If you’re anything like the smart, driven women in tech we work with, then you’ve seen your professional success rewarded by your employer through stock awards. It’s something we see time and time again with our clients, and manifests a common response from all of the women we help: Now what do I do?
In fact, this question has become so prevalent, that I would say it has become the number one concern for our clients in tech. These women are thriving in their careers and have been rewarded accordingly, but now the crucial step is to make the most of this opportunity by creating a strategy around their stock awards that will help capitalize on this financial benefit.
So What Are Stock Awards?
Stock awards are a form of stock-based compensation. They have become an increasingly popular way for highly competitive technology firms, both large and small, to hold on to in-demand talent, and are usually awarded after a set duration known as a vesting period.
This is essentially an incentive program that provides benefits when you have contractually fulfilled a specified term of employment with the company. As well as stock awards, the benefits can also be other assets, such as retirement funds.
The vesting period or schedule can be based on length of time employed after the grant date and/or on meeting specified performance goals. Once the grant vests you own the shares outright (in a public company). You can then choose to hold, sell, donate, or gift the shares as you wish.
This means you are locked in to your position until you are able to receive your shares, which helps firms reduce employee churn at a time when the battle for talent is still in full force and it is projected that talent shortages could hit 85 million people by 2030.
These retention strategies have been dubbed ‘golden handcuffs’ by some, but they can also lead to significant windfalls if there is a jump in the company’s share price or if a lucrative merger is on the cards. Conversely, there are implications if the stock price dips. Either way, there are important personal financial planning strategies for you to consider.
What Should You Do with Your Stock Awards?
As busy high-earning women in tech, stock awards can make your financial landscape a more confusing one to navigate. However, with strategic planning to avoid unnecessary tax liabilities and ensure the options contribute positively to your overall wealth strategy, stock awards can provide a powerful earnings boost.
Understanding the Purpose of Stock Awards
The key issue with stock awards is that they are really just another way for companies to give money to employees,in a way that is easier for the company than issuing cash.
Stock awards serve as a placeholder for cash, and are then used to create cash. They are a non-cash incentive that are not intended to stay in their stock form. Our job as your financial advisor is to turn the stock awards into cash, and then invest it based on your unique financial goals.
Diversification Is Essential for Growth
Your stock awards are essentially like a seed. As nice as it is to have, you can’t live off a seed, but if you plant it well, it will grow and nourish you for years to come. Holding on to vested stocks from your employer provides tremendous concentration in one company, and is generally a far riskier investment.
After the vesting, you could have substantial amounts of your personal wealth tied up in just one stock. An important part of financial planning for just-vested shares is understanding the risks of holding them and the need for diversification.
We’ve all seen how quickly a stock price can plummet. That’s why diversification is essential for success here to spread your money across multiple investments in a diversified portfolio. At WealthChoice we help our clients build long-term strategies around the vesting of their stock awards, utilizing diversification for maximum growth of your investments.
Types of Stock Awards and their Benefits
It is important to know and understand the type of stock award you are receiving. There are a variety of reward frameworks frequently used in the tech sector, each with different characteristics:
- Restricted Stock Units (RSUs)
- Non-Qualified Stock Options (NSOs)
- Incentive Stock Options (ISOs)
- Stock Appreciation Rights (SARs)
- Employee Stock Purchase Plans (ESPPs)
- Employee Stock Options (ESOs)
Each type has its specific advantages, underlying strategies, and tax considerations. Developing a well considered strategy to achieve your goals, manage risk, and minimize taxes are critical components to your future success when it comes to monetizing your stock awards.
At WealthChoice, most of our client stock awards are RSUs, ESPP, and ISOs. But by far, RSUs are the stock awards we see most often. We help our clients form a strong awareness of the type of award they have received, and how best to utilize that.
It is incredibly rewarding for us to help the women we work with transform their stock awards into diversified investments that, if managed well, can be far more lucrative than simply holding on to their awards in their basic form.
The Financial Implications of Receiving Stock Awards
Navigating company-awarded stock holdings, diversifying creative solutions, and making tactical financial planning decisions are complex tasks. But with the guidance of a financial expert experienced in working with women in tech, you can optimize your position as an executive, maximizing financial benefits while mitigating the associated risks.
The financial issues we focus on here at WealthChoice are:
Having a Sell Strategy
When shares vest it’s vital you put that cash to work towards your goals, most often by adding to your diversified portfolio. Selling RSUs is different from selling common stocks. You must choose whether to keep or sell the RSUs and the best timing to do so. Therefore, it is best to have an RSU selling strategy for this.
Having a Tax Strategy
Given the financial and tax implications associated with stock awards, WealthChoice takes a considered approach to dealing with these compensation perks, building in well considered tax strategies to protect your wealth as it grows.
When RSUs vest, for example, this shows up as income on your W2. Companies normally only withhold 22% for federal taxes, which is below what most of our clients need to pay. This means you need to be holding cash aside to be ready to pay the additional taxes you’ll have.
Not Counting the Stock Awards as Income
Stock awards should never be used for the purpose of covering expenses. This is a slippery slope that leaves you financially vulnerable. When a company stops issuing stock awards, or the price of stock awards drops, if you are counting on this money to cover important expenses you can be in big trouble.
Work with an Expert to Capitalize on Stock Awards
It’s an incredibly exciting time in the world of tech, and we’re seeing more and more women build thriving careers on the cutting edge of the tech sector. We love watching smart women do incredible work moving the tech world forward, and want to ensure you have all the tools you need to help capitalize on this success.
If you’re a woman in tech looking for expert guidance on how to handle your stock awards as part of a holistic financial and wealth management plan, then please do get in touch.
