At WealthChoice, we’ve partnered with breadwinner women for several years. Recently, we’ve seen an interesting shift for our clients – more and more women at the peak of their careers are being awarded some form of equity or stock options as part of their overall compensation plan. This is especially true in the tech and startup space, as more and more companies work to secure top talent.
Unfortunately, with an increase in equity compensation, we’ve also seen an uptick in gender pay gaps across our client base. A recent study has shown that women receive 15-30% fewer stock option grants than their male counterparts. This cements the idea that it’s still critical for women to negotiate their salaries confidently. Still, it may be even more important for them to gain confidence in what types of equity compensation are available – and ask for it.
Understanding Your Equity Package
Your first step is to gain a deeper understanding of what equity compensation you have available through your company. In general, there are a few types of common stock options that we see our clients deal with:
ISO (Incentive Stock Options): Employee stock options with a favorable tax treatment. There’s no tax at exercise, and you owe long-term capital gains if held more than one year after exercise and two or more years from the initial grant.
NSO (Non-Qualified Stock Options): Standard stock options that are taxed as ordinary income at exercise based on the difference between strike price and fair market value.
RSUs: Company stock granted to employees that vests over time. Taxed as ordinary income based on fair market value when shares vest.
ESPP: A program allowing employees to purchase company stock at a discount through payroll deductions. Tax treatment depends on the holding period and discount level.
If you’re climbing the corporate ladder at a large public company, you’re likely looking at RSUs as part of your compensation package. However, other tech companies and startups employees may have a blended package, including NSOs, an ESPP program, and RSUs, which are made available after a company goes public. Regardless of your unique situation, it pays to chat with your manager or HR representative to learn more about what type of equity compensation is available to employees and at what level it’s offered.
Negotiation Strategies for Equity Compensation
Wondering when and how to bring up equity compensation? There are a few key trigger points that you can easily bring stock options and your compensation package into the conversation:
- New job offers. Whether you’re moving to a new role internally, or you’re going to a new company, this is a great time to raise the equity compensation question. For example, if a company can’t increase their base salary offer, you may be able to negotiate stock options as part of your overall compensation.
- Promotions. Often, at startups and tech companies, promotions may happen in title only. Especially in a tight economic market, there may not be enough cash flow to adequately support promotions across the board within the company. While it’s nice to be able to update your email signature and LinkedIn profile, those things certainly won’t pay your bills or help you unlock the financial freedom you’re working toward. Instead of requesting a base salary increase, discussing how equity compensation can play into your new role can help to set you up for future success.
- Responsibility changes. At startups and tech companies, it’s all too common for scope creep to happen within each employee’s role. It can feel like everyone is wearing multiple hats, and before you know it you could be doing the job of 2-3 people – while only receiving your individual compensation. If you’ve had a significant change in responsibility within the company without a formal promotion or role change, you might consider asking about equity compensation. Framing it as a reflection of your vested interest in the company’s success will mirror the hard work you’ve been doing!
It pays to remember that, regardless of when you’re having a conversation about equity compensation, it can be framed as a win-win situation for both you and your employer.
Companies offer stock options for several key reasons:
- Align employee & company interests by tying compensation to company success
- Attract & retain talent while conserving cash, especially for startups
- Give employees potential upside in company growth
- Compete with larger companies that can offer higher salaries
- Create sense of ownership and motivation among employees
Luckily for you, equity compensation saves your company cash flow, and helps you to grow your portfolio for retirement and beyond. Knowing this can help you to frame a conversation about equity compensation with your employer as a win for them, as they’ll be saving money and retaining you as a key employee.
Tax Planning Essentials
One of the primary reasons the breadwinning women we work with shy away from equity compensation is that tax treatment of stock options can feel complicated and confusing. Even if they’ve already been awarded stock options or shares, it’s easy for them to become stuck in an analysis-paralysis loop. They do research on how their shares are taxed, feel uncertain about how to exercise them without getting hit with a massive tax bill, and ultimately do nothing.
This is all too common, but can result in an even more costly tax mistake down the road.
Once you understand how your stock options are taxed, you can start building a plan for timing your exercise or sale of shares. For example, you may want to sell your RSUs the same day they vest to avoid incurring short or long term capital gains taxes. However, if you have known liquidity or tax events coming up in your future, it may make sense to hold onto your shares for a longer period of time and sell them when it’s most tax advantageous.
Strategic Equity Management
Equity compensation can help you move toward your goals by growing your overall portfolio value. However, it also poses a unique problem:
When you hold a number of shares in your company, you often face an overconcentrated position. In other words, you have all of your eggs (or a large percentage of them) in one basket.
This is amplified by the fact that your other compensation – salary and benefits – also come from your employer. So, if your company faces economic difficulties or turbulence, you could potentially:
- Lose the value of your shares.
- Face layoffs.
- Lose your salary and benefits.
All in one fell swoop.
This makes it particularly important to diversify your portfolio, and to ensure you don’t become overconcentrated in your company stock, or hold too many shares in your particular industry.
Action Steps
While it’s possible to create an equity management plan on your own, it can be challenging to navigate the tax implications of your stock, time the sale of your shares to reduce taxes and maximize your earnings, and balance your total portfolio to minimize the risk of overconcentration.
At WealthChoice, we help a number of our clients with navigating their equity compensation. Our team takes a hands-on approach, helping our clients negotiate their equity compensation, partner with their CPA to create a tax strategy, and map out a plan to make sure there are no surprise tax bills upon vesting and exercising their options.
If you have questions, or want to discuss your unique situation, we encourage you to reach out. We’re here to help you leverage your equity compensation to achieve your unique goals – whatever those may be.
