place you must meet two completely different, thresholds with a purpose to avail your self to, to, uh, long-term capital good points tax.
One fundamental, major approach, and that’s incentive inventory choices are reserved just for staff. (That comes from the treasury account). The non-qualified inventory choices that’s sometimes given to board members, consultants, folks which have a collaborating exercise inside the agency itself, however they’re not essentially an worker.
Barry Ritholtz: I bear in mind a narrative a couple of man who designed a brand for Fb they usually paid him in inventory and it ended up being price tens of millions of {dollars}. I don’t know if that that sounds acquainted. So, look, my agency is an employer; we situation fairness participation. We have now about 30 out of practically 80 staff or companions. I perceive the benefit of providing fairness compensation, however I need to hear it in your phrases. What are the benefits of fairness versus money from a company perspective?
Joey Fishman: I imply, to not sound cliche, however we’ve all heard the time period that like tradition, every technique. That could be very a lot the case in, in, on this endeavor.
It units the tone, the appropriate tone from the start. Workers are incentivized to develop the enterprise, , put their heads down and get after it with much less friction between, , administration and themselves. They, they really feel like they’re energetic members in rising the enterprise they usually’ll be financially rewarded for doing so.
Barry Ritholtz: What are the disadvantages from a company perspective?
Joey Fishman: They’re complicated to manage. Uh, the regulatory surroundings is form of a beast. And also you do must spend cash on compliance to just remember to’re threading the needle of all the assorted guidelines that apply relying on the assorted inventory plan that you simply select to, to make use of.
Barry Ritholtz: So let’s say each an organization and an worker say, Hey, this fairness factor sounds enticing. How do you go about determining what’s the right combination of fairness and, and precise money compensation? How does this differ for workers at completely different ranges inside the firm?
Joey Fishman: It’s extra artwork than science, and so every firm goes to have its personal model of an fairness comp inventory plan.
The Nike’s of the world, they have a tendency to get people which are athletes and wish to push themselves. So in some circumstances, they may supply these staff incentive inventory choices, which have numerous leverage upfront. Additionally they have the flexibility to, to decide on RSUs or restricted inventory models for people that need to at the very least on the finish of the day, assure that they’re going to have one thing tangible.
Different corporations like Netflix, they, they provide the possibility to find out how a lot of your precise compensation that we’re going to offer you annually may be devoted to purchasing non-qualified inventory choices.
Broadly talking, oil and gasoline sometimes makes use of RSUs financials, sometimes use RSAs (restricted inventory awards) with wholesome or juicy deferred comp packages. After which tech could be very a lot reliant on choices at first. After which as the corporate grows and turns into extra established, it switches to RSUs.
Barry Ritholtz: We’re speaking about a wide range of other ways to implement an equity-based compensation. What does this imply for taxes? It appears like every one among these has its personal set of tax ramifications for the worker.
Joey Fishman: They do, and it’s very arduous, it’s very difficult to navigate all of it. It’s like taking part in a sport of economic tornado.
The objective on the finish of the day is to get your self obtainable in order that any realized good points from right here on out or, or long-term capital good points tax therapy. As a result of at the very least there, , inside the spirit and intent of the legislation, you’ve gotten the flexibility, or at the very least some choices to beat again that tax legal responsibility. Ideally, such as you’re, you’re getting your self to that place.
Those that find yourself being most punishing, which, . Comparatively talking is, , people which have non-qualified inventory choices or ISOs in, within the incentive inventory possibility case, they could fall underneath what’s known as AMT taxes, which is it. It’s an extremely in spent costly tax that’s levied on people that isn’t all the time recoupable down the highway. In non-qualified inventory choices, it’s possible you’ll simply end up utterly in atypical earnings tax charges. And , in some circumstances, , in case you’re realizing a pair million {dollars} price of non-qualified inventory choices and you reside within the state of California, on the finish of the day, you’re strolling dwelling with possibly 50 cents on the greenback.
The needles that must be threaded to make your self obtainable for long-term capital good points tax therapy are arduous. But when you are able to do it accurately, then the window opens up in your capacity to at the very least chip away at that tax legal responsibility and maintain extra of that sport when all is alleged and performed.
Barry Ritholtz: Let’s speak about vesting schedules and the distinction between a cliff or a graded vesting. When do these possibility plans truly present up as actual property to the worker?
Joey Fishman: To the worker? That’s a superb query. Okay, so to the worker, they must observe a vesting schedule and most work underneath a four-year vesting schedule with a one-year cliff, which merely signifies that you might want to stick round for the subsequent 4 years and your shares are going to vest in equal quantities. Nevertheless, nothing goes to vest for the primary 12 months, that’s known as a cliff.
After the cliff is met, the primary 12 months is met. You then get 25% of your shares from there on out for the subsequent 36 months, you’re going to get quarterly divestitures or vesting of, , uh, a fractional share of the overall till that the rest interval is up and the fairness is all yours.
Barry Ritholtz: Somebody who has opted for a excessive fairness portion of their compensation – and their firm does rather well, let’s simply say they’ve received. What’s the procedures from there? How do they take full benefit, reduce their taxes, and cut back a few of their concentrated wealth in a single holding?
Joey Fishman: Right here’s the place issues actually get complicated, and it’s going to rely on if the corporate is publicly traded or in the event that they’re privately held.
In the event that they’re publicly, that’s the better of the 2 as a result of there’s liquidity whenever you want it. Nevertheless, as an worker, you’re going to be topic first. After IPO, assuming that you simply’re going by means of the method, there’s going to be a six month lockup interval the place you’ll be able to’t contact your shares.
Sometimes, what usually occurs is, is that the inventory’s going to unload. It’s going to get shellacked for the subsequent six months, and it’s going to look horrible, and it’s going to really feel terrible. However finally, as soon as that six-month lockup interval is over and all the insiders have divested their shares, then it’s, it’s, it’s put up or shut up time. Normally like that, that six month interval is admittedly grueling for lots of oldsters to endure.
There’s, there’s going to be buying and selling blackout intervals that, that encompass, uh, earnings releases. When you’re within the C-suite, you’re going to want to file particular kinds to, to just remember to, there’s no whiff of insider buying and selling.
There’s a complete patchwork of legal guidelines and guidelines that you must observe with a purpose to promote these shares. It’s not as simple as saying, Hey, when it hits this value level, I’m going to promote all the things and simply reside off the, , the curiosity for the remainder of my life. It’s not that simple, sadly.
Barry Ritholtz: You talked about non-public versus public. Clearly it’s simple if the corporate goes public or in the event that they’re bought in an M&A transaction, however what occurs with non-public corporations the place there isn’t essentially a broad deep market that’s very liquid.
Joey Fishman: They name these double set off occasions. In a privately traded market, primarily two issues have to happen. One is have to vest. In order that’s the primary set off. And the second set off is there must be a liquidity occasion.
If there’s no transaction the place someone buys shares, or , liquidity exchanges, you’re form of caught there till one thing occurs, if in any respect. You may theoretically simply have a bunch of internet price on paper that’s captive and by no means will get realized as a result of there’s simply no marketplace for it.
Barry Ritholtz: However apart from that, there actually is not any distinction between numerous inventory possibility plans for a publicly traded firm or for a non-public firm. It’s simply what the exit seems like.
Joey Fishman: It’s principally the liquidity constraints that which are difficult for privately traded corporations and having the ability to understand that acquire inside at the very least the timeframe that you simply hope. Typically it’s simply not obtainable to you till a fluke occurs.
Barry Ritholtz: What are among the largest errors you see that both company offerors of fairness compensation make or staff who obtain fairness compensation additionally have interaction in?
Joey Fishman: On the worker aspect, overconfidence tends to run rampant. And I say this as a result of like with our agency, like they’re coming to us after already having received the sport. So just like the world with which we see is thru survivorship bias, I ought to say that on the, on the forefront.
However they’ve already received. So that they’re coming to us and among the many issues that they should instantly wrap their heads round is the uncertainty of getting to navigate the assorted guidelines. There’s a level of overconfidence, which has its personal challenges that have to be handled. And normally, like, by means of strategic planning and exhibiting them, , sequence of danger and the way this may all play out helps, , dampen that down and, , there’s resistance to diversifying away from what they’ve hooked up themselves to for, for thus a few years. So overcoming these issues is, is certainly difficult on the worker aspect.
On the employer aspect. It’s the regulatory needles that must be threaded. It’s a beast. There’s, there’s this fraught with litigation even on the advisory aspect as a result of it entails taxes. It’s a must to be very cautious in, in, in the way you talk issues and, and, and show issues so that you simply’re not giving tax recommendation when try to be strictly relegated to monetary recommendation. And so the employer can also be straddling that exact same line
It’s very unclear. Typically even attorneys don’t need to contact these items. So let’s say it’s, it’s a landmine in case you don’t know what you’re doing.
Barry Ritholtz: Let’s speak just a little bit about psychology. Each worker appears to suppose their inventory is the subsequent Nvidia, when it may simply simply be the subsequent Lehman or GE or Enron, for all we all know. How do you as an advisor work with staff at sizzling corporations? Letting them perceive all the dangers and potential dangers they’re taking a look at?
Joey Fishman: On the finish of the day, it’s significantly inexpensive to lock in your high quality of life by diversifying than it’s to keep up a concentrated danger in a single safety. The opposite method to say that’s that volatility is a tax on returns.
When you get to a spot the place, look, there’s 35 instances your burn price internet of taxes which are sitting in your fairness comp. When you’re not de-risking and locking in your high quality of life, now you’re lacking the chance of a lifetime.
Getting them to know what they don’t need to occur and what they need to keep away from is completely tantamount. And whenever you present them the distinction between, hey, it’s going to value you this a lot to lock in your high quality of life with a diversified portfolio, versus in case you proceed to keep up this course, it’s going to value you 30 to 40% extra to make sure that you’re by no means going to run outta cash once more due to the related volatility with that single safety.
Barry Ritholtz: Final query. Inform us about the newest developments you see in fairness compensation. What’s going on – particularly at tech corporations and and excessive progress corporations?
Joey Fishman: They’re switching to RSUs, that are the better of the fairness comp. Varieties to manage, and there, there, there, it’s, it’s a quite simple course of. You’re going to have a vesting schedule. It’s most probably going to have a one yr cliff. It’ll unfold over 4 years. However , in every portion or every vesting schedule, you’ll be allotted a set of shares, regardless of the worth is or the buying and selling value is on the time of your vesting.
That’s what, that’s what, uh, your, your, your quantity goes to be. There shall be taxes owed, nevertheless it’s, it’s significantly simpler than having to navigate, , incentive inventory choices and AMT tax or non-qualified inventory choices, the discount factor and all the assorted tax remedies that go together with it.
The underside line varies that everybody’s looking for a method to simplify all this after a 15, 16 yr bull market; A whole lot of the cash has been made within the possibility area and now they’re, they’re settling in for I’d say a extra mature approach of distributing earnings as a result of distributing fairness compensation as a result of with RSUs, at the very least on the finish of the day, you, you’re going to have one thing.
Barry Ritholtz: To sum up, if you’re an worker at an organization that provides you an fairness a part of compensation, you need to very a lot discover it. Converse to your monetary advisor, converse to your accountant or tax skilled. Be sure you perceive the dangers.
However in case you’ve received this sport, don’t hesitate to de-risk. Have a extra broadly diversified portfolio. Don’t have 90% of your complete internet price tied up in a single inventory. It’s simply approach an excessive amount of danger and probably creates numerous draw back.
I’m Barry Ritholtz. You might be listening to Bloomberg’s on the Cash.
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