Bryce Emo on the Transformative FinTech Company Quid

Bryce Emo of Quid - Podcast Transcript

Scott:	Hey, it’s Scott Orn at Kruze Consulting and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing they integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer, which sounds kind of like not a huge deal, but actually we did the study at Kruze. We spent $420 on average, just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal. It saves a lot of money and the dogs are eating the dog food. Like we see a lot of startups coming in to Kruze now using Rippling. So please check out rippling great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share. So, shout out to Rippling and now to another awesome podcast at Kruze Consulting’s Founder and Friends. Thanks.
Singer:	(singing) So, when your troubles are mounting in tax or accounting, you go to Kruze Founders and Friends. It’s Kruze Consulting Founder and Friends with your host Scotty Orn.
Scott:	Welcome to Founders and Friends podcast with Scott Orn at Kruze consulting. And today my very special guest is Bryce Emo of Quid. Welcome, Bryce.
Bryce:	Nice to see you, Scott. Thank you-
Scott:	Before we turned the mics on, we were reminiscing about our college days and Bryce was the mascot at Notre Dame and I was involved in the cow mascot. So, two middle-aged guys that had some good times back in college.
Bryce:	Yeah. There’s a lot to brag about there, a lot to brag about.
Scott:	Our wives are swooning right now.
Bryce:	Yes, that’s great.
Scott:	Well, so maybe you can tell, just retrace your career a little bit, and tell everyone about Quid and how you ended up there.
Bryce:	Yeah, absolutely. So, I started my journey after college at Notre Dame. I moved to New York and I was a wall street analyst for two years at Merrill Lynch doing derivatives. And that took me to about 2000 when the internet got very hot. And so, I flipped tracks and spent the next 18 years building and running sales organizations at MySpace photo bucket, and a couple of privately held companies in the big data SAS space. And so, it was during my journey at those private companies that I realized when I would leave or as new 409As changed at the company level that there was an opportunity to really optimize my equity position along the way. I’d, start buying my equity on my own account. And then when I’d leave, eventually the tax bill would be so high that I couldn’t afford it personally. And so, I’d either only exercise part of it or I’d take out a loan from family or friends. It’s one of the issues that I saw myself having. And when my friend Josh Berman who’s one of the co-founders of MySpace started Troy Capital and then launched this fund, Get Quid. I was eager to get involved in and run sales here and help people figure out this option, exercise, puzzle that everyone’s trying to solve for.
Scott:	And you’re so right. And I want to have you on the podcast because this is a question we get all the time and it’s not just from our clients, but our friends and the startup community. And like the classic, especially when someone’s leaving a company and they might have like $300,000 worth of options to exercise. And they don’t have anything close to $300,000 laying around. And so like, what do you do? And you put it perfectly like a lot of people just kind of exercise a quarter of it or half of it. And even that is a ton of exposure relative to their net worth. And it’s very risky and something could happen with a startup and it could go to zero. And so, when I heard about Quid and heard about what you’re doing from our friend, Chris Swanson formerly of SVB now at Quid, I was like, “Hey, let’s go on the podcast. So, we can talk about this and explain how you can help solve this problem for a lot of the people in our lives”.
Bryce:	And thanks again for inviting us. It wears on people, right? I mean you’ve got tens of thousands of people now working at these hyper growth unicorn pre-IPO companies, there’s 700 of them globally, probably four or 500 in the United States. And so, you’ve got tens of thousands of people working at these companies. They take tremendous amounts of deferred income, right in the stock, in the form stock. And I live in the Bay area. I know you do too. It’s extremely expensive here, right? And in New York and in major cities across America, it’s very expensive to live in these areas. And these startup companies oftentimes pay below market wages because you’re taking this large gamble on your equity. And it creates a lot of stress when you one worry about maybe leaving the company, right? Not being able to exercise your options. Two, as the company continues to increase in value, the cost of those options and the tax consequence becomes more expensive on a monthly, quarterly, yearly basis. And so, helping people gain peace of mind that “Yes, you will be able to buy your options”, right? They will not go unexercised because of companies like Quid out there. It’s a great thing to do. One. Two is the level of education in the marketplace around equity is very, very low. It’s shocking. When you think about the gamble that people take at these start companies that they really still don’t have a great mentor in many of these companies or through their personal networks of people who’ve done this because it’s not that old. Only in the last 10 years that people taking a lot of risk in stock. And so, understanding the different types of equity, I might have options, whether they’re ISOs or NSOs, RSUs, how to think about those, how to understand their value and what the tax consequences. There’s a lot to learn there. And so, at Quid, we really try to take an education first approach and help people understand their equity. We build them models over those calls, right? So financial models we’ll plug in all their information and help them think through what the best option is. And a number of times we’ll say, “Look, you should have exercised two years ago. It’s too late now”, right? Or, “You should exercise this part of your options because they’ve got low strikes, but not these because they’re really high priced NSOs and it’s not going to make sense”. Or, “You might want to sell some and take a loan”. So, a lot of times there’s a hybrid approach there and that’s, we try to bring a voice of education in the marketplace.
Scott:	Well let’s talk through some of those scenarios you talked about. So, the first thing I always think about for people who don’t know is like when you do exercise your options, whenever that is whether it’s when you first joined the company or first best, or right before the IPO, you’ve created like a taxable event. Right? And so that’s from whatever your options were the strike price to that dollar amount, whenever you exercise that’s based on the income tax, right? That’s not capital gains tax at that point?
Bryce:	Yeah. So, and I’ll always preface by saying I’m not an accountant, so don’t rely on this advice to your detriment, run it by a CPA. We work closely with the folks at ENY. They’re an amazing shop as are a number of great, there’s a lot of great firms around San Francisco and the Bay area. But so, when I have options, right, when I exercise those options, there’s two costs that I’m going to bear. The first is the cost of exercising those options which is the number of options. Let’s say, I have a hundred options times the strike price, let’s say it’s a dollar. So, I owe a hundred dollars. Well, if I have ISOs, which is really what you want to have, I will end up paying an AMT bill on that cost to exercise. And it’s different by each state. Some don’t have a state income tax, some do, et cetera, but it’s going to be somewhere between call it 25 and 35%.
Scott:	And the AMT is the alternative minimum tax. So, it’s like, it’s yeah, keep going.
Bryce:	And so, I’ll pay that now. A lot of times I don’t owe that generally until the next year, right? The following April. If it’s an NSO, a non-qualified stock option, sometimes you’ll hear that the term, “NQ” be used, it’s the same thing. And you can find this information in Carta or Shareworks, or your e-trade platform, whatever your company’s using, but on NQs or NSOs, you’ll end up paying ordinary income tax. And that tax is due at the time you exercise. So, we’ve made over the course of the last couple of years, we’ve made 125 plus million dollars in loans. And there are some great stories. We have stories where we’ve lent people $10 million and 50,000 was to exercise the options. And 9.95 million was to pay tax. So really the major financial burden that people bear. And that’s the reason why this solution becomes so appealing for them, because the last thing they want to do is borrow and use their own money to pay Uncle Sam on an asset that they don’t know if it’s ever going to actually become liquid and have value to them.
Scott:	Yep. And the advantage of exercising earlier, we’ll talk about the risk of that in a second, but the advantage of exercising earlier is you’re locking in that cost basis. Right? And then everything after that is capital gains taxes. So that’s why people kind of take that leap, right? Is that, that’s the rationale?
Bryce:	Yeah. That’s the rationale. And of course, there are some holding period requirements and things like that in order to get long-term capital gains. There’s a couple of reasons why people do this, right? One is “I want to set myself up for long-term capital gains now while the 409A valuation of the company is low”. And generally, we recommend that if a company’s 409A valuation also known as their FMV or fair market valuation, if that’s less than 40 or 45% of the preferred value of the stock, usually they should be talking to us. There’s generally an opportunity to work together there. As long as their strike prices are below a couple bucks, it’s worth the conversation. So those ISOs the reason why they’ll exercise those is one, to lock in hopefully start the long-term capital gains clock. Two is, when the company goes public and we’ve seen the volatility in the markets, which has been tremendous. It’s great to watch on a daily basis, but every day that company is public and you own stock. It creates stress for you, especially when 99% of your wealth is in one stock, which is the case for most our shareholders. And so, I can exercise now before the company goes public, and I know that post lockup and, in some cases, post lockup might mean the day it goes public. In the case of companies like Palantir and Slack and a few others, Airbnb, you could actually sell some of your shares before a full six-month lockup period. So, if I can buy my shares now, and a year from now and my company goes public. If I can trade on day one or day two and not have to worry about optimizing for tax then it helps me have a clearer mind. Every one of those days that I get back, I think reduces the stress in your life and creates peace of mind
Scott:	And Bryce that’s super interesting. Maybe you can talk us through the actual structure and mechanism that Quid uses to accomplish this and give founders this peace of mind you’re talking about.
Bryce:	So, we have a money tree in my backyard. And what we do is we go out there, break the heck out of that thing. No. So the way that it works is couple of things. One our loans. So, we’re California lender, right? Our loans are only backed by the value of your shares. So, if we lend you $1.6 million, which is approximately our average loan in any given quarter, right? Lowest loan is a hundred thousand dollars. The biggest loans we’ve done recently are like 25 million per person. For a couple of people. Yeah, significant, right? If we lend someone a million six, and the shares, let’s say a rogue wave hits the company, kind of, we work style, right? And the shares become worth $5. In that case, the shareholder either transfers us $5 or transfers us the shares. That’s considered repayment of the debt. The loan is effectively unsecured today, by which I mean, you don’t transfer shares anywhere. Many of our competitors will have you transfer shares into a trust. Sometimes you may have to declare that you have a certain amount of net worth to be able to do this. So, we thought that was a messy structure. That’s why we’re a lender. The loans effectively unsecured until the point at which transfer restrictions lapse, and you can sell the shares or get liquidity on them at that point in time, our lien springs into action. Between now and then there are some, what we call “bad boy clauses” is the legal term or jargon I should say. Which means basically you can’t, rehypothecate your shares put another lien on them. If you commit a felony or declare bankruptcy, then we’ve got to act like a creditor in that case, but it’s a very eloquent solution and what that allows us to do is it means we don’t have to be on the cap table. And it means we’re probably not going to affect the 409A. So, it’s very company friendly because if I’m the CFO or the CEO or the GC of a company, my biggest concern is my employees going out to the secondary market and doing sale transactions where they’re transferring shares. And now all of a sudden, I used to have a cap table that had 50 people on it. And I’ve got 5,000. So, it’s a big concern for, for GCs and CFOs. And that’s one of the things that’s so friendly to them.
Scott:	Does this get around the right of first refusal, like the ROFR too, because it feels like it’d be compliant with a ROFR too.
Bryce:	Yeah. So, we have not had companies come to us with any issue around a ROFR. Companies, they’re not in the business of making a loan. And so that hasn’t been an issue for us.
Scott:	Hey, it’s Scott Orn at Kruze Consulting. And before we get back to the podcast, quick shout out to ChartHop. ChartHop is one of my favorite new SAS tools on the market. And basically, what ChartHop does is it puts your org chart in the cloud. And I always like to say it brings transparency to your organization. And so, everyone in your organization can see who they report to. They can see the full org chart of company and how their group relates to other groups. It also has a lot of information on the individuals in the company. And so, you can click on the chart out profile and just get like where people live, their experience Slack handles all this kind of stuff. And it’s just a really great tool. The other thing is ChartHop has started doing some cool stuff around compensation and budgeting planning. And so, you can actually start seeing like what the cost structure of the company looks like during certain kind of scenarios. So, I’m loving ChartHop check it out, Charthop.com. We use it at Kruze. We really like it. And I can’t recommend it enough all right. Back to the podcast. But that for the audience, like sometimes the venture capitalists can make a diff… Like they, in a lot of their negotiated deals, they kind of say like, “Hey, if anyone at the company is going to sell stock, we want the right of first refusal”.
Bryce:	That’s right.
Scott:	So, there’s been times where I’ve had friends who like had a really difficult time actually selling because the VCs didn’t really want to buy it, but they also didn’t want it to be sold. And so, it ended up in like paperwork paperwork land, and never actually happened. So, the fact that Quid can actually facilitate that in that situation, it seems like a pretty big plus to me too.
Bryce:	Well and paperwork land is, it’s a real thing. Like in a secondary transaction, if I want to go sell shares of a pre-IPO company in the secondary market, and there’s some great companies that do this, right, and they’re serving a very important role, it might take me, they’d say two to six months is how long it takes. We spoke with a client at a company two weeks ago on a Wednesday, and we funded them on Friday. If we’ve already underwritten the company, we can do a loan from start to finish in three days.
Scott:	Wow that’s amazing.
Bryce:	So, it’s fast. A lot of times, the number of people that have come to us this month who, they forgot they had such a huge tax burden in April. The person who prepared their taxes didn’t take everything into account. And so, they come to us and we’re able to finance their loans very quickly.
Scott:	That’s great. And talking about that, well, first of all, the springing lien or that type of structure makes so much sense. I think we talked a couple of months ago. I think I told you the story, but when I was at Lighthouse, we were a lender to startups and took equity. I remember someone who had been an investor in Dropbox, like cold called me out of the blue and was like, “Hey, I’ve got $10 million of Dropbox stock”. And that’s probably worth like 300 million now or something crazy, but he wanted us to finance that in the way that Quid does it. And I actually remember calling our lawyer and she couldn’t figure out how to get a lien on the stock. And so, we said no. Because we didn’t think about the elegant solution that you have. And we were, it wasn’t our business. And it was a one-off kind of thing. But I tip my hat to your team for figuring this out, because it actually makes a ton of sense. And that was like an institutional investor that wasn’t like a company.
Bryce:	Yeah. That’s great.
Scott:	So, it’s everyone has this problem, you know? So, it’s pretty cool that you figured this out.
Bryce:	Well, I’m happy you bring that up. You know, for two reasons, one our founders Samit and Josh and Anthony are partners and Landon on our team did a ton of work too. But to come up with a solution like this was not a trivial task, they spent a year working with our partners very carefully and very closely to construct something that was very company friendly and also helped us achieve our investment objectives that we were pursuing. It’s not something that’s easy to do. The second reason why I like what you said is just a few weeks ago, we did a loan for over $20 million to an institutional investor who had a capital call, right? So, if I’m getting a capital call or sometimes there’s opportunistic moments where they can put some more money to work at a great valuation. And so, if you think about it, institutional investors, they don’t have margin capabilities or margin loans, the way that you would on a publicly traded stock. So, we’re starting to see, and we’ve done this number of transactions over the course of the last couple of years with institutions who have that same reason. Either they need to buy out, an LP wants to get out of the fund, they have a capital call, or they have an opportunistic moment to take on more ownership in the company.
Scott:	I can totally see this for kind of funds that are older, that maybe their 10-year windows closing, or a little bit longer, I mean at Lighthouse. We were like three extensions in or something. I think our fund was at 13 years. And there’s no more money in the fund at that point. So, like using a solution like this is pretty helpful. That’s really cool. Well, maybe you could talk about, you talked about if you’ve underwritten a company already, you can move fast. Maybe you could talk about what types of companies what parameters they have need to have. And then maybe some success cases of companies you’ve worked with.
Bryce:	Sure. So, the companies that we’ll underwrite our rule of thumb is this, if the company’s worth over a half billion dollars is doing $50 million in revenue and growing by 50% year over year, we’ll have a conversation with these people. Now, Chris and I spoke with a company just before this call, that’s worth 400 million, but they’re crushing it. They’re growing super-fast. And with the growth rates of many of these companies, they might be worth 400 today in a year from now, they could be worth a billion three. So, we do have some elasticity in our thinking and we try to be flexible. The reality is most of the companies we’re making loans are probably worth a billion dollars plus. We focus on the Cloud. We focus on tech. We focus on businesses that are not going to be terribly capital-intensive with massive prep stacks, where there’s a lot of risks to us. But we weren’t doing loans in the crypto space a year ago. And now we’re actively talking with people at a number of cryptocurrency companies because it’s become more mainstay. And it feels like some of these companies are going to get public and get some liquidity. And if they feel better to us, we like the space more than we used to.
Scott:	Yep. That makes total sense. And then once you’ve kind of qualified a company it’s easy to, once you’ve done one deal, you can do a bunch of deals because you already underwritten that, underwritten is like a fixed cost you’ve already spent. Right?
Bryce:	That’s right. That’s right.
Scott:	That’s cool.
Bryce:	And so that underwriting process probably takes us three or four weeks, it’s a light lift on the company’s part, generally a call with the CFO or somebody who has good data on the company under NDA will help us get through that underwriting process. We’ve done it with just a couple of calls with CFOs in the past, and it moves fast.
Scott:	Nice. Very cool. Maybe you can talk about like the cost, like how does Quid make money? What costs does the option holder or individual bear? How does this work for them?
Bryce:	Sure. So, and I mentioned this earlier in our chat, we build these financial models or Excel spreadsheets for everyone we talked to. And the reason why we do that is this is not an inexpensive loan, right? It’s only recourse to your share. So, we take on a lot of risks. I mentioned, we worked before, we actually made loans to shareholders at WeWork. Now, luckily, we were there early, but there’s still, it only takes a couple of bad companies for your funding, have a tough time. So, we build these models because the question is, “is our loan cheaper than the opportunity costs of selling today? Or is it less expensive than if you end up paying ordinary income tax on the whole thing, because you exercise and is it cheaper than the stress that it’s going to cause you right when your company goes public” And so there’s three costs the first, and this is pretty standard for anyone in our space. There’s going to be a transaction fee up front, which is how our company has basically funded the company and survive our operational costs until the average company that we’re making a loan to their shareholders might be outstanding for two to four years. So, it’s, there’s a transaction cost upfront. There is an interest rate. It’s a simple interest rate. And then, and it’s annual. And then the third is a percentage of the shares. Now the person will probably never transfer us single share if they do, they’re going to be a one percenter because very few people have ever transfer shares. People settle it in cash the same way you would a futures contract.
Scott:	Meaning they would sell some of their shares in the market after an IPO, and then just pay you cash instead of actually sending you shares. Right?
Bryce:	Correct. Exactly. Right. And so, there’s actually two things that they’ll do. One they’ll either sell shares in the market or two, they’ll take out an asset back loan from their bank at that point in time, because they’ll have unencumbered shares and their cost of capital at a First Republic who we were on the phone with this morning or Merrill Lynch, Morgan Stanley UBS, Goldman Sachs, all these amazing banks, their cost of capital is so inexpensive on publicly traded stocks. They’ll use that to pay off our debt as soon as it’s possible because our stock fee changes based on duration. And so, you can pay it off sooner rather than later. And we actually have a number of clients who they used our loan solution a year to two years ago. Right? And now the price of their stock in the secondary market has increased fourfold. That’s not an exaggeration, it’s a four X. And so, they’re like, “Look, we want to pay off the loan now because I’m going to do a secondary sale. And I’m also going to take some liquidity”. And so, we do find that a number of people do that as well. And don’t wait until IPO.
Scott:	Yeah. But they locked it in. They locked that cost basis in four years ago and it’s a great deal for them. So yeah, that makes total sense. So, it’s expensive money in the sense of you stared at it on a blank piece of paper, but the arbitrage you’re saving on taxes and peace of mind makes it really attractive for people basically.
Bryce:	Well and not just that, because a nice chunk of our business is people are using these funds to start businesses, buy houses they’re getting married. They’re having kids. They want to set up trusts for their children. What have you. And so, if you compare, if I want, let’s say, I feel like I need $3 million because I’m buying a house or something like this, right? If I go sell my shares, I have just capped the opportunity of those shares that I’ve sold. Right? We find that with a loan, you only probably need 30 or 40% growth of the course of a couple of years in order to be better off at the loan than you are with a sale. Most of the companies we’re making loans to are growing by one to three X per year. So that becomes a no-brainer for them when they see the side-by-side math.
Scott:	Yeah. If you’ve sold those shares, you don’t get the appreciation on it. So, it’s better to do the loan, lock it in and then benefit from the appreciation and then sell it down the road and pay the loan off. That’s the structure.
Bryce:	That’s exactly right.
Scott:	Yep. That makes total sense. You really got something here. It’s really cool. So, you’ve done, Quids done about $125 million worth of deals.
Bryce:	Yeah. I’ll that number just to be safe because it’s larger than that but I always like to be conservative.
Scott:	Yeah. Well you’ve built something super cool. I’m glad Chris introduced us. Maybe you can tell everyone how to find you, how to reach out if they’re interested and maybe some of the information you need right off the bat to see if it’s interesting deal for you.
Bryce:	Sure. So, our website is W-W-W dot, get quid.com, G-E-T Q-U-I-D.com. You can go there and fill out, it probably takes you a couple of minutes to fill out a profile or a request for a meeting. And we’ll just ask you things like, “Do you have ISOs or NSOs, how many do you have? What’s your strike price”. You can enter as much information as you like, and then we’ll reach out to you and within a couple of days at the max, we’ll be on a Zoom call like this with you walking you through a model. Most people we talk to the same day, whether it’s myself or some of the other folks on my team.
Scott:	I love it. And thanks for coming by. And I think this is going to be really helpful and kudos to you and the team for coming up with this. And it’s been, I still remember that phone call about Dropbox like 10 years ago, 12 years ago. So, capitalism is beautiful, figures things out, and now people are going to have this problem solving going forward. So really neat.
Bryce:	Thank you very much. And thanks for having us on the show, love the folks at Kruze Consulting and congrats on what you and your wife have built.
Scott:	Thanks, Bryce. Appreciate it.
Singer:	(singing) So, when your troubles are mounting in tax or accounting you go to Kruze Founders and Friends. It’s Kruze Consulting Founders and Friends with your host Scotty Orn.

Bryce Emo of Quid - A transformative FinTech company providing capital, $100K to $30M, to employees for option exercise, tax, and general liquidity

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