Get your equity right. It could change your life.
How to take control of your startup equity - Interviewing SecFi's CEO, Frederik Mijnhardt
At one point in my career (OK, it was last week), I was shaking out the couch cushions, searching for nickels and dimes to pay for my stock options and cover the taxes (!?!) that came along with exercising them. In my moment of illiquidity and tax incredulity I discovered Secfi, a company unlocking private company equity.
I got the chance to speak with Frederik Mijnhardt, CEO & Co-founder at Secfi. Along the way we touched on a number of tips that can help employees (like me and you) better manage their equity outcomes.
Here’s the TL;DR of the topics we covered, and my favorite sound bites:
Starting SecFi, and the equity learning curve
“I realized that it would cost me almost $2 million in taxes to own my equity, which seemed insane to me.”
Unlocking the value in your private equity
“Most commonly, we see startup employees who are bullish on their company but either can’t afford the exercise costs, or have other financial goals or obligations like a downpayment on a house, using Secfi Financing.”
Advice for startup employees evaluating their equity situations
“On average, startup employees have 86% of their wealth tied up in their company’s equity.”
Running a company
“The other thing that was surprising at first is that a lot of CEOs, CFOs, founders, etc. also don’t fully understand equity themselves. So, while they want to pass on knowledge to the rest of the company, they just don’t know where to begin.”
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I. Starting SecFi, and the equity learning curve
If you had to explain SecFi to a third grader, what would you say?
We help people that work in startups figure out their finances, starting with the private equity they have in their companies.
What was the personal experience you had working at a startup that led you to start SecFi?
I worked at my first startup and helped build it over a number of years. Then, I realized that it would cost me almost $2 million in taxes to own my equity, which seemed insane to me. When I started asking around to others that worked in startups, I realized they were in the same boat and had zero information about how to understand and plan around equity.
That’s how we started Secfi, to solve that problem for everyone else in the space.
What’s the most misunderstood component of employee equity?
There are quite a few, mostly that you have to pay for stock options and that you probably will pay taxes on top of that. And that, because of taxes, the cost can change alongside the valuation of the company.
But the biggest misconception is that they should be considered an asset, in terms of your full financial picture. Meaning, when you are making any financial plans or goals for the future, your equity should be a part of your planning, even, and especially, before they become liquid.
Are you competing more against a set of companies or the fact that people just don’t understand their equity grants?
The biggest competition is definitely that startup employees, everyone from entry level to even senior leaders, just don’t know what they don’t know when it comes to equity. Most don’t pay attention until they have to. And usually that happens when they leave their company, and have 90 days to exercise, or their company is about to have a liquidity event, like an IPO, tender offer, or acquisition. And, usually, they realize that they should have been figuring this out much earlier.
II. Unlocking the value in your private equity
What problems do your core products solve?
Our equity planning tools are all free and they help employees better understand how their equity works and the implications of exercising. Our Equity Planner, for example, shows the difference between cost, taxes, and potential gains in various exercise scenarios.
For our financial products, Exercise Financing is a core product we offer to help startup employees pay for their stock options (including taxes) so they can be shareholders in the company they helped to build. It’s designed especially for startup employees with equity who work at companies on the path to exit (acquisition or IPO). Those who finance with Secfi are not required to pay it back until (or unless) their company exits. Most commonly, we see startup employees who are bullish on their company but either can’t afford the exercise costs, or have other financial goals or obligations like a downpayment on a house or not wanting to deplete their emergency funds, using Secfi Financing. We also work with a lot of people who are in job transitions, meaning they left a startup and have a 90-day window to exercise their options.
Liquidity financing is very popular amongst those who have already exercised their equity, hold their shares, and want to use the value of their equity for a different financial priority — ahead of IPO. These clients are still bullish on their company’s path to exit, and don’t want to sell their shares.
What’s the next problem you want to tackle?
Wealth management. We recently launched Secfi Wealth, in part based on client feedback. As a Registered Investment Advisor, we are now able to offer startup employees a full advice and investment management solution — that starts with getting their equity right, aligning it with their financial goals, and using it to grow it over the course of their lifetime.
III. Advice for Employees at Startups:
What’s the best advice you have for someone negotiating equity for the first time? How do you think they should benchmark themselves?
First, I think they need to be armed with the right questions. Most often, an offer will just include the number of options you’re receiving. But that tells you nothing about the actual value.
So, they should be asking:
What type of options are they?
What is the strike price?
What’s the current fair market value?
What’s the current preferred price?
What’s the liquidation preference?
They should also ask about their vesting schedule and if they can early exercise. And, also what the post-termination exercise window is, meaning how long they have to exercise if they leave the company.
All of that will help them better understand the value of the equity they’re receiving, and if it’s in line with what they would want. But, they should also ask the company their methodology for how they determined how much they’re being offered. Similar to salary bands, many companies have equity bands. So people should be asking the company if they have those, which could give them more insight into what they should expect.
Of course, there are a lot of different factors from company to company. The biggest factor will be what stage the company is in. Typically, you’ll see more equity from earlier companies and less from later stage ones that are closer to exit.
At what point in a company’s lifecycle do you think employees should stop asking about their fully diluted percentage and start asking about the value of the shares?
They should be asking about the value immediately. It’s certainly important to understand your diluted percentage, and how dilution in a future funding round could affect you, but that all just goes back to understanding the value. You can not build a successful company without diluting the stock. By bringing more money through funding, and diluting the stock, the goal is to actually bring in more value to the company.
A common misconception is that more options equals more value. But, of course that’s not necessarily true because it’s about how large the pie is, and how large of a piece you have. You could have a large piece in a small pie or a small piece in a large pie. And that small piece could be worth more. So it’s important to ask about overall value and how that sizes up your piece of the pie.
How should employees think about equity in relation to their salary? Is there a typical ratio or rule of thumb?
The short answer is that it really depends. There are so many factors, including the company size and stage to your own appetite for risk. Our 2022 State of Stock Options report found that most employees receive 12-14% of their salary in equity. But we also found that, on average, startup employees have 86% of their wealth tied up in private equity.
Equity is a form of compensation, but it’s also an investment opportunity and that’s how employees should approach it. They should think about what they need in terms of salary to live and, of course, that will be different for a single person starting their career versus someone that’s starting to have kids. But when they join a private company, they should think about the potential that equity could have in the future and how that could impact their lives. Ultimately, different people will have different risk profiles. Some will be more willing to be on the future potential of equity while others will be more focused on a steady salary.
I’ve noticed a lot of people don’t know that early exercise is a thing - what is early exercise and what are your thoughts on exercising immediately when you join a company if you have the cash, even before you hit your one year cliff?
This is a really important topic. We believe in offering employees the potential to exercise and participate in the company’s growth from the get-go, and not waiting until they vest. We do this at Secfi for all employees. Early exercising is just that — you, the employee, have the ability to exercise, or buy your options, before they vest.
The upside for the employee is that this can minimize costs and taxes. When you’re offered an equity grant, the strike price is based on the current 409A. Taxes are determined by the difference between those two. If they’re the same, you probably won’t pay tax. And, if the company is early enough, your strike price could be very low.
But I also believe it’s a good practice for companies. You offer this as an opportunity, educate employees on what’s involved, give them access to experts like Secfi to help guide their personal situations, and effectively people will have all the information and tools to make a smart decision based on their personal situation.
When employees have the opportunity to take secondary at the time of a fundraise, what’s your advice for sizing up if they should do it or not, and how much?
Understanding whether or not to participate in a tender offer, or for how much, is definitely a situation employees should be prepared for. And it’s actually a situation our financial advisors have worked with their clients to figure out.
The opportunity is that you can liquidate some of your equity today. You can use that for other financial goals, like buying a house or taking a family vacation, whatever that is for you. Or, you can re-invest it elsewhere. It’s a good thing that employees can access that immediate liquidity.
But it’s important to know that you are, in effect, selling that equity. So, if your company does exit and it’s at a higher valuation, you’ve already sold a portion of your stock. It’s also important to understand the tax implications before you decide to participate.
Where a financial advisor can really help you is to think about your overall net worth and where your equity fits into it. You can compare the percentage of your net worth in your equity today, versus the potential percentage of your net worth down the line, assuming the company continues growing. Meaning, it may not be a bad idea to diversify now and put that money to work somewhere else, even if you believe your company will grow. But others may think the company will grow quite significantly and they want to stay invested.
For our non-US based readers - What do you think about employee equity for domestic vs international employees? Is the US more or less complicated than, say, Europe?
No, the US is not necessarily more complicated, but it is more mature. In the US, on average, 18.6% of the cap table is owned by employees when a company goes public. IN UK, it’s 10.6%. In the Nordics, France, Germany it’s 4-6%. So, the U.S. is far more mature but Europe is catching up.
IV. Running a Company:
What’s changed the most in terms of how you think about employee equity now that you are a CEO and not just an employee?
What I think is super important is that it feels like I’m not alone building this company. I love seeing the ambition the employees have and how their belief in the company translates into equity. I really like it when employees ask for more equity, and that they’re as bought in as I obviously am.
It may go without saying, but we do a lot of equity education at Secfi and I love seeing how our employees become equity experts. Not just our financial advisors or Equity Strategists, but our engineers, marketing folks, etc. A great piece of feedback we consistently get is that we have one of the best offer letters because it clearly explains the equity we’re offering, the current value, and the potential value in the future. I’ve even heard that from spouses who also work at startups!
What have you learned from talking to CEOs and CFOs about employee equity?
The vast majority find it very complicated, and they’re conflicted about what they know and not wanting to influence their employees. They don’t know how to talk about it so they just don’t talk about it at all. It’s not always bad intent, it’s just that they feel uncomfortable. They don’t want to say the wrong thing or influence employees in the wrong way.
The other thing that was surprising at first is that a lot of CEOs, CFOs, founders, etc. also don’t fully understand equity themselves. So, while they want to pass on knowledge to the rest of the company, they just don’t know where to begin.
But we have worked with a number of companies over the past few years that have brought us in to do education programs. As a third-party, we’re not endorsing any decision, we’re just giving their employees the resources they need to understand their equity and to make more informed decisions. We continue to do that today, and many companies have actively sought us out to do that and I think that says a lot about the companies that are actively looking to help their employees understand their equity.
What I’ve Been Reading:
My friend Ciler interviewed me about my writing journey, and broke down all the trials and tribulations of being a creator (who also works full time). She’s been writing some excellent content on the game behind the newsletter game. Check it out.
What I’m Looking Forward to:
When it comes to cutting-edge FP&A best practices, processes, people, and tools are leading the way. With an ever-increasing need to manage larger volumes of data and automate every process, planning tools are more important than ever. Today we are seeing a new breed of software called Third generation FP&A software that empowers FP&A teams of all sizes to create greater value across the enterprise.
FP&A 3rd Generation Tools Demo Days will allow FP&A and finance professionals to see how companies are leveraging 3rd generation FP&A solutions to tackle the FP&A challenges facing businesses today and will enable them to support growth while successfully navigating market dynamics.
You can register (at no cost) for the event on March 15th and 16th, 2023.
Quote I’ve Been Pondering:
“Startups don’t starve, they drown"
-The Mom Test, by Rob Fitzpatrick