If you play an integral role in your company as an executive or leadership-level team member, you may receive a competitive compensation package that includes stock options. When managed effectively, your company stock has the potential to accumulate a significant amount of earnings. This is how many professionals (like those working in tech companies or growing start-ups) are able to amass sizable wealth at a relatively young age.
Anytime equity compensation is involved, it’s important to be aware of how certain business transitions or liquidity events could impact your portfolio. During exciting business (or professional) milestones, you may have the opportunity to do things like cash in and sell for a profit, increase your net worth, or accumulate additional shares at a lucrative price.
Let’s dive deeper into the strategic planning that goes into making the most of a business transition.
Understand the Power of Your Executive Compensation Package
Most high-level executives are given a compensation package that extends far beyond a traditional salary and cash bonuses. Depending on your position, experience level, and the status of your company (private or public), you may have a compensation and benefits package that includes stock options.
These are typically offered in the form of:
- Incentive stock options (ISOs)
- Non-qualified stock options (NSOs)
- Restricted stock units (RSUs)
Unlike a traditional salary reported on a W-2 each year, stock options can be complex from a tax planning perspective. The trade-off? They have the potential to accumulate significant value and supercharge your portfolio’s growth (especially for early or long-time employees).
Aside from concerns over tax liability, it’s also crucial for executives with equity compensation to watch out for unintentional overconcentration within their portfolios. Additionally, suppose you have a large stock concentration in your own company. In that case, you run into another nerve-wracking scenario: what happens if your company starts to struggle and jeopardizes both your job and your portfolio value?
As your shares vest or you exercise your options, your portfolio may become overweighted in company stock (especially if you don’t sell right away). This may increase your exposure to market volatility and risk, and you’ll need to make intentional decisions regarding portfolio diversification and preservation. At WealthChoice, we believe that stock awards are just a form of compensation that needs to be turned to cash that is then invested in a diversified portfolio! We work with clients to make sure every time they vest they are setting aside money to cover taxes. It’s important to note that most employers don’t withhold enough taxes to cover the taxes due on vesting shares. Most of our clients will owe additional tax, so we encourage them to have a plan to cover that future tax.
Managing Your Employer Stock During Major Transitions
To manage your tax liability and risk levels, you’ll need to monitor your vesting schedule, the tax treatment of your specific type of equity compensation, and potential liquidity events.
This becomes especially important during significant transitions, such as experiencing an IPO or leaving your employer. Let’s briefly take a look at both potential scenarios.
Navigating an IPO
If your company announces an IPO, this can be cause for celebration. For many, an IPO marks the first actual liquidity event. Until an IPO, employees of private companies may feel like their shares of company stock aren’t even “real money,” since there are limited (if any) opportunities to sell.
If your company has announced an IPO, you can work with an advisor and tax professional to do pre-IPO planning. Depending on your type of equity compensation, an IPO could trigger some of your shares to vest (and impact your tax situation).
Your employer should share important information with you regarding lock-up and blackout periods, which dictate how soon you’re allowed to start selling shares post-IPO. You may also need to use a 10b5-1 plan to conduct company stock trades (to comply with laws regarding insider trading).
An IPO can be incredibly exciting, and it has the potential to increase your net worth significantly in a short amount of time. It’s natural to get caught up in the emotional component of experiencing an IPO (especially if you’ve been with the company from inception). But keep in mind that if your company shares rise in value post-IPO, it could cause your portfolio to become overconcentrated.
You should still maintain a long-term focus on your personal goals, and ensure your values and financial well-being are considered every step of the way.
Exiting Your Company
Sometimes, equity compensation can be referred to as “golden handcuffs,” since it’s such an enticing and often rewarding benefit for loyal employees that it compels people to stay put. If you do choose to leave your job, you’ll again want to consider how your departure will impact your equity compensation.
Generally speaking, leaving before your shares of company stock vest will require you to forfeit them for good. There may be certain instances, however, where you may be given a post-termination exercise period (usually around 90 days after your last day at work). If you are given this three-month window, you have the option to exercise your vested options—or watch them get absorbed back into the company. Keep in mind that exercising your options could trigger taxes if you’re awarded NQSOs. If you have ISOs, you won’t owe tax when options exercise (unless you’re required to pay alternative minimum tax). Either way, you will still need to cover the tax bill on all capital gains once you decide to sell.
However, it’s also possible to leverage “left behind” stock options to negotiate a higher salary or a new stock award at a new job. So, if you’re concerned about navigating the tax implications, or just losing out on potential stock options if you were to go to a new company, keep this in mind!
Creating Your Financial Blueprint to Navigate Wealth Transitions
Perhaps one of the most important pieces of advice to keep in mind is that your equity compensation should support your financial life and goals, not dictate them completely. You have the power to define your ideal future. With some strategic planning and consideration, your growing net worth can help you accomplish your greater goals.
At WealthChoice, our team helps women in leadership manage their equity compensation through important transitions like IPOs or career transitions—all while keeping their greater financial priorities front and center. If you’d like to learn more about how we can help you navigate every financial hurdle and opportunity coming your way, we invite you to book a complimentary consultation with our team.
Our content is collaboratively written between our Bridget, Marnie, and team Perfectly Planned Content.
