Dave: Hey everyone, Dave here with another episode of the Philly Tech Entrepreneurs podcast. Today I’m speaking with Mark Chini. Mark is a financial advisor at fintech company Compound Planning. He works directly with clients and their finances, been doing it for over 10 years, working with tech founders, executives, employees, and investors. We’ll be talking about tax strategies, investments, and his company also has built a web-based product that’s pretty cool for comprehensive wealth management. So, a lot of good topics we can kind of get into. Mark, how you doing today?
Mark: Doing well, Dave. Thanks for having me, excited to be here. Cheers, man.
Dave: Really appreciate kind of getting that perspective on the tax side of things. I think it’s often very overlooked in business. Entrepreneurs can be great about starting businesses and growing them, but it’s not really about what you make, it’s about what you take home, right? Is that what they say?
Mark: Yep, I’ve been in a situation where I’ve made some mistakes so I think there’s gonna be a lot to talk about.
Dave: Let’s kind of think about it from like the life cycle of like actually from an employee perspective. So maybe not necessarily an entrepreneur, in the true sense, but someone who’s joining a tech startup because I think that’s still relevant to the community. If I go, I interview, I get hired by a tech startup, they present me an offer, I’m kind of comparing them. What are some things I need to be thinking about in this offer? What’s important? What are common mistakes people make?
Mark: Great question. I think the high-level breakdown between cash and equity is obviously very important, right? Where are you at in your stage of life and what’s more important to you? Is it really the current cash compensation in the form of salary and bonus, or is it the equity upside? And are you willing to sacrifice one for the other? And I think, you know, when I joined my first startup a couple of years ago, they actually presented me with three different offers in terms of here’s a certain amount of cash with more equity, and then here’s a little bit less cash with more equity. And you sort of get these three scenarios, and at the time, I had to evaluate sort of which one was more important to me. So that’s the first thing, is do you want to negotiate that offer? I think most firms and companies will be okay with you negotiating. I think sometimes, I even had a boss one time who said if someone doesn’t counter my offer, I actually look at that as a red flag, because are they going to negotiate on behalf of our company when they’re talking to vendors and different places? So, I thought that was interesting. You always want to do it respectfully and get a sense of what the founders and the people in those decision-making positions are going to be comfortable with. The second part is what type of equity are you getting? Are you getting incentive stock options (ISOs), or are you getting non-qualified stock options (NSOs), or are you joining a company at a later stage where typically they’re giving out RSUs or restricted stock units? All three of those are taxed in very different ways. There’s more strategy with options than there is for RSUs. Are you given a mix of the two, right? Sometimes companies allow you to choose a mix of RSU versus ISOs or NSOs versus ISOs. So, we won’t get into the whole details of those tax complications of those three types, but those are the big things. And then what’s the exit outcome for this company? Is it something where the founders are really looking for a quick exit, are they looking for an acquisition? Is this something they truly believe can be a company that can go public one day? In factoring that into what the net present value of that offer is today, given the strike price, given the number of shares, given how many shares are outstanding, and just the future outlook for the company, I think those are all really important things to ask about.
Dave: Super good points. You mentioned a lot of acronyms that are new for me, and I understand kind of the deal, you know, the devil’s in the details, but we’re not all that today. But it’s a really interesting point, first of all, just mentioning that a single company could potentially present you with multiple offers, that’s something I wasn’t really expecting. But then, moreover, really kind of thinking about like, yeah, how do you kind of calculate what the value of these offers are by trying to understand like the vision of the founder and the likely kind of journey that it will go on. I mean, everybody, I mean not well, many people are obviously thinking that a startup’s going to go big or it’s going to sell for a lot, but trying to kind of hone in on what that vision is and trying to distill what that translates to for the offers that you’re presented is a pretty interesting perspective. And it definitely seems like if you do find yourself in a situation with an offer that maybe is a little more complex like the types of ones you described, seems worth it to like talk to a professional about that because if you make the wrong choice, you’re stuck with it, right?
Mark: Exactly. There’s calculators too online. I will say there are great resources online. If you plug in your sort of, hey, here’s the number of shares, here’s the stage the company is in, is it a pre-seed, is it Series A, is it Series B, here’s the dilution we expect for the rest of the way, it’s usually around 20% per Series A, B, C, D and so on, what’s the current 409A evaluation of the company? If you plug all those in, you can actually get a really nice sense of what your potential outcome could be if the company went public at a $10 billion valuation, for example. That’s really cool. I wish I had a reason to have played around with that.
Dave: You kind of mentioned sort of like that as companies raise more money, then your shares can be diluted, right? And then therefore, are somewhat, like, the company issues more shares and then your ownership percentage goes down, and exactly how valuable is that, right?
Mark: Exactly. And a lot of times, you know, founders don’t always have these answers. And I think if you press too hard, it might be off-putting to a future employer. But, you know, you can ask sort of what any future refresher grants might look like. Is it part of your compensation package going forward? If the company does well, will I get more equity or will I get a refresher so that my dilution isn’t so dramatic, right? My ownership percentage is still, you know, 0.2% or 0.5% or whatever it was. And I think going into the offer with a sober mindset of what the future could look like because, you know, as you know, many companies are staying private for much longer. The exit is not guaranteed. In fact, very few companies get to a big exit, such as an IPO or a major acquisition. So just being sort of realistic about your outcomes as opposed to letting yourself dream and maybe taking less cash than you might otherwise be comfortable with or, you know, just underselling your true value.
Dave: An interesting comment also you made about, like, that, you know, we talk about, oh, asking these questions, trying to understand the founder and their vision and their expectations and things like that. But those questions could potentially be off-putting, right? If someone looks overly invested simply in the financial outcome of their tenure at the company, it might rub the founders the wrong way. They’re not really in it for the mission or the vision or things like that. The appropriate way to kind of have that conversation, which questions are within bounds, which ones are kind of looking a little too picky?
Mark: Yeah, I think nowadays, particularly with companies like Carta and Share and Pie and Shareworks and all these companies that are sort of trying to democratize equity and saying we want people to understand their equity. And I think a lot of founders now should be willing to disclose certain elements like number of shares outstanding, the current 409A valuation. They should be willing to disclose that to a future employer or potential employee. If they’re not, I think that is a little bit of a red flag in some cases because, you know, this should be a future teammate, right? We’re talking to. It should be. And if we’ve already gotten to the offer stage, hopefully they’ve vetted you and you’ve vetted them in some ways. If you’re asking them, you know, what your revenue is and what your nitty-gritty, you know, long-term retention value in unit economics are, those can be somewhat sensitive, particularly for investor rounds. If you’re trying to raise capital, they don’t always want all those things floating around in the sort of public sphere. And so, I think some of those can be held close to the vest. But otherwise, some of the very basic details should be fair game for them to ask.
Dave: You talked about kind of understanding like your market value, and I wonder, how do you kind of go about understanding what is the appropriate amount of equity or something that you should be receiving? I mean, salary is something that we generally have a little bit more intuition around. I just think it translates a little more directly. We’re kind of used to it. You can kind of do a Google about what a marketing manager should be earning, things like that. But, you know, stock is so more nebulous. What are kind of expectations for equity? How do you kind of go about determining what’s correct?
Mark: Great question. There are a lot of companies now, like Levels is one, which is sort of a Glassdoor but specifically for tech, and being able to sort of measure offer letters and compensation. Quora is also a great resource. There’s a lot of conversations that happen on Quora around, hey, I’m a level seven or L six sort of engineer going into Amazon or a big FANG company or formerly, I guess, FANG, and these are my numbers, right? In terms of shares, in terms of equity and salary. For startups, it can be challenging. I think depending on what stage, if you join the first 10 employees, your percentage ownership of the company should be anywhere from 0.1% to, you know, 1%, being on the high side. If you’re a CTO and you’re being offered a CTO role at an early-stage startup, you know, 1% might be a fair compensation for that. If you’re sort of a head product designer or lead designer, maybe 0.75% or 0.5%. It just depends on sort of the nature of the offer and your skill set and your experience. But you can compare those numbers fairly easily. If you’re joining in the first 200, 500 employees, you’re probably looking at a 0.02 or 0.01% ownership, maybe even lower. It’s just the nature of they can’t give away too much equity in the beginning of the company.
Dave: Okay, so it’s not like 50/50. I understand.
Mark: Yeah, well, the founders, you know, the founders sometimes have very strict 50/50. Sometimes it’s very skewed. And then by the time they get to exit, their dilution is already down to maybe 12% at the end. So, I think sometimes that’s a misconception in terms of, oh, if I’m a founder, I still own 90% at the end of the road. Sometimes it doesn’t happen that way.
Dave: Interesting. Someone in the community had once asked about QSBS, and I believe you left a comment about, hey, this is stuff I do all the time. I know we’re limited on the number of acronyms we can explore. Talk to me about that one.
Mark: Sure. So QSBS stands for Qualified Small Business Stock, and basically, the IRS set it up to encourage investment into small companies. It just so happens that a lot of technology companies qualify under QSBS. Unfortunately, a financial services company like my company would not qualify because we’re directly involved in financial services and investment management and tax planning, that sort of thing. But if you had a company that was doing artificial intelligence, for example, that fully qualifies as a qualified business activity. There are a number of things. The other exclusions are hospitality, farming, there’s some other things that just don’t qualify. But assuming the business does qualify, if you hold the stock for five years, so that’s a big distinction, not options. You have to exercise your options, get the shares, and then hold them for five years. If the company, when you were granted your equity, had less than $50 million in net assets, and then if you hold that, meet that holding period requirement, a couple of other things, you can get completely tax-free treatment on your long-term capital gains. So, that’s really the big thing here, is that, you know, say I got my options and they were a penny per option per share, and they go public at $10 a share, I could be sitting on millions of dollars of capital gain, but if I meet that QSBS requirement, none of that is taxable to me, at least at the federal level. If you’re a California resident, unfortunately, California is one of the states that does not conform to federal treatment of QSBS, and so you would have to still pay California taxes or state taxes on that. But the entire federal amount would be tax-free, which is a pretty unbelievable. I wouldn’t even say loophole, it’s just the way the tax code is still written. They may close it one day, but right now, it’s still pretty powerful. I deal with clients that have that all the time. And one thing to note there is if you do claim QSBS and report zero on your taxes for capital gains, you may be audited by the IRS. And so that’s something that may be a flag to them. And if you do, you just want to make sure that you’re prepared with a defense, right? You have your files, you have your company equity documents, you have your founders’ letter that says, this is what our balance sheet looked like when you were granted the shares, and you want to have a CPA and a financial advisory team that are guiding you through that process so that if the IRS ever did audit you, that you have a complete defense file ready to go.
Dave: Yeah, well said. This is one of those things that someone might be like, oh, that’s whatever, it’s never going to happen. It happened to me, four years and I didn’t really find out until years later that QSBS was a thing. Like, sometimes you just don’t know, you know? I mean, yeah, the C Corp is a great point. Yeah, that’s one I forgot. It has to be a C Corp. Yeah, sure, otherwise maybe there aren’t like shares or something. But in any case, it can definitely happen to, you know, a regular kind of person, which I consider myself to be one. So, it’s good to be like passively aware of these types of things. Like, you don’t need to know the exact definition, but you need to know if it’s something you should look into, like in what situation or who to talk to about it.
Mark: And it’s up to $10 million of capital gains, either $10 million or 10 times your original cost basis, whichever is higher. And you can do something called trust stacking where you would funnel shares into an irrevocable trust, and then 10 times the number of trust could be your exemption. So, that’s a, you know, if you’re looking at the Tim MIT Airbnb sort of IPO situation, that could be something that to explore for folks who are expecting a very large liquidity event.
Dave: Very cool, man. I wish we had met five years ago, but never too late. For those getting in touch with you because they’re ready to kind of, you know, who knows, join a startup, get some equity, build a business, what should they do? How should they find you?
Mark: Yeah, absolutely. So, we can be found at compoundplanning.com, so just compoundplanning.com. We also have a demo of our application. I think one of our biggest strengths is kind of we built this ecosystem for things that affect the tech ecosystem. So, you know, company equity, crypto investments, cash accounts, insurance, you can link up all your accounts in this platform and really be able to see your full picture come to life and model different scenarios and that sort of thing. So, that is under app.compoundplanning.com. You can find that demo. I’m on LinkedIn as well, Mark Cecchini and then Twitter as well, Mark Cecchini is my handle. So, I share a lot of financial tips and things that affect tech employees. I’ll write threads on, you know, long complicated topics and that sort of thing. So, it’s been fun to get involved there.
Dave: Awesome, man. Appreciate your wisdom that you dropped today. Hope to see you at an upcoming event. Thank you very much.
Mark: Awesome, thanks, Dave. Appreciate it.