Wealth Podcast Post

Employee Stock Options with Aaron Rubin

George Grombacher July 17, 2022

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Employee Stock Options with Aaron Rubin

LifeBlood: We talked about employee stock options, dealing with complexity and making good decisions, how to save money, when to think about exercising options, and how to get started, with Aaron Rubin, attorney, CPA, and Partner with WRP Wealth Management. 

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You can learn more about Aaron at WRPWealth.com, Facebook, Twitter, Instagram, YouTube and LinkedIn.

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Our Guests

George Grombacher


Aaron Rubin

Episode Transcript

george grombacher 0:00
Come on one level, this is George G. And the time is right. welcome today’s guest struggle powerful Aaron Rubin. Aaron, are you ready to do this?

Unknown Speaker 0:18
I’m ready to do this Georgia Gee, I like it. You know, I’m in the bay area here. And we all had Jimmy G for a while, and ended up not not doing as hot. So but I know, I know, you’re a better host, Jimmy cheese quarterback. So I think we’re all right

george grombacher 0:34
here as you might be an amazing podcast hosts one day, and it’s still still a great quarterback. It just doesn’t always work. So

Unknown Speaker 0:41
well. That’s true. I’m a Bears fan. So Rex Grossman’s is really in our recent past. Yeah. Great, great guy. We’ll see. We’ll see. We’ll see how he does. I’m gonna

george grombacher 0:54
love it. Well, Erin is a partner with W RP, Wealth Management. They’re providing successful Silicon Valley entrepreneurs with integrated financial planning, including pre IPO planning, his first book is financial adulting, a guide for young professionals. Aaron, tell us a little about your personal life more about your work and why you do what you do.

Unknown Speaker 1:14
Sure, so my personal aside that I have three daughters, and so they’re all under the age of 13. So I’m somewhat safe for now. Although, although my 12 year old is sort of like a 17 year old at this point, so it’s kind of rough, but, but that’s sort of what my life revolves around right now. So it’s either it’s either school or for them, or it’s worked for me, one of those two choices, and, you know, it’s, it’s, it’s rewarding many times and challenging, even more, but, you know, in my professional life, you know, I help individuals at pre IPO companies make great decisions about the stock compensation. And so one of the things that sets us apart from from many firms, you know, one is that we have a tax firm in house. So we prepare people’s tax returns, we do projections for them. And all the important stuff that people need to do when they’re when they’re going through major will say tax slash economic changes in their life. And then you lay on top of that, we have this narrow focus on stock compensation. And so for people that are in that world, you know, where they’ve joined a company that isn’t public, and you know, they’ve probably gotten a pretty decent amount of stock options, because that’s how people get paid in Silicon Valley, they sort of get paid in the future, in some respect, because they can’t cash it anything, typically out there exceptions until much later on. And so, you know, those are the people that that I help, you know, make decisions, and, you know, they’re they’re one, they’re brilliant, everyone, everyone I work with, is super smart, and have a has a really interesting story. And there, they tend to be world changers, in the sense that, you know, they want to go out and make a difference, you know, when they’re, you know, a lot of times they’re serial entrepreneurs. So, so they have a successful, you know, event and then they’re okay, what’s next? And sometimes, you know, they’re, they’re ready to hammer the Spurs. And they said, Well, I’ve made, you know, a ton of money, let’s, let’s do some good in the world. And they want to, you know, do charitable planning, fun trust and get their kids on their way. And so it’s, it’s, it’s just, it’s, I like those fun job in the world, in my opinion. And, you know, got into it somewhat by accident. You know, I was accounting undergrad, and I end up going to law school, where I met my wife. Now, my wife was in law school, I would never marry a lawyer. I don’t know who would marry a lawyer. But, but I certainly wouldn’t. I don’t know. I don’t know why my wife would. But, you know, she, her dad was in this industry, my father mine, so he was a pioneer in it. And so hey, you know, if, if you’re interested, you have that right background because he was also CPAs. Also CPA, and I think you’d be good at it. I said, Sure. Alright, let’s let’s do it. You know, and, you know, at that point, I was in public accounting. And in sitting behind a desk, you know, in March, you know, for 16 hours a day working on tax returns, you know, wasn’t as alluring as doing what he did, which was golf three days a week. So, so I said, you know, that that sounds like a really great idea. So that’s how it ended.

george grombacher 4:40
And in here we are, I apologize. I didn’t necessarily undersell you, but I certainly should have said that you are a CPA or had your CPA and also a law degree as well as well as being a successful financial advisor. So love it. Alright, so you’re working with these super smart people. This is not something that They can figure it out on their own.

Unknown Speaker 5:02
A lot of times, sometimes they can, most times they think they can. And in at a certain point, the numbers get big enough that they’re like, huh, I really got to make sure that I’m understanding this correctly. And so that’s when they’ll, they’ll come to our website, they’ll read, we have a lot of information on our blogs about tax and, and stock options, focus, and then eventually, they’ll reach out and say, hey, you know, I have X amount of shares, I want to exercise them, I don’t have the money to exercise them, how, how does this taxon work? How am I gonna come up with the money for the tax, and so we can help them kind of piece together what they need to do to to have not not just a successful today, but a successful tomorrow? And get them to the point where, hey, yeah, you know, when this whole event happens, I have a plan, you know, I just strategy, I have a text mitigation strategy on the front of attack mitigation strategy on the back end. And so then, you know, in there, they focus on what they do best. And that’s engineering stuff and in writing code, and do all our managing people that write code. And, and, and again, I think I didn’t bring it bring a lot of value in that sense.

george grombacher 6:16
Yeah, that certainly makes a ton of sense. So sounds like this probably makes sense to start engaging in this plan, and sooner rather than later.

Unknown Speaker 6:26
Yeah, it usually does. You know, and I think there’s a couple ways to go. But I think when you when you first join a company, especially if they’re an early round a company, A, B, even even C round companies, you know, typically they’re going to be throwing a lot of equity compensation at you. And you may have choices right off the bat. So you know, one of the choices that that sometimes you have, is something called early exercise. So when you granted stock options, normally, you know, they vest over a four year period, this is a general Silicon Valley thing, you know, for the first year is a click vest, so you don’t miss a thing until you complete your first anniversary, then you get 25%. And then the rest of it is over, whether it’s monthly or quarterly. And then from there on out, you sort of buy it as an editor, you can buy it as it comes along. You know, if you’re a company that you feel super strongly about sometimes that they’ll let you do is they’ll let you buy the stock option before it technically tests. And so what happens is, you have to come up with the cash up front, for to buy the stock option. So the stock option has a strike price, right. And that could be anywhere between, you know, 10 cents to $10, depending on where you’re at. And of course, the sheer quantity. And you have to pay that strike price up front. And the great thing about that is that you can tell the IRS, well, since I own this stock already, I want you to tax me on it before it technically is. And the tax is the difference between that strike price. And the fair market value, which when you first get your stock options, just so happens to be the strike price. So it says sorts of zero tax gain. And so and so then as the stock best, you know, you’ve already paid for it, you’ve already made this 83 B election there, so you don’t get taxed on that difference. Because if you would have waited, what would have happened is that delta between the strike price and the fair market value, that would have ended up on your tax return somewhere, and you couldn’t get in when you bought the stock, you could have been hit by really high gains, you know, when and, and I don’t want to get too much in the weeds. But you know, those gains are calculated differently depending on the type of stock option it is. But, you know, again, if you can make that a through B election with early exercise, you can avoid a lot of that tax pain later on. And there’s also some other benefits. So, you know, so you know, the earlier it is there, you have some really early decisions, you got to think through.

george grombacher 8:57
What is it is 803 So you said

Unknown Speaker 9:01
eight sorry. 83 B?

george grombacher 9:05
One more time? 83 B 83? B? Yep. 83 sounds like a really big deal.

Unknown Speaker 9:12
It’s a it’s a huge deal. And it’s interesting, though, a lot of companies don’t really think through it. And so a lot of companies don’t actually offer early exercise. So if you’re an entrepreneur, listen to this podcast right now. You know, do yourself and your in your favor and have early exercise be a standard part of what you guys do. Because once again, I see it a ton where I mean, someone’s really excited about communism, well, it’s great, you know, you have these, you know, whatever 10,000 100,000 shares 10 cents apiece, why don’t we do do an early exercise and they come back from HRSA can’t do it. And it’s like, ah, missed opportunity, but I mean, there’s nothing you can do. Because again, unless you can buy them early, doesn’t do any good.

george grombacher 9:58
And that’s because when you to actually set up your your, your your stock plan, right? You need to incorporate the ability to do the 83 B.

Unknown Speaker 10:08
Yep. Yep, that’s right. So you’re gonna, and usually, when people are setting this stuff up, and then they got a business turn, they got things to do, you know, they’re not clearly worried about, you know, tax consequences, you know, that might happen, you know, five months from now level five years from now. So, yeah, but you gotta be forward thinking on

george grombacher 10:28
this is I should know this, but I don’t think that I do, who actually what, what kind of entity is setting up the stock plans for companies.

Unknown Speaker 10:36
Usually, it’s an attorney that’ll come in and interact all the documents. For the for the company, again, if you’re working with a corporate attorney, typically, they’ll try to do the soup to nuts thing, hey, we’re, we’ll sit down, we’ll you know, we’ll get everything started, you know, and then include the stock plan. So I just don’t think it’s on their radar necessarily. I mean, of course, no, I don’t set up this way. It’s maybe there’s a really great reason that I don’t understand. But I know, I know that there’s that there’s some companies that do have their subcommittee. And I don’t, and I haven’t heard the logic as to why that is. So I’m assuming it’s just because it’s, it’s just people drafting that don’t really understand the nuance

george grombacher 11:16
got it could be, I wonder if there’s other parts of society where there’s people drafting things that don’t really understand the nuance. So like, life, life is challenging enough as it is, you’ve got three daughters under the age of 13. And when things are going great, it’s still tough. And we’re running businesses and everything else. And then the stock market explodes. How are you talking to to clients and people about managing through uncertainty or whatever the term might be?

Unknown Speaker 11:43
Yeah, so I’m gonna say I’m, I’m super excited. You know, I’m, I think this is this is fantastic opportunity. You know, it, I don’t know what this bear market. I don’t think it’s technically recession yet. I don’t know if this bear market is yet how long it’s gonna go. But, you know, relative to where it was, you know, almost to the when the COVID had hit, right. It’s, it’s on sale. So, you know, there’s, there’s opportunities to buy out there, even if you’re just buying the broad market, which is, you know, what we tend to do? You know, and certainly, you know, you’ve seen the public markets tank, and, of course, there’s tax loss harvesting, you can do, you can grab some tax assets on your, on your, on your income, income tax, state income tax. And then you know, that what people need to know is, is that, you know, the public market looks ugly, right? It’s down 3%, you know, in, let’s say, the NASDAQ, I haven’t looked at my phone yet this morning, or mark is still not that long ago. But if the if what you see the market is doing that, you can bet underneath the water under the water, right? That’s, that’s the pre IPO world, you know, it’s just as turbulent if not more so. So, so coming up in the next few months, if things stay status quo, I’ve seen nothing to indicate that inflation is abating anytime soon, were the Fed and the Fed saying they’re gonna be more aggressive yesterday, you know, the valuations for these pre IPO companies are going to be are going to tank. And it’s good and bad, it’s bad for the company, because that’s hard to do capital raise, and you don’t get as much money, you know, when you do that, but for the employees, the stock price, that, that 409 a valuation, that’s coming down, and that’s opportunity. And so, you know, maybe, you know, maybe a few months ago, you did the calculation that was like, Oh, Jesus, you have to I have to come up with you know, $20,000 to buy the stock. Oh, and by the way, I have to come up with you know, half a million dollars to pay the tax, which is not unusual. Now, you can look at it, well, wait a second, I still got to come up with the, you know, the 20,000 to buy it, but now my tax is like 100,000 or 50,000, or maybe less, depending on what it is. And so if you’re still competent in that company, and you see this massive valuation, you know, decrease. That’s great. That’s fantastic for you. Now if you don’t believe in the company, and you think they got exposed and you think that it’s still a bad investment, right that a stock options, the end of the day, their investment in a company, it’s you know, good good value as long as the company has liquidity, but you know, again, if you are investing, and so you just got to keep that in mind.

george grombacher 14:30
It makes a ton of sense. Thank you for that. Where are the people are ready for your difference making tip even though you’ve given us a bunch, what do you have?

Unknown Speaker 14:37
You know, I’d say my difference big tip is always plan, do your tax planning. You know, it’s, you can you can do some back of the envelope type stuff, you know, if you’re a non tax person, you’re gonna go online and use calculators but at some point, you really need to engage someone about that. Whether you’re selling you know, a rental property or, you know, because for the, or, for instance for that, you know, obviously rental properties are now all the rage. You gotta sell rental property, you’ve had it for five years and you say, Okay, well I bought it for this and I sell for this my tax rates this great, I know my taxes Well, no you don’t, because you need to realize that on your tax return, there’s something called depreciation recapture. And there’s all these nuances that get baked into it. And the same thing goes for stock options, you know, when you buy your stock options, you get taxed. Now, when you set what when you sell your tax tip, you get taxed at both ends. But you know, when you buy your stock options, depending on what happened during the year, you could be facing taxes that you didn’t know you had. So and I’ve had that conversation with people before, people who have called me up again, they realize that numbers got big enough. And, you know, hey, I exercise, you know, I was just 5000 shares of you know, blah, blah, and, you know, that’s a $250,000 paper game. You know, I mean, if you realize that’s going to cost you like $20,000 in taxes, watch. So, it’s, so it’s like you have to get when you have an event when you when you sell a property when you when you buy stock, because you gotta be thinking, Okay, let’s pay an expert, who really understands this stuff. To do this work, you know, you know, for like, my firm, just, for instance, my firm charges about $300 an hour. You know, if we’re doing a tax projection, you know, on a short term basis, you know, we’re two hours of work, maybe, depending on how complex it is, you know, spend 600 bucks, be certain, you know, don’t don’t don’t cheap out on it, because man, if you show up on the tax bill, and you’ve you know, you’re underpaid by, you know, how are my hundreds of $1,000 maybe it’s only 50. You know, you’re there’s there’s penalties if you don’t pay on time. And that makes sense. $600. So it may be worth

george grombacher 16:50
your while. We think that that is great stuff that definitely gets Come on. ounce of prevention is worth a pound of cure kind of a thing,

Unknown Speaker 16:59
Aaron? Yeah, yeah. Yeah, I mean, of course, and sometimes there’s things you can do about it. Sometimes you just gotta take the medicine. Sometimes.

george grombacher 17:10
Love it. Why aren’t thank you so much for coming on? Where can people learn more about you? How can they engage with you?

Unknown Speaker 17:16
Yep. So our websites a great place to start WSOP wealth.com mentioned some blogs there. Again, it’s hyper focused on that pre IPO world. And I think we’re going to start coming up with more articles on acquisition, I think that’ll be, that’ll be coming up a lot more. As valuations come down. Larger companies with tons of cash, Apple, Google, all those places, they’re probably looking to buy. So I think we’re gonna see some more m&a, coming up with all that cash sitting around. And then, so you can check out our blogs that way. And then you can always schedule you know, a consultation, and we don’t we don’t charge for first couple meetings just to get to know you. And then of course, you can head off to Twitter, W RP, advisory, or Facebook, which is post our blogs. There’s

george grombacher 18:04
excellent. Well, if you enjoyed as much as I did to earn your appreciation and share today’s show with a friend who also appreciates good ideas, go to w r p wealth.com. And check out all the great resources, read the articles and figure out if now is the time and it’s probably the time if you are thinking about it, because to Aaron’s point, the cost of being proactive is probably going to be a lot less than the cost of being reactive and then find them on Twitter and Facebook as well. Thanks again, Erin. Thank you, and until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai

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