Unravel the complexities of stock options and RSUs with us. We delve into the intricacies of these financial instruments, shedding light on their potential benefits and pitfalls, and guiding you towards informed investment decisions.
When accepting a job offer, it’s important to understand how to take advantage of the rewards of stock benefits while mitigating the risks.
First, know the difference between stock options and restricted stock options (RSUs). Stock options allow you to purchase shares in your…
- Startups that can’t afford to pay out huge salaries often include some form of stock benefit in their hiring packages to make their offers more competitive and to motivate their employees.
Stock options
These are stock options that allow you to purchase shares in your company’s stocks at a predetermined price, also known as a strike price, for a limited number of years (usually 10).
- They encourage you to stay with your employer longer because there’s typically a vesting period before the options become exercisable.
Tax-Optimized Sales
If you hold exercised incentive stock options (ISOs), it would be beneficial to sell your stock options that meet the special holding requirement (i.e. you’ve held the shares for two years since the grant date and one year since the exercise date) before selling your options that do not meet the holding requirement.
- Sell company stock acquired through an employee stock purchase plan (ESPP) last.
Restricted stock units
Common type of equity compensation and are typically offered after a private company goes public or reaches a more stable valuation
- Like stock options, RSUs vest over time and do not require you to buy them.
- As soon as they vest, they are no longer restricted and are treated exactly the same as if you had bought your company’s shares in the open market.
Maximizing Tax-Savings Opportunities
Consider investing the proceeds from your equity compensation by funding tax-advantaged accounts, which are savings accounts that are exempt from taxes today or in the future or that offer other tax benefits.
- You could use the money you make to cover your ongoing cash needs to max out your 401(k) or Roth 401(t) account. You could also use the proceeds to fund a traditional IRA or Roth IRA.
Negotiate
You should negotiate your equity compensation as well
- Because stock compensation is generally tied to the success of the company, employers tend to prefer giving more stock over more cash
- Companies typically issue a grant of options or RSUs with your first job offer, followed by refreshers either annually or as a bonus
Evaluate
When you agree to any type of equity compensation, you must be careful about how much company stock to hold
- Equity in your company should be part of a balanced approach to accumulating wealth
- In order to have a balanced portfolio, you’ll either need to invest cash salary or diversify some of your equity compensation by investing in different things
- What does my personal financial picture look like if my company stock is cut in half tomorrow or even drops to $0?”
