Opportunity Cost

I graduated from college in 1999. This was two years later than my peers because I left my junior year to start a startup with my best childhood friend. We sold that startup and I returned to Stanford a lot wiser about the world and life and ready to finish my bachelor’s degree.

When I did get out of school, it was boom time. You couldn’t throw a rock from San Jose to San Francisco and not hit a booming technology company. While many of my friends were taking jobs in investment banking or consumer tech startups or consulting firms, I gravitated to software companies that sold to businesses. It was way less sexy than investment banking or consumer technology. (Everything was sexier than consulting in my opinion. Then and now.)

I received a job offer from Vitria Technology. The company was based in Sunnyvale in one of the many cookie cutter office parks. We made software that helped banks and telecommunications and other firms move data between various databases. For example, at Apple we helped them move orders from their website to their inventory and manufacturing systems. The only downside was working in Sunnyvale was way less fun than living and working in San Francisco. However, the job was perfect for me.

Business was BOOMING. I joined when there were around 200 employees. 18 months later, we had 1,500 employees. Several days a week, including a lot of Saturdays, you would spend half your day interviewing potential new hires. The revenue side of the business went from single digit millions per quarter to $40m per quarter in 6 quarters. At that time $100m a year of revenue was the magic number to consider going public.

I knew absolutely zero about companies going public and what that meant for the company and the employees when I started the job. By the end of my two years there, I learned a lot but the most valuable learnings had to do with money, not work.

One of the conditions of the offer was that I needed to do 6 months in technical support before I could look at other roles internally. I really wanted to get my foot in the door so I agreed. I wrote a program in my first 6 weeks that automated the gathering of key files needed to diagnose and debug issues that would save time for customers or sales teams when working with technical support. This made it much easier to figure out what was going wrong in the field. Then I began looking at groups of issues and organized a list for engineering to help them understand how many customers were having the same issues.

This directly led to me getting a job in product management once I fulfilled my six month commitment to technical support. When I graduated I did not even know that product management was a job. You had to be technical. You had to be a good verbal communicator with customers and various internal stakeholders. You had to be able to write long technical documents. You had to be a good negotiator. And you had to have good taste on what made for a successful software release.

Six months after joining the product management team, I was the lead product manager on the product that generated 75% of our revenue. I ended up spending every year for the next two decades either working in product management or having product management teams reporting to me. I had found one of my callings.

One of my strengths is for a guy that is more comfortable with books and code, I always try to make sure to build good relationships. I made sure to form good relationships while I was in technical support and continued to invest in them even after I transferred out of the group. I would often spend a couple hours one day a week hanging out with the team. We would talk about work or go grab lunch or grab a beer if it was the end of the day. On one of those days, people were talking about “the end of the lockup.” I had no idea what that meant.

When companies went public in those days employees could not sell their stock in the first six months to make sure to not put too much downward pressure on the stock. The date when this policy changed was called the end of the lockup. As that day approached a huge percentage of every company’s employees would become increasingly fixated on the stock price. They would count how much fake money they had (stock options) and how much real money that would turn into.

One day, I was treated to three lockup stories. These were really lessons about whether you should buy, hold or sell your stocks options when the lockup expired.

The first was from the leader of the group who had the most experience. He shared the advice of “do not double down”. Doubling down is an expression from blackjack about doubling the size of your bet after seeing your cards. There are a lot of details to the story but the lesson was to be careful about trying to minimize your taxes. The short version was his friend thought he had $8m but actually had $100,000. He was trying to save $800,000 of taxes but ended up owing $2 million dollars of taxes on $100,000. So he had to pay the IRS 20 times what the stock was worth. It took his friend 10 years to pay off the tax bill. The lesson was simple, just pay the taxes. Don’t try to avoid or minimize taxes.

The second story was from another member of technical support. This time it was his personal experience. He sold some stock at his previous company to buy himself a new Honda car to replace his ten year old car. A new Honda was $25,000. He also needed to sell a bit extra to cover the taxes. The stock proceeded to grow by 10x over the next 2 years. He said he is now driving a $350,000 Honda Accord. The moral of his story is don’t necessarily sell your stock to improve your lifestyle. He wished he had kept driving his old car and just sold a smaller amount each quarter. He felt like he could have made $175,0000, paid his taxes, bought a Honda and had $100,000 left over for his kids tuition fund.

What caused me to write this today was I was listening to the CEO of Nvidia, the world’s most valuable company, tell a similar story at the World Economic Forum in Davos this week. The CEO of Nvidia is a really smart guy. Even 26 years ago when they went public he was a really smart guy. When Nvidia went public he wanted to say thank you to his parents by buying them a Mercedes S Class. The car cost about $100,000 plus the tax overhead. He said he and his parents wished he had not bought that car. Nvidia is up 5,000 TIMES since going public. The $100,000 Mercedes S Class ended up costing $750 million dollars of missed gains. I’m sure his parents appreciated the sentiment but they probably felt they had splurged too much at the moment.

Obviously, everything turned out fine for the Nvidia CEO and his parents but the $350,000 Honda Accord was something to actively avoid.

The final story was told by a third member of the technical support team who at his previous employer bought himself a mid priced Porsche for around $60,000. The next quarter the stock had fallen 90%. He explained that the only thing that feels better than driving a Porsche is driving a new Porsche for $6,000. He felt that way because had he delayed gratification he would have simply lost 90% of the money in the market. By cashing out at the top, he got a great deal on something he loved.

I had several interesting conversations this week around money. A couple have been about the proposed California wealth tax. Another has been around financial advice about when to sell stocks to upgrade lifestyle and when to continue living as much like a monk as possible. And a final one was getting someone to stop being afraid to sell stock and pay taxes. Obviously, each situation is unique. And the rate in which money can be created or destroyed in the technology sector is very unusual. 30 years in things going up or down so quickly is nauseating for all but the most stoic of investors.

For most people, the decisions they face are more often about now versus 10 years from now. It is good to learn to think about not only the benefits of taking an action but also the unknowable opportunity costs.