What’s better: public or private company equity grants?

Now that companies are staying private longer than ever, more and more technology professionals are being recruited for pre-IPO jobs. Which is why we're often asked if private company equity grants have more wealth potential than public company equity grants. This month we interviewed Georgina Lai to find out.

Georgina has helped many well known companies (Facebook, Pinterest, etc.) prepare their equity plans for initial public offerings (IPO). So she's seen first hand what the transformation from private to public company looks like. But perhaps most importantly, she's also experienced the different wealth effects.

We thoroughly enjoyed our conversation with Georgina and are confident you will as well.

Interview with Georgina Lai, Head of Equity at Reddit

[Evan] Well Georgina, thank you so much for participating in this Zoom, I'm so glad to have you on today, how are you doin'?

[Georgina] I'm doing well, Evan, thanks for having me.

[Evan] Absolutely! Well, when we first started talking about doin' this it was a totally different world, it was pre-COVID-19, so I just kind of have to ask that question, in light of the circumstances, as the Head of Equity at Reddit, what are you hearing from your team members?

[Georgina] Well, our team members are great, and they're focused on continuing to build Reddit, into the fantastic product that it is, but I think that there are concerns with our employees, and not so much for themselves because we are very lucky, but more so for our colleagues in The Valley, in Silicon Valley, we look around and a lot of our neighbors are going through rounds of layoffs, which is a little scary. And not only that, there's also been talk about the market volatility, so yeah, it's strange times right now.

[Evan] Yeah, it absolutely is. It sounds like all things considered, it's actually fairly business as usual at Reddit, is that kind of right?

[Georgina] Yeah, it is. And I know that there are some other lucky companies out there that where we're fortunate enough to be in the situation where we are to be able to continue to work. And to work from home and remotely. So, yeah, business as usual, certainly interesting times as far as the markets are concerned. Reddit is a private company, and things are, we're just kind of keeping an eye on the market because, obviously, as a private company you always kind of keep your eye on that, because there's that chance of going public at one point in time. Now, Reddit has no plans of going public anytime soon, I have to disclose that.

[Evan] Insert disclaimer here.

[Georgina] A disclaimer here. But it's pretty interesting because we know that some of our peers were planning to go public this year. Obviously, I think people have certainly reconsidered, I think Airbnb publicly stated last year that they said by 2020 that they would be a public company and they are one of the hardest hits, unfortunately, in this environment right now.

[Evan] It's been a struggle for sure. Would you consider though, that being private is actually a benefit for employees because things are seemingly more stable? Is that a potential pro for working for a private company verses a public company?

[Georgina] That's a really interesting take, now, certainly as an employee of a company that's one less thing I have to worry about. I'm not worried about if my shares are underwater or what have you, and that's a huge relief. Flip side of that, I'm sure, is a lot of employees say well they want liquidity, but, the good news is I agree, that we don't have to really worry about our exposure in the market and how our stock is doing.

[Evan] Yeah. That makes a lot of sense. Are there benefits to working for a private company verses a public company and participating in the equity plan?

[Georgina] Oh, you know, certainly and this is not necessarily having to do with our particular time, right now. But I do think the benefit of working for a private company is the chance that when your company goes public, that you're gonna be raking in the dough, right? That's the dream, that's the Silicon Valley dream. Normally when you join a private company, your cash compensation is lower, however, they try to make up for that by compensating you higher in the equity. And so, if you can take that risk, certainly going to a private company has a lot of pros in the bucket.

[Georgina] You, from a work standpoint, work for me tends to be very satisfying because you get to do everything soup to nuts. You don't have to just specialize in that one area, you can kind of branch out and do as many things as you can be helpful to your company. But also, the compensation side is the equity, right? So, private companies tend to, like I said, grant more in equity, so if you're not risk adverse, you know, and you're laying a bet, and I have full faith in Reddit, that by the time we go public, that my shares might be worth a little bit of money.

[Evan] That makes total sense.

[Georgina] Yeah, that's definitely a pro of working at a private company.

[Evan] It's totally a pro.

[Georgina] Yeah, can you imagine working for a company like say, I'm just pulling this out, Disney, what kind of a rollercoaster ride that must be for the employees who hold stock in that company, if their compensation is weighted heavily in the equity component. That might be pretty stressful because you know their stock has kind of gone up and down quite a bit, you know.

[Evan] Absolutely, now for someone listening that may be thinking about working at a private company, how would you suggest they go about balancing the potential upside that you mentioned with the illiquidity that you also mentioned.

[Georgina] Well, I think it's really important to partner with a great financial advisor, and a tax advisor. And think about what are your life goals, are you looking to buy a home pretty soon, are you looking to start a family or do you already have kids? A lot of these things can really influence your decision on whether or not you would want to take the risk of going to work for a private company, because as there are many success stories like the Facebooks and the Twitters or the Ubers, there are companies that I have worked with in the past, or know people, where the company just folds. And your equity is worth nothing, right, because it just goes out of business. So, there is that risk there, so get together with a financial advisor, and make sure that you plan out your goals to do a risk assessment, right? If you're a dual income family, that might be great. One person can go and work for this steady company, like the Microsofts or the Amazons, and let the other partner take that risk, in working at a private company. So first and foremost definitely consult a financial advisor, I think that that would be the first thing I would do to assess whether or not you want to take the risk of working for a private company.

[Evan] Okay, now I love that answer, but now I have to say for anyone listening, I did not ask Georgina to say that. (Evan and Georgina laugh) But I think it was an excellent answer, so thank you.

[Georgina] You're welcome.

[Evan] Now, I mentioned you're at Reddit now, but I think it's super fascinating, and impressive that at one point in your career you actually worked at Nasdaq Private Market, and you were the Director of Product Development and Strategy, which is a super impressive title, by the way. (Georgina laughing) That's a really unique experience though, because at one point you've been on the equity administration side, and on the other side you've actually been on the product side. And for anyone listening that doesn't know what Nasdaq Private Market, it's secondary market exchange, so it's where you can go and buy and sell private securities. Now, I'm just curious, Georgina, how has that potentially benefited you in your role and kind of shaped your perspective in your role today?

[Georgina] Oh that's an interesting question. I think, when Nasdaq Private Market came about, when NPM kind of grew out of this need where a lot of private companies were staying private longer, so it used to be that the life cycle of a private company you have couple of rounds of funding, and then they're off to the races and they have an IPO. I'm gonna say probably, I'm going to guess around the time of Facebook, there was a lot of, Facebook was staying private for a really long time, and truly during my time there, I would venture a guess if Facebook didn't have an excess of people on their cap table that they would have remained private longer, because there really wasn't truly a need to go public. They ended up going public, I think, partially because of the share hold account on the cap table. And basically because it exceeded a certain number, they were going to be forcedly publicly disclosed anyway. And part of the reason that happened, is because of the secondary markets, where people were trading in private company shares.

[Georgina] So, what I learned from going to Nasdaq is that because of these private companies who are staying private longer, employees are getting, kind of, anxious about having some sort of liquidity in their stock. And so that's what Nasdaq Private Market really kind of served to address that need. And really to organize a way for companies, let's say in this scenario Facebook is a private company could work with Nasdaq Private Market to organize what is known as a tender offer, and allow some of their employees to sell some of their shares to an investor. So, and that's kind of the secondary market.

[Georgina] Now, it's a little controversial because you have to think about who the investor is. Part of the reason why you have a public market is because there are rules that they, guidelines by the SEC that tells people hey, these companies have to disclose to you the financial health so you can make an educated decision as to whether or not you want to buy into this stock, right? So those are usually the quarterly financials and the earnings release, right? But private markets don't have to do that. So, it's a little scary, so, if you're somebody who's looking to buy in private market securities, there is a risk inherent because those companies do not necessarily have to disclose anything about their financial health of the company.

[Georgina] But, sorry, to get back on track, how that helped me in my role back now, in a (mumbles) company, at a company like Reddit, is that it helps inform that decision as to whether or not, hey, if we wanted to sell our shares on a secondary market to allow our employees a little bit of liquidity before an IPO, that would be a mechanism in which we might think about working with NPM in order to allow for that to happen. So, employees can sell a bit of, a few of their shares to a private investor.

[Evan] Yeah, and you know everything about that, so...

[Georgina] I feel like this industry changes quite a bit, I think people are really innovating in this space, so where we're gonna see, probably some interesting developments in I'm sure in the next year or two in this space.

[Evan] It's interesting that you went there, what do you expect to see over the next couple of years? It's impossible to predict the future, but, in light of the markets, would you envision more tender offers, more private transactions?

[Georgina] You know, that's an interesting question, I think it's very much a possibility. Partly because, again, maybe with our current market situation, companies who were about to go public may choose to hold off, it might not be a great time to pull the IPO trigger. So, it is very possible that some of these companies decide, again, well we have an investor who is interested and on the other hand we also have employees
who would like to sell a few of their shares. So that might be, there might be an uptick in those kinds of transaction.

[Georgina] Also, I think on the vendor side. On the side of NPM or a Carta, or Shareworks. They might be looking to facilitate these kinds of transactions, and might get creative with, everybody's always kind of innovating to kind of see, okay what can we do to one, make money, right? And see what we can do, and if employees want to sell, we have to figure out a way to do that. So there's a lot of interesting things going on in that space, I think there are some companies actually, that, it's sort of like a loan situation. Where, these companies will loan employees cash, to exercise their stock options. So, that's also a really interesting scenario. And, they know with a lot of private companies there are the right of first refusal, that there are restrictions on transfer of these shares, so they've developed these kinds of

[Evan] Other avenues.

[Georgina] That kind of take that into consideration, and get around it. So, it's pretty crazy.

[Evan] Yeah, so even if it's not more private transactions, it could be more things like that.

[Georgina] Yeah, absolutely. And again, driven by the need of, because these companies are remaining private.

[Evan] Absolutely. Georgina, thank you so much for joining me today. It was such a delight to speak with you, and as always you always have so much knowledge to share. Thank you for being so generous about doing that.

[Georgina] Yep, no problem, any time.

Neither Evan Schmidt nor any guests intend to provide personalized investment advice through the various broadcasts and does not represent that the securities, services, or strategies discussed are suitable for any investor. Investors should consult with their financial advisors before making any investment decisions.