#148 – How to value equity at startups, above your cash salary | Mike Haney, Ryley Walker, & Tom Griffin

Here’s a look into how to value equity at a startup as part of your compensation package and how to think about secondary sales. Editorial Director Mike Haney sat down with Senior Finance Manager Ryley Walker and Head of Partnerships Tom Griffin to talk about how early-stage startups approach compensation differently, how to think about equity.

01:11 – Compensation at a startup is different

Early stage startups often include equity as part of their compensation package, which is a variable factor that can grow a little or a lot, depending on the success of the company.

One of the things that’s unique about working at an early stage startup is that compensation doesn’t work the way it works in most jobs. In most jobs, you get hired, you get a salary, maybe there’s a bonus structure, but you know exactly what you’re going to walk away with at the end of the day from that job on an annual basis or a weekly basis. In startups, there’s this weird extra factor of equity. You get a little bit of ownership in the company that in an early stage is worth very, very little, but could be worth a life changing amount down the road.

06:21 – The opportunity of equity

Equity is a unique compensation tool that lets you participate in the value that you help create for a company.

I think it’s important to be mindful that it could be worth nothing. I think on the other side of the equation though, equity is one of these fantastic compensation tools that allows you to participate in the value that you help create for a company. And in the startup and tech world, we’re looking at solving really big, exciting problems and so the value creation can be quite large. And as a startup employee, you get that opportunity when you take equity to earn a life changing sum of money that you wouldn’t otherwise be able to do in any other line of work. So I think it’s important to look at that as the benefit is, “Hey, I can potentially make enough money that I’m going to change my life and allow me to do maybe a bunch of those things that I would love to do if money weren’t an option.”

14:35 – The variables that affect equity

Many factors play into the reliability of equity in your compensation package, beyond the most recent valuation.

I can talk to a friend who’s going to work at some, forgive me, but “random startup” that might not have a team with the best track record and doesn’t have any founders that have already exited a company and doesn’t have the best investors behind them. And they might be really bullish on their equity and I’m sitting there going, “I know this game a little bit better than you do, and I wouldn’t count on that equity.” But it is true that Levels, at a certain size and stage, given founders have exited companies, we’ve got great investors, the odds look a little bit different.

15:58 – A high level of influence

Team members at an early-stage startup like Levels have a high level of influence over the trajectory of the company, and in turn, over the value of their equity.

We’re post series A. We have about 50 people. The impact that a person can have on the outcome of the company is actually very large. So I don’t necessarily like the term lottery ticket because you can get up in the morning every single day and you can do something that greatly impacts your chance of success. And so not only that general, out of your hands probability, but that you can also influence that. Both of you guys have a lot of influence on the chances of Levels’ success. Do you have a control over all probabilities and all outcomes in all scenarios? No, but I think we underestimate how big of an impact we can have at this stage. And so I think that’s one thing I wanted to point out because I find it really motivating. And that’s one of the things that excites me about joining a startup. And maybe personally, I value the equity quite a bit just because I know that potential is there and it’s something that I can influence.

18:51 – How to view secondary sales

If you’re looking to have a lot of flexibility, or if you want to take out a lot of money immediately, then maybe selling in the secondary market is right for you.

How you look at the secondary probably depends on your motivations and future goals in life and how you see the value of equity evolving over time and how much you want to take out at this stage and what your current life looks like. So let’s just assume that your salary is something that is leaving you in a great position in terms of providing for yourself, providing for your family, living a healthy life, having your performance at the top of your ability. So what is the reason that you’re selling in the secondary sale I think drives your behavior. So is there some sort of life event that you’re planning for? Like, are you planning to purchase a house? That might be a good opportunity to take advantage of some secondary sales liquidity to do something like that.

21:15 – Secondary sales as a tax advantage

Another way to view secondary sales is from a tax planning perspective so you can give yourself more options for the future.

A secondary sale can be a great opportunity to get some liquidity, to realize your shares, exercise some options, and reduce the risk or reduce the financial impact of having to fund that out of your own portfolio. So that’s another way to look at it is actually setting yourself up from a tax planning perspective so you can get more out of it in the future.

24:22 – Personal preferences

Your perspective on how to use a secondary sale is your preference. The key consideration is whether or not the money is more valuable to you today than it may be in the future.

As an individual, that’s your perspective on what type of life expenditures are important. To somebody else, that might be a really nice car or a Tesla, or just that thing that makes them happy every day. And if that’s going to improve your lifestyle in a meaningful way and you have the opportunity to do it, to make your life better now … Maybe it’s a course, maybe it’s education or something you can fund that’s self-improvement related. It’s different. These type of things are different and opportunities are different for everyone. So I think that you don’t have to justify it by saying, “Oh, I need to have a life event or be getting married or buying a house to do this.” There’s all kinds of life events that could justify or opportunities that could justify you creating some liquidity for yourself now versus later. I think the context is that you’re really giving up on some potential upside. So make sure it’s really worth it to you right now.

26:37 – Consider it a bonus

One way to view your secondary sale is to divide it by the number of years you’ve been in your role and consider it as an annual bonus.

To the diversification point, if 90% … The way I think we’re thinking about organizing our secondary is that 10% is the max. You could sell it any time anyway, which is kind of good. You don’t have the option to just go crazy and cash it all in right away. But if 90% of it’s remaining there with that potential upside, that’s a lot. And if what you could take out now is X amount of money, as a little bit of a hedge against that lottery ticket or that upside later, we were like, would we feel better knowing that amount of money was just sitting in an account, but fully ours? That no matter what happened with Levels, we could always look back and go like, “Well, that was a weird ride, and it blew up when we didn’t expect to, but you know what, we pulled X amount of money out of it.” And that was another framing Sam gave me for thinking about this is he’s like, “You could also think about it, like take your normal comp, and then take the amount you could pull out, divide it by four and think of it as a bonus. Think of it like you got an X amount thousand dollars bonus every year. It’s just like adding onto your existing comp.” And if you think about it as sort of a bonus, then it’s like, oh yeah, that would be nice.

28:22 – Future outcomes and diminishing returns

The potential upside of equity is the life-changing amount of money you can cash in on at a future date, but at a certain point, those large sums of money produce diminishing returns.

I think the other important piece is the future value. Future outcomes. I think part of the really intangible value right now is that we’ll go back to that concept of life changing sum of money. So in the future, you have an opportunity to take a life changing amount of money out, but nothing is more life changing than your first million or two million. And then after that, you get really diminishing returns. And depends on who the individual is how much that return diminishes for them. But what’s the difference to you between five or six million? Maybe five and 10 million makes a big difference. What’s the difference between a five or six million dollar potential outcome? That’s a lot more than the difference between 500,000 and a million or a lot less impactful than the latter.

35:15 – Culture at Levels

Ryley shares that Sam does whatever he can to keep the team motivated and happy because that’s their culture and that significantly contributes to the value of the company.

Sam knows that value is going to be created by the team’s performance. And so keeping the team motivated, excited, happy, healthy is super, super important and has a huge value outcome. And so that is something that’s reinforced by our leadership and the values of our company. It’s probably not the same in every company. You might be in a group or another business where the tone at the top is very much like you don’t cross the line with my equity. I’m holding it. I’m clutching it until like you take it from my dying hands type mentality. And so I think that culture is Levels specific, but I think the philosophy of it is the team creates value and the team makes good decisions. And so I think that’s really important for who we are in the journey we’re on.

Ryley Walker: (00:06)

I don’t necessarily like the term lottery ticket, because you can get up in the morning every single day and you can do something that greatly impacts your chance of success. I think we underestimate how big of an impact we can have at this stage and so that’s one thing I wanted to point out because I find it really motivating. And that’s one of the things that excites me about joining a startup. And maybe personally, I value the equity quite a bit just because I know that potential is there and it’s something that I can influence.

Ben Grynol: (00:45)

I’m Ben Grynol, part of the early startup team here at Levels. We’re building tech that helps people to understand their metabolic health and this is your front row seat to everything we do. This is A Whole New Level.

Mike Haney: (01:11)

One of the things that’s unique about working at an early stage startup is that compensation doesn’t work the way it works in most jobs. In most jobs, you get hired, you get a salary, maybe there’s a bonus structure, but you know exactly what you’re going to walk away with at the end of the day from that job on an annual basis or a weekly basis. In startups, there’s this weird extra factor of equity. You get a little bit of ownership in the company that in an early stage is worth very, very little, but could be worth a life changing amount down the road. We’ve all heard the stories of early investors in Amazon or in Facebook who became billionaires later on. So that gets tricky to think about both as an employee, somebody coming to work at a startup, but also I can say as a manager working at a startup when you go to hire people and you think about how to compensate them fairly, how do you think about the value of equity?

Mike Haney: (02:03)

Is it a lottery ticket? Is it something that you can assign some amount of value to? It has a value on paper, but what’s the chance that value is going to become real at some point? Further complicating that is an idea of what’s called secondary sales, which gives you an opportunity to sell some of that equity before an IPO or before some other way down the road event, which can turn some of that equity into real cash that you get to use. So these were the questions on my mind recently, and I sat down with Ryley Walker, who’s our head of finance and Tom Griffin, our head of partnerships, to talk through these questions, to talk about how does one think about the value of equity? How does one think about the value and the psychology of secondary sales? Is selling your shares equity a vote of no confidence in the company, or should it be something that you do because you want to use the cash or the cash could mean something to you now? So those are the kinds of things we got into. Ryley’s got a great number of years of experience in other startups coming from this and Tom as well. So it was a really helpful conversation for me to hear how other people think about this and this is where we kick it off.

Mike Haney: (03:14)

The genesis of this conversation was we already did two podcasts around equity. And the thrust of both of those podcasts was really about technical definitions around equity. What does all of this stuff mean? What is an 83B election? What’s the difference between an RSU versus an option? And we’re not going to cover any of that again, except as we need to define a term. What led to this was after listening to those and then thinking about equity as part of compensation, both I just went through a hiring process and had to kind of think through this as we were putting together a comp package, looking at my own equity in my own comp package, and then thinking about secondary sales, which we can get into, which is something we’re I think planning to do. I realized I still had a whole bunch of questions about how to think about equity that we hadn’t really addressed in the technical definitions.

Mike Haney: (04:08)

And that’s what led to this chat. One of the things that was really interesting is in the thread, our internal message system that kicked off this conversation, when I posed these questions, a number of people weighed in with experiences that I hadn’t necessarily thought of. People who had had equity that went to zero, people who had had equity in companies that I would’ve thought made them billionaires, that they were like, “Nah, it actually didn’t end up paying off that much.” And so just to capture the fact that there’s a lot of different experiences, a lot of different ways to think about it. But that’s kind of what we want to get into here is more the sociology and psychology of equity. So I guess I’ll throw this out as a starting place.

Mike Haney: (04:50)

One of the things that I have a lot of difficulty with, both for myself and as I think about a comp package, and I see even a lot of internal discussion about this as well so I feel like it’s not a settled matter, is how do we think about equity as part of compensation? It’s obviously a part of the comp package. We put together as I think is pretty standard practice a four year total value of a comp package is the number that we anchor on and the equity value. X number of shares based on current valuation, which is determined by our most recent investment, equals a number. But the reality is that’s not real. It’s a maybe. It’s a could be. It’s a bet.

Mike Haney: (05:31)

So how do you … I’m curious, you guys … Ryley, you’re on the finance side so you help put together these comp packages. And Tom, I know you’ve both hired and had to think about this as your own. How do you think about the value of equity as part of comp? Do you value it? When I took the job, I’ll just start by saying here, I thought about it and when I talked to my wife about what kind of balance we took between equity and cash, I said, “The equity is … It’s a fantasy. It’s a bonus. We shouldn’t count on it at all. It’s a lottery ticket. If it happens, cool. But there has to be enough cash that we’re happy with the cash component.” And that’s the way I’ve been thinking about it, but I’m curious how you guys come down on this. Maybe Ryley, we’ll start with you.

Ryley Walker: (06:12)

Yeah. It’s very much a personal view. You’re not right or wrong to look at cash or look at it that way. I think it’s important to be mindful that it could be worth nothing. I think on the other side of the equation though, equity is one of these fantastic compensation tools that allows you to participate in the value that you help create for a company. And in the startup and tech world, we’re looking at solving really big, exciting problems and so the value creation can be quite large. And as a startup employee, you get that opportunity when you take equity to earn a life changing sum of money that you wouldn’t otherwise be able to do in any other line of work. So I think it’s important to look at that as the benefit is, “Hey, I can potentially make enough money that I’m going to change my life and allow me to do maybe a bunch of those things that I would love to do if money weren’t an option.” Give back to charity, get involved in another business, launch your own venture, buy a nice house, buy a nice car, whatever you want to do with that. So I guess those are the two sides of the framing. Could be worth nothing. Fantastic opportunity to change your life and an opportunity that’s not available for everyone.

Tom Griffin: (07:55)

Yeah. I’ll jump in and say to further frame the confusion around this topic, I have heard two very different things from smart people in my life. I would say the first early on in my career, I was absolutely told equity effectively means nothing and you should consider it a lottery ticket. From smart mentor type people, at least presumably so at the time in my life told me. And so I internalized that. And as it turns out, I mean, this is my bias coming to this conversation, the equity that I’ve gotten in my life has gone to zero so they’ve been right. And then I’ve also heard smart people say that that advice is absolutely terrible and idiotic and equity of course has a probabilistic value associated with it. And depending on the company, the team, the investors, the stage, and other signals, there absolutely is value associated with that equity.

Tom Griffin: (08:56)

And in fact, depending on what your goals are in life, equity in a startup might be the only way that you might have really high upside or comp if we’re going to frame it in that way. So I’ve long been confused around … I mean, I know what it means. I know how to calculate the values. But to the point of this conversation, how to think about it in a practical way. And I am remembering something that somebody told me at some point, which is think about what the upside is, know what the upside is in terms of best case scenario, and then also know what worst case scenario is. And this brings you, Haney, to your point, which is how I initially thought about it, which is if it does all go to zero, am I okay with the cash salary that I’m getting right now? And to paint an extreme example, let’s say that you’re offered 40K cash salary for your first year, but a ton of equity in a company. You might say worst case scenario for one year, I’m actually okay with that. But if someone were to say, “Will you do that for five years?”, you might say, “Worst case scenario, no. I’m not okay with worst case scenario, which is 40K for the next five years.” So I remember thinking about that when looking at my initial comp.

Ryley Walker: (10:09)

I think whether or not, it’s bad advice at first to say don’t value equity, because that might be the right advice. But I think for a subset of people, I think for everybody else, if you’re looking for an opportunity to earn more than you otherwise would’ve, then you have to ascribe a value to that equity. I think the contextual piece that’s really important is recognizing that it can go to zero. So I’d take that nugget out of that advice and say, it can be worth zero. Okay. That’s good advice. I have to keep that in mind and then be okay with where I’m at as a basis.

Mike Haney: (10:54)

Yeah. I was going to say when I was offered this job and I was weighing … And we should say, I think this pretty standard practice in startups. We offer folks when they join a range of options of heavy on equity, heavy on cash. And so I was weighing these options and a person I worked with in my previous job who was a longtime journalist said, “As long as you can live on the lower cash amount, keep in mind that people in our industry don’t get very many shots at early stage equity. And so you should probably take that.” And I feel like that’s something I’ve thought about is if I were a software engineer and I knew that my career was going to be jumping from startup to startup, that’s one thing. I come from a field where it’s very rare in journalism that you get early stage startup equity.

Mike Haney: (11:37)

It’s like, usually you just anchor on a salary. So to your point Ryley, about considering assigning some value to it, and the word you used, Tom, I like of probabilistic, does make sense that you have to keep that in mind of, well, it might be a lottery ticket, but other jobs don’t come with a lottery ticket. There is still the possible upside of this could be life changing money in some way. Small life changing or big life changing down the road. And I’m curious, just flipping this around a little bit … And Tom, maybe because you’ve been through the hiring process here too, how did you think about this when you went out to hire and figure out the comp level for the position that you brought in or did any conversations come up as you were hiring about equity versus compensation? Did you have to wrestle with this at all and trying to figure out how to compensate people?

Tom Griffin: (12:33)

The honest answer is not a ton, given that we have such a flexible mechanism for determining comp where we really put it in the hands of the individual in terms of being able to toggle cash and equity. I think it came up a bit just because I was hiring relatively more junior. And I think people were coming in with more of a question mark around what any of this means at all. And frankly, I’ve had this conversation with just people in my life who are younger, who are joining startups. And I don’t know if I’m sidestepping your question now, but this is just on my mind, which is that the reality is your probability of success or the probability of success for one of these companies varies so, so, so widely. And the stat that everyone’s familiar with is some version of 90% of startups fail.

Tom Griffin: (13:35)

Sometimes it’s 95. Some people say 99%. And I remember frankly talking to Sam once about this, where I was like, “I don’t really know how to think about my equity. And frankly, I think about it as if it’s a lotto ticket and it’s going to go to nothing.” And Sam was like, “That’s crazy to think about it that way.” And I dropped one of those stats and Sam was like, “Whoa, whoa, whoa. That stat isn’t right. And there’s way better data out there.” And he was like, “In fact, based on where we are and we just raised a …” Whatever it was at the time. It was either seed or A when we had this conversation. He pegged the odds of success … And now I’m putting words in Sam’s mouth on the record, but he pegged the odds of success based on the data at something like 70% or 60%, depending on where we were at. Call it 50 to be conservative.

Tom Griffin: (14:21)

But the point is Sam had a mental model for what our odds of success looked like in terms of just making this calculation based on a number of factors. And I think that’s critical to this conversation because I can talk to a friend who’s going to work at some, forgive me, but “random startup” that might not have a team with the best track record and doesn’t have any founders that have already exited a company and doesn’t have the best investors behind them. And they might be really bullish on their equity and I’m sitting there going, “I know this game a little bit better than you do and I wouldn’t count on that equity.” But it is true that levels at a certain size and stage given founders have exited companies, we’ve got great investors, the odds look a little bit different. And I don’t know, I think there needs to be a better way. I don’t know if there’s data out there or what the latest success odds are. There’s got to be a better way to just think objectively about some of this stuff.

Ryley Walker: (15:15)

Yeah. I think there’s a bunch of good points in there and a lot to unpack. It’s absolutely correct that not all companies are created equal. Not all founding teams, not all in investor backing is equal. And so that can greatly impact the risk of failure. I want to take a second to circle back on one of the things that’s kind of been implied and we’ve been talking about probabilities of outcomes as though it’s out of our control. And I actually, I think that there’s a better way to think about it. I think that more … Like Levels. We’re post series A. We have about 50 people. The impact that a person can have on the outcome of the company is actually very large. So I don’t necessarily like the term lottery ticket because you can get up in the morning every single day and you can do something that greatly impacts your chance of success.

Ryley Walker: (16:26)

And so not only that general, out of your hands probability, but that you can also influence that. Both of you guys have a lot of influence on the chances of Levels’ success. Do you have a control over all probabilities and all outcomes in all scenarios? No, but I think we underestimate how big of an impact we can have at this stage. And so I think that’s one thing I wanted to point out because I find it really motivating. And that’s one of the things that excites me about joining a startup. And maybe personally, I value the equity quite a bit just because I know that potential is there and it’s something that I can influence.

Tom Griffin: (17:15)

Yeah. I think that’s a good point and I think it’s also why you hear that often the best early stage investors say they’re just betting on team. They often don’t even care what the idea is. They just look at the people in the room and they’re like, “We think they’re going to figure it out.” So I think that’s important framing.

Mike Haney: (17:32)

The other thing that starts to then complicate this when I posed this question to Sam at some point and said, “Why shouldn’t we think about equity as purely a lottery ticket?”, one of the things he mentioned was secondary sales, which is the ability to sell your shares before you’d normally have a chance to. Normally the only time you get to do anything with all that equity you own is either if the company … And correct me, if I’m wrong here, Ryley, but either if the company gets acquired or if the company IPOs. And then you can cash in all those magic beans for dollars. But a secondary sale is the opportunity to sell some of those shares on the market at whatever current value they’re at. And we have a whole podcast that Sam did with the head of Carta about secondary sales and what that means. But that is an opportunity to exchange some of those shares for money at an earlier stage. So I’m curious, maybe Ryley, if you want to say something about secondary sales and maybe how to think about those.

Ryley Walker: (18:32)

Yeah. It changes the timeframe and the value that you can assign to equity if you’re going to be able to get some money or funds out before you get to an IPO or other liquidity event. Now, I think how you look at the secondary probably depends on your motivations and future goals in life and how you see the value of equity evolving over time and how much you want to take out at this stage and what your current life looks like. So let’s just assume that your salary is something that is leaving you in a great position in terms of providing for yourself, providing for your family, living a healthy life, having your performance at the top of your ability. So what is the reason that you’re selling in the secondary sale I think drives your behavior.

Ryley Walker: (19:41)

So is there some sort of life event that you’re planning for? Like, are you planning to purchase a house? That might be a good opportunity to take advantage of some secondary sales liquidity to do something like that. Likewise, if you’re trying to manage your portfolio or risk, hey, I’ve created some value for myself now. I’ve worked hard for the last year, two years and I just want to balance the outcomes because I know now if I go sell 10% of my shares and that share goes 10X, I still have 90% of my shares that are going to go 10X. So that’s a difference in outcomes between five and six million and that extra million dollars isn’t going to be a major influence on how I live my life. I don’t necessarily value that. So I think you can look at it like that. I think you can look at it too, as maybe you’re not getting a sum of money out that is tied to a life event or an opportunity to create liquidity for yourself, but maybe you have some shares or some options that require you to put down some money or take some risk to exercise stock options or do some tax planning.

Ryley Walker: (21:15)

A secondary sale can be a great opportunity to get some liquidity, to realize your shares, exercise some options, and reduce the risk or reduce the financial impact of having to fund that out of your own portfolio. So that’s another way to look at it is actually setting yourself up from a tax planning perspective so you can get more out of it in the future.

Mike Haney: (21:39)

Tom, how are you thinking about secondary sales? And do you have any experience with this in previous companies?

Tom Griffin: (21:46)

I don’t have any experience with it. And again, I think it’s fascinating because there seems to be confusion about this as well from the conversations that I’ve had in terms of just what secondaries mean. And from my perspective, they fundamentally change the dynamics that we’re talking about. I mean, if we constantly have access to liquidity, then needless to say, these are not lottery tickets anymore. Or if they are, you can sell them for cash anytime you want. So they’re not like normal lottery tickets. And I think there’s confusion around that. I mean, I recently had a conversation with a friend in their 20s, they have access to secondaries and they still are trying to understand a lot of these dynamics, but this person basically said effectively, “Hey, we’re about to raise a B round and our valuation’s going to go way up, but that’s not going to impact me, right? That doesn’t impact my comp.”

Tom Griffin: (22:41)

And I was like, “Well, no, no, no. If your share price 10X’s and you can sell your shares, then you can make 10X the amount of money than you can today. This is a big deal.” And I only say that because I think it’s just worth highlighting that, from my perspective, secondaries change everything relative to a world where they don’t exist. And it seems that it is complicated and some people don’t quite understand it. And then also on the note of confusion and different advice that I’ve gotten, I am confused about how to think about when to take money out via secondaries because I have gotten advice from people who say … Maybe the first time I got this advice was in my 20s. I’m no longer. But they were like, “Listen, if you’re not taking money out for a family or a home, then there’s no reason for you to be taking money out. As long as you can pay your rent and live your life, unless you have it …” And this gets to what you were alluding to Ryley, but it’s like, “If you don’t have a specific reason, you don’t need the money right now, definitely don’t take it out.”

Tom Griffin: (23:44)

And then I’ve gotten the polar opposite advice, which is, “You’re out of your mind. If you can sell 10%, sell it immediately.” As long as at some point later in your life, you’re going to want more money to do something with it, it’s okay if you you’re not buying a house right now. Which I think gets to your diversification point, which has been, my attitude is, well, if 90 something percent of my net worth is in Levels, then it would seem to make sense to diversify a bit, in theory. Not saying that’s the case, but you know what I mean.

Ryley Walker: (24:13)

Yeah. I think there’s something underlying what you’re saying too, Tom, about buying a house or buying … As an individual, that’s your perspective on what type of life expenditures are important. To somebody else, that might be a really nice car or a Tesla, or just that thing that makes them happy every day. And if that’s going to improve your lifestyle in a meaningful way and you have the opportunity to do it, to make your life better now … Maybe it’s a course, maybe it’s education or something you can fund that’s self-improvement related.

Ryley Walker: (25:00)

It’s different. These type of things are different and opportunities are different for everyone. So I think that you don’t have to justify it by saying, “Oh, I need to have a life event or be getting married or buying a house to do this.” There’s all kinds of life events that could justify or opportunities that could justify you creating some liquidity for yourself now versus later. I think the context is that you’re really giving up on some potential upside. So make sure it’s really worth it to you right now. But on the flip side, there’s also nothing wrong with investing in yourself.

Mike Haney: (25:40)

Yeah. And I think some of that comes back to the probabilistic conversation we were having before, right? Because it still comes into play. It’s like, what do you think the likelihood is that if you sit on this and you don’t cash it in, it’s going to either 10X or it’s going to go to zero? Because either way, you’re looking at an outcome where you potentially look back and feel like an idiot. Where you’re like, “I could have taken out X hundred thousand dollars or something.” And like, “And then the company blew up and I didn’t.” And then you’re going to feel like an idiot. Whereas if you cash it in and later the hundred thousand could have been worth a million. We had the similar kind of discussion. This advice about thinking about how this would impact your life now came up in the thread.

Mike Haney: (26:20)

And so when we were talking about this in our house, that was really what we looked at. And what we ultimately came to was we didn’t necessarily have a life event right now where it was like we absolutely need a sum of money right this minute for it. But we also thought, to your point, Tom, to the diversification point, if 90% … The way I think we’re thinking about organizing our secondary is that 10%’s the max. You could sell it any time anyway. Which is kind of good. You don’t have the option to just go crazy and cash it all in right away. But if 90% of it’s remaining there with that potential upside, that’s a lot. And if what you could take out now is X amount of money, as a little bit of a hedge against that lottery ticket or that upside later, we were like, would we feel better knowing that amount of money was just sitting in an account, but fully ours? That no matter what happened with Levels, we could always look back and go like, “Well, that was a weird ride and it blew up when we didn’t expect to, but you know what, we pulled X amount of money out of it.”

Mike Haney: (27:24)

And that was another framing Sam gave me for thinking about this is he’s like, “You could also think about it, like take your normal comp and then take the amount you could pull out, divide it by four and think of it as a bonus. Think of it like you got an X amount thousand dollars bonus every year. It’s just like adding onto your existing comp.” And if you think about it as sort of a bonus, then it’s like, oh yeah, that would be nice. It’s divorcing a little bit the potential upside, but I guess similarly, if you got a $100,000 bonus as a salesperson from some other company, and then you invested it in Bitcoin, it could also 10X over time, or it could go to zero. And to your point, Ryley, I think it is inspiring to think we do have some control over it or at least some agency, some hand in the success. At least you hope so. Although I don’t want to take responsibility if it goes to zero.

Ryley Walker: (28:19)

Yeah. Yeah. That’s a fair comment. I think the other important piece is the future value. Future outcomes. I think part of the really intangible value right now is that we’ll go back to that concept of life changing sum of money. So in the future, you have an opportunity to take a life changing amount of money out, but nothing is more life changing than your first million or two million. And then after that, you get really diminishing returns. And depends on who the individual is how much that return diminishes for them. But what’s the difference to you between five or six million? Maybe five and 10 million makes a big difference. What’s the difference between a five or six million dollar potential outcome? That’s a lot more than the difference between 500,000 and a million or a lot less impactful than the latter.

Tom Griffin: (29:25)

Yeah. And I think to one of Ryley’s initial points, really all depends also on your personal attitude. And another relevant piece here that isn’t talked about that often is just how are you going to feel day to day, month after month at work, based on your compensation? This came up in a conversation recently with friends, which is that you shouldn’t go work at that startup where you get paid 50K and a ton of equity if you don’t really value the equity and you’re going to be really resentful and pissed off the whole time because you’re working long hours and you think the equity is a lottery ticket. And I think this is relevant for secondaries as well, which is one other piece here is if you’re going to feel a lot better about your job and about the work that you’re putting in and the hours that you’re working and the emotion you’re pouring into it if you have a little nest egg or you’re get getting more cash off the top, then that’s another thing to consider. Because there is a world where you’re three years in and your salary’s kind of low and you start saying, “This sucks and I’m pissed off at what I’ve been doing for the last few years.”

Tom Griffin: (30:36)

And I think that’s something to be mindful of.

Mike Haney: (30:40)

Yeah. I feel like that’s a really good point and something that I feel like in the conversations we’ve had internally is a motivator or at least a factor in the notion of secondary sales is to head that idea off and give people a chance to not only have the theoretical ownership, but feel the real ownership or the effects of that. That, like you said, you can take some of that money off the top and use it to cushion yourself a little bit. I’m curious, Ryley, because you’ve been through … Without getting into any specifics, I’m curious what lessons you learned at Skip. SkipTheDishes, your previous company. As I understand it, you were very early employee there. You guys grew like mad. Did you learn any surprises about equity either in your professional role there or just personally?

Ryley Walker: (31:28)

Well, I think that you always bias or index towards success, right? So I would say I came into that experience very bullish on equity. I was just like, “Give me as low salary as possible and as much equity as possible.” And I didn’t ask a lot of questions about how much equity was worth or I didn’t do take the steps to understand those things that are … They’re almost implied at Levels. Like what is our latest round price and how does that reconcile to the value of equity I’ve been given, which is tied to my total comp package relevant to the market? And all these things. So I didn’t take the steps to really understand the value of the equity I was given early on. And I wish I would’ve done that a little bit more. I’m not sure it would’ve changed outcomes for me specifically.

Ryley Walker: (32:33)

And in fact, I often question whether I would’ve actually done it if I would’ve taken those steps. So I think there is an element of this that it’s valuable to just dive into things. And if you believe in the mission, believe in the team, believe in what you’re doing together, that equity can be worth a lot and it can be worth something. So I guess in hindsight, it was just more about educating myself on what it all meant. And I think that’s something that we do really well at Levels compared to what I’ve seen in the startup world and community. It’s really hard to put a value on shares, but at the same time, we’re transparent as possible with reference to what our latest rounds are or what the market level compensation is. And I think those things are really important to understand

Mike Haney: (33:34)

Another piece of secondary I wanted to mention, we talked about this briefly before we started recording, but it’s worth getting into is when the concept of secondary sales first came up, one of the questions I put to Sam is, “Is there a weird stigma around taking advantage of that? Like cashing in some? Does it feel like you don’t believe in the company’s mission? And he was quick to say, I think in a very Levels way, Not at all. We wouldn’t offer something that we don’t expect people to take advantage of.” And he said, “I’m going to do it as a signal to everybody to let them know it’s okay to do and feel that way.” But I’m curious, Tom, has that thought crossed your mind at all?

Tom Griffin: (34:14)

Absolutely. Definitely crossed my mind. And right when I started to consider it as a possibility, I absolutely feared that. I almost thought, I was like, “I think I’m going to be the only person at the company who considers this.” And I felt … I don’t know, maybe I’m a little younger than some other folks who I chatted with about it, but there was this fear where I was like, “I’m going to need …” I remember thinking, “I want to reach out to each founder and have a conversation with them about how committed I am to this company long term, despite considering the possibility of selling a very small number of shares.” So I don’t know how I got that idea in my head, but it’s definitely worth flagging and talking about in public like this because clearly I think other people feel it as well.

Ryley Walker: (35:02)

Yeah. I think it’s culture specific and that tone is coming from Sam. And I think the reason that’s coming from Sam in that way or part of the reason is Sam knows that value is going to be created by the team’s performance. And so keeping the team motivated, excited, happy, healthy is super, super important and has a huge value outcome. And so that is something that’s reinforced by our leadership and the values of our company. It’s probably not the same in every company. You might be in a group or another business where the tone at the top is very much like you don’t cross the line with my equity. I’m holding it. I’m clutching it until like you take it from my dying hands type mentality. And so I think that culture is Levels specific, but I think the philosophy of it is the team creates value and the team makes good decisions. And so I think that’s really important for who we are in the journey we’re on.

Mike Haney: (36:25)

Yeah. I feel like there’s a little bit of countervailing forces at a culture like Levels. I think the one you just talked about, that transparency, that idea of making sure folks are happy and feel productive and feel a part of things, is the part of culture that wins. The opposite side is I think probably what motivated that feeling you had Tom. And I had exactly the same thought of like, “Oh boy, before I opt into this, do I need to have a chat with Sam and let him know it’s all good and give him some specific reason of, ‘Well, we’re thinking maybe a down payment on a house or something.’” Because we are a mission driven company, right? That’s part of the thing that is also true of Levels is everybody is here.

Mike Haney: (37:11)

We hire very specifically on this. You’re not here unless we’ve already gauged that you really believe in the mission. Nobody’s here to collect a paycheck or just to collect a paycheck or just for the equity payout. And so it does create a little bit of … I feel like that’s a countervailing force we always have to think about. This comes up in how we give feedback on things. Like if you criticize the product or give challenging feedback to somebody, you’re undermining the company mission. And again, I think we created a culture of transparency and openness and feedback and all of those things that makes it okay. But it is something to this point, I think that we should talk about and air so that people, when they have that thought, which I think is a very natural thought in a company like this of am I the only one who thinks maybe there’s a possibility this won’t change the world and get to a hundred billion dollar company, and I’m going to hedge a little bit? I suspect everybody has that thought a little bit.

Ryley Walker: (38:10)

Yeah. I would look at it differently though. I think that’s beating yourself up over it. I think you got to think about what needs to be true in your life for you to make it worth $100 billion company. And if that’s selling some shares on the secondary, so you can be at your best in your personal life and professional life, then that’s your choice as individual. And I think that it’s great that we can give that to people.

Tom Griffin: (38:44)

Ryley’s attitude is inspiring. This is what we call an internal locus of control. Everything is within our control, Haney. One last note on secondaries. I know we’re doing a lot here on secondaries. But I think to make this conversation as candid as possible, my first question to Ryley by email, Ryley, I don’t know if you recall this, was, “What the hell are the odds that this actually is going to happen?” Now we’re talking about secondaries and it’s an option and it’s exciting and how many shares do you want to sell? But is this real or is this a 10% chance this is going to happen? 50%? 99 at this point. And I do think this is relevant because more and more companies are starting to do it. Came up with another friend who also thought at some point in the future their company said they’re going to do secondaries. And to be very honest, to this day, like right now in this moment, I couldn’t throw a rough percentage on the chance that even Levels employees are going to be able to sell shares in secondaries, even though that’s our intent. And so I don’t know if it’s worth doing a minute on that, but that’s just sharing an honest thought.

Ryley Walker: (39:54)

Yeah, that’s a really good question and a tough one to answer. I suppose for context, if you even own public company shares, let’s say they’re worth $50 a share, and you take that to bed one night and you’re like, “I’m going to sell these the next day.” You know you’re going to be able to sell them, but you don’t know what the value of the shares at noon the next day are going to be. And the reason I’m pointing that out is there’s always market uncertainty anytime you’re matching a buyer and seller. And so somebody has to agree to buy your shares in the secondary market, and they have to agree to buy them for a price that’s acceptable to you. And so that is never a guarantee until the deal is done that that’s going to happen. Now, assigning a probability to that is really, really difficult in the startup world. And especially Levels, we’re relatively early stage. It’s starting to happen more and more, but there’s not a ton of companies that are doing this to benchmark off of. So maybe that’s a bit of a non-answer, Tom, but hopefully that gives some context to the forces that are at play.

Tom Griffin: (41:28)

It’s a non-answer for sure, but it does give some context.

Mike Haney: (41:34)

Tom, was there anything else as you thought about coming into this conversation, any other conversations you’ve had about equity that you wanted to raise?

Tom Griffin: (41:41)

I mean, when thinking about some folks I’ve chatted with, including younger people in my life, my brain is going back to the point I made earlier around a better way to evaluate probability of success based on general statistics in the market, as well as some of the other more subjective traits that companies possess like team and founder history or even amount of money raised. So I think this conversation has been helpful. I’m imagining a 22 year old who’s trying to think about these things. But at the same time, I do think there’s room to put together more concrete frameworks for people so maybe someone in the audience can surface a good resource. But there’s not a ton of great stuff out there. I’ve done my googling over the years and it can be pretty hard to sift through.

Mike Haney: (42:38)

Yeah, that’s been my experience as well is you can find a lot of technical definitions to understand what an RSU is, but how you should think about it … And the thing, I guess, that I’ve come to over the past maybe three months of thinking about this a lot since going through the hiring process and then starting to think about secondaries, is kind of where we started that it’s not super satisfying, but it is that it’s all individual. It’s very highly dependent on what your circumstances, your attitude about money. And then to the thing we were just talking about, macroeconomic conditions that are largely out of your control, that are going to have an effect on whether or not we can do secondary, what the value of it might be. Even what the success of the company is. Even if we do everything right, sometimes things just fail because it’s not the right time. And I will say, coming to that realization, hearing a bunch of people’s very different experiences around equity even within the company was actually kind of a comfort. Because what I realized is it’s not that there’s an answer out there and I just don’t know it, it’s that there actually is no answer around this and you’re just going to have to figure out what works for you and then own it and run with it.

Ryley Walker: (43:47)

So to that point, though, it’s not a complete shot in the dark if you can get some information on what valuation the company is raising at, what maybe some of the terms are that are attached to that valuation, what the 409A and strike price for your options are. All those things can be used. You can rely on other parties, right? So investors are doing diligence to price around. They’re seeing what’s happening in the market and what other companies are being valued at. And they’re applying that valuation. So they’re accounting for some of the things that we’re talking about too, like the experience of the founding team and that risk of failure in the value that they’re paying to invest in the shares of the company. So there is information out there. It’s just, nothing is guaranteed and I think that’s important to keep in mind. And on the other hand, there’s huge opportunities for success. If you’re aligned and you believe that the company can achieve the goals, then getting involved in the startup is a great opportunity.