How stock options made him an overnight millionaire

0:01NPR.

0:06Stacey Vanek Smith:When Juan Hernandez came to work at SpaceX in 2013, employees' stock options were not front of mind.

0:14Emma Ferrara:You're like looking at the bottom line like, all right, how much are you actually paying? How much can I actually take home to feed the family? Especially me, I had no experience with stock options or the market or anything like that. Eventually, Juan started to learn that shares in SpaceX were growing and growing in value. You would go on your little web page and they would show the value kind of going up and you get the emails. You're like, huh, this is interesting.

0:39Stacey Vanek Smith:This is starting to be worth something. Tech firms aren't the only businesses that give their employees shares of the company. In fact, sailors hunting whales hundreds of years ago would often get paid a share of the profit. But startups giving all employees stock options is a particularly Californian model that might explain why the state is a tech hub. This is The Indicator from Planet Money. I'm Darian Woods. And I'm Waylon Wong. Today on the show, why do Californian tech companies love to give their employees stock options? We learn what they are, why they might be the secret ingredient to Silicon Valley, and how they've changed WOD's life.

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3:22Stacey Vanek Smith:It's a year of paydays for tech employees. SpaceX put shares of its company public mid-June. Also, Anthropic and OpenAI have announced their filed paperwork to possibly do the same too. All three companies give their employees rights to buy shares of the company as part of their pay package. And when the companies go public, it becomes a lot easier for those workers to cash out those shares. We met one of them, Juan Hernandez. Juan was born in Mexico and raised in California. He started off working in warehouses and restaurants before moving into office work in an aerospace company. But he kept hearing about another company on the other side of town.

4:03Emma Ferrara:They were marketing themselves as like, we hire the best of the best. And, you know, I've always been kind of competitive in what I do. To me, it was just kind of like, all right, I want to work where they say the best of the best work. That company was SpaceX.

4:16Stacey Vanek Smith:And I decided to put my name in the hat. Juan says because he didn't have a college degree, he didn't have a lot of leverage.

4:22Emma Ferrara:Fortunately, I was hired. Juan became a scheduler in SpaceX's engine factory. I had a team under me that we would schedule to make sure that we hit our launch dates and commitments.

4:33Stacey Vanek Smith:You were responsible for making sure everybody's on target, which, you know, coming from Elon Musk, who is like a known taskmaster, that must have been a lot of pressure.

4:41Emma Ferrara:Yeah, yeah, there was a lot of pressure, but he took care of us. But yeah, he was a very demanding guy. And so, you know, we had skin in the game, so we wanted to execute.

4:50Stacey Vanek Smith:The team had skin in the game because they had options to buy SpaceX stock. Ifat Aran is a professor at Israel's University of Haifa, specializing in startup corporate law. They are not just workers receiving wages, they are partial owners of the firm. And that ownership interest gives them a reason and an incentive to invest their time, their knowledge, their effort in building the firm. Ifat says that retaining workers is particularly important for tech companies and their investors. They want the talent to stay around. You're basically investing in people, in ideas, in what they have in their heads.

5:31So you really need to work hard to make sure that you're not just creating an empty shell and the most important asset eventually walks out of the door. Now, the way employees get ownership varies between companies. And there have been different types within SpaceX over the years, too. But a basic employee stock option situation goes like this. At certain dates, a company gives you special contracts, stock options. Those contracts are the opportunity to buy shares in the company at the current price.

6:02Stacey Vanek Smith:Yeah, so they're not giving you the shares themselves. They're giving you the right to buy at that price. Exactly. So let's say you have the right to buy SpaceX shares at$1 a share. If SpaceX's shares stay at$1, that option isn't really worth anything. But if the company rises in value a few years later, then that option can become very valuable. Let's say the share price goes to$100 a share. You can still pay the price of that original$1, which is now worth$100. So a pretty good deal. A very good deal. Yeah, but it's worth noting that when you exercise that option, you likely have to pay taxes on that$99 gain.

6:42Stacey Vanek Smith:And when the company's private, there are limited opportunities to actually sell some of those SpaceX shares to fund that. Plus, there's often restrictions on how long you need to work at the company before you can actually get those stock options. And the options have expiration dates, say 10 years. So if you don't actually buy stock with that option, then its value goes to zero. That timeline is even faster if you leave the company. Once you leave, you have only three months to decide whether or not to exercise the option. And that would involve out-of-pocket costs and maybe alternative minimum tax.

7:19This is roughly the problem Juan Hernandez faced after six years working for SpaceX.

7:24Stacey Vanek Smith:Unfortunately, in 2019, I got laid off. In Juan's case, he hadn't bought any SpaceX shares while he'd been working there. He said he had 30 days to buy$50 ,000 or$60 ,000 worth of SpaceX stock or leave them forever.

7:39Emma Ferrara:Convincing the wife was the biggest part. It was like, hey, we need to get these. I was telling her, it's almost a sure thing. And she was very nervous. She was nervous because A, Juan had just been laid off. B, they need to borrow against their mortgage to pay for it. And C, it's putting all your eggs in one basket. That is the exact opposite of what financial advisors tell you to do. She said, like, you're putting the house up. You know, we don't even own this house. Like, this is the only thing that we can leave behind at the time. And, you know, I was able to convince her. And we got to a point where she's like, OK, you know, I believe in it.

8:15Emma Ferrara:Let's do it. So Wan's dilemma reflects how hard it is to take advantage of a rising company's value when you leave, whether it's voluntarily or involuntarily.

8:24Stacey Vanek Smith:But Ifat Aran says what's distinctive about stock options is that they don't lock people into failing companies. If the company is not doing well, the options aren't worth much. So employees actually have an incentive to seek a better opportunity elsewhere. Ifat says this is a huge part of why Silicon Valley became such a success. And yes, we know SpaceX started in LA and is now headquartered in Texas. But Elon Musk really is a product of Silicon Valley. Anyway, 100 years ago, there was no particular reason why California would dominate as a center for tech. Bell Labs in New Jersey had extraordinary scientific talent.

9:10Boston was another contender. They had MIT engineers and defense funding and major technology companies. In those places, workers could be subject to non-compete clauses. And this is an important point. A non-compete clause says you can't work for companies for a time after you leave. That's a strong way for a business to keep staff working for them.

9:33Stacey Vanek Smith:Yeah, if they want to keep the same line of work in the same region, they're basically stuck. But California doesn't allow non-compete clauses. So with Roots going back to the 1950s, tech companies would do something else to keep their talent. They started to give ordinary employees more of a share in their startups. Ifat thinks that employee ownership is the big factor that gave rise to the tech startup ecosystem in Silicon Valley and not elsewhere. Definitely, because when you are investing in intangibles, you're actually investing in people. And you want them to be happy and you want them to stay and you want the incentives to be aligned.

10:13And Juan Hernandez is very happy. He says those shares he and his wife bought for$50 ,000 or$60 ,000 are now worth a lot more. He wouldn't say the exact amount. And if you've been following the markets, you'll know SpaceX stock has been erratic to say the least. But he says it's between$1 and$5 million, if not more.

10:32Emma Ferrara:I was an immigrant and she kind of grew up in LA, not the best circumstances. So, you know, feel blessed that we kind of got in a situation where we can, you know, now put generational wealth in our family and set up our kids to have the advantages that we didn't have. You know, kind of the American dream. Textbook American dream, honestly.

10:54Stacey Vanek Smith:If I delivered this to Hollywood as a script, I'd say, no, go back to the drawing board. Yeah, they would say, this is too on the nose.

11:05Stacey Vanek Smith:This episode was produced by Cooper Katz-McKim and Emma Ferrara, who also fact-checked. It was engineered by Maggie Luther. Kate McCannon edits the show, and The Indicator is a production of NPR.

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