Category: Investing

Only The Disciplined Will Survive

Earnings season is among us. If you’re not familiar, it’s a time when publicly traded companies release their quarterly earnings reports. It’s usually the busiest time of the year for those who work in and watch the markets. Many analysts set their expectations for specific quarters, so the results reported by the companies during earnings season often play a significant role in the performance of the stock. Considering most of the country is on lockdown, and unemployment claims are at their highest in history, you can expect things to get a little rocky for Q1 2020 earnings report. Word of advice: only the disciplined will survive.

Beyond performance, successful investing requires understanding what matters and, at the same time, recognizing what you can control.

Financial planning is a process, not an endpoint.

Financial planning isn’t a destination; it’s a process. Similar to iterating and agile development — it involves agile planning, evolutionary development, continual improvement, and encourages rapid and flexible responses to changes in life. Inherent in its nature, real financial planning will focus on being smart with your money, and it will equip you with the solace needed in moments of uncertainty.

Concentrate on long-term goals and objectives.

Buying an investment and holding it for the long haul can help keep you focused on your goals and reduce the anxiety that is often experienced with short-term volatility. While short-term profits can often entice investing neophytes, long-term investing is essential to greater success. Not to mention, long-term planning allows you to abandon a hand-to-mouth approach and set a priority list for the things in life you genuinely value. All in all, you should invest for your goals, not just for the sake of investing. Your financial success depends less on what markets do — and more on figuring out who you are and what you want out of life.

Focus on reaching goals, not beating benchmarks.

Investing, now more than ever, is about controlling the controllable. You can’t control the markets. But you can control how you react to the markets. Be that as it may, I’m an advocate of goals-based investing or setting a personal benchmark. After all, would you be upset if you achieved all that you wanted in life, but didn’t beat the S&P 500 consistently? Probably not. From my experience, no one has ever mentioned benchmarks when we talk about their life goals and values. Why? Because it’s not the benchmark that’s truly important to you.

Maintain a disciplined approach in good and bad markets.

Only the disciplined will survive. That reigns true in both good and bad markets. Disciplined investors understand that the market is cyclical, and there will be periods of growth and decline. Sure, discipline sounds nice in theory, but it’s certainly challenging to execute in the real world where market conditions change, incomes fluctuate, and personal needs and desires evolve.

Because of this, it’s easy to get caught up in the whirlwind of emotions and make costly mistakes. If you genuinely want to be a disciplined investor, you must create and stick to a game plan that allows you to be both flexible and steadfast for decades to come. Put your finances on autopilot. Have automated processes in place that forces you to make systematic moves not based on how you’re feeling at any particular moment or based on the movements of the markets. Remember, only the discipline will survive.

Invest broadly and globally; asset allocation is key.

Although you have no control over your investment returns, asset allocation is still one of the most important investment decisions you can make. Besides your risk tolerance and time horizon, it also tells the unique story of who you are as an investor.

If it helps, try to decide on an investment philosophy that aligns with your goals and objectives. For example, my philosophy is to continuously invest in globally diversified passive vehicles while paying a low fee. It’s nothing fancy, but it’s a prudent way of getting the job done.

Reduce investment and tax costs when possible.

Limiting your investment-related fees and expenses is a critical aspect of investing. Think about it in this fashion — every dollar saved is a dollar that remains in your portfolio working for you. It’s fair to wonder if lower-cost investment vehicles will yield lower returns. However, time and time again, we’ve learned that low-cost index funds outperform the vast majority of their actively-managed peers in the long run. Go figure. As for tax costs, that’s simply a matter of displaying patience and holding on to your picks for the long-term.

Rebalance as necessary.

Investing isn’t a one and done activity. In fact, it’s quite the contrary. Selecting the right allocation of stocks, bonds, and funds is a delicate balancing act that should be revisited periodically. It may not seem obvious, but investments can, and do, change in value. Markets and economies change, and individual businesses change. Similarly, holdings may increase or decrease in market value or have changes to the dividend. Because of this constant change, it’s wise to rebalance your portfolio to the target allocation regularly.

Selling Company Stock To Raise Cash

Believe it or not, selling stocks require a strategy that is just as important and detailed as buying them. There are a few scenarios where selling your company stock to raise cash makes sense. It generally has little to do with market activity and a lot to do with your personal circumstances as a Millennial in tech.

As history proves, successful investing isn’t a matter of timing the market. It’s more about responding to changes in your life and your portfolio. For reasons beyond your control, you may find yourself in a position where you suddenly need to come up with cash. In an ideal world, you would have a cash reserve in a high yield savings account to meet urgent or unexpected expenses.

Alternatively, the proceeds from selling shares of your company’s stock, acquired through equity compensation, can be a useful source of income as well. However, you must proceed with caution when selling company stock to raise cash.

If you’re considering selling your company shares, there are a few concepts and tax consequences you must know. To guide your decision making around this topic, I’ve put together some main points you should consider.

Identify the best shares to sell

When you hold company shares you’ve received at varying prices and moments in time, it’s advantageous to clearly identify which shares are best to sell. This strategy is an investment accounting approach known as Specific Share Identification, where an investor’s objective is to optimize their tax treatment when selling company stock to raise cash.

For instance, let’s say you’re awarded RSUs, and receive 1,000 shares that will vest over four years. Each year, the price per share, also known as your cost basis, is increased by $5. In this scenario, you’ll receive 250 shares at $10 per share in year one. In year two, you’ll receive 250 more shares for $15 per share. In years three and four, you’ll receive 250 shares, but at $20 and $25 per share, respectively.

As you can see, these shares will vest at different prices, and if you decide to hold them rather than selling immediately, they will have different holding periods. If an employee were to sell a portion of their company stock to raise cash, there would be different tax implications for each group of shares. Considering this, make sure to get clarification on how to indicate specific shares to sell through your brokerage firm (E-Trade, Vanguard, Fidelity, etc.).

Understand capital gains taxation

Capital gains are profits from the sale of a capital asset, such as shares of company stock. Notably, when you sell company stock, you will generate a capital gain or capital loss. The calculation is simple — it is the difference between the sales price and your cost basis. Once you’ve decided to sell your company stock to raise cash, the challenge becomes minimizing taxes on the income received.

If you hold company stock for more than one year after exercising stock options, purchasing shares through an ESPP, or vesting of RSUs, it will qualify for long-term capital gains rates. If you hold the shares for less than a year, it will result in short-term capital gains rates.

The difference between the two is relatively simple. Short term rates are taxed as ordinary income, as high as 37%, while long term rates are capped at 20%. Because of this favorable tax treatment, you are incentivized to sell shares that will result in long-term capital gains as opposed to the alternative.

Know your holding period for ISOs and ESPPs

Capital gains taxation especially plays a role when dealing with ISOs and ESPPs. Holding company stock purchased in an ESPP for more than two years from the enrollment date and one year from the purchase date will lead to favorable tax treatment on the sale. In a like manner, holding shares exercised via ISOs for more than two years from the grant date and one year from the exercise date will lead to lower tax rates.

On the other hand, selling the shares too quickly will result in a disqualifying disposition and will have different consequences for ESPPs and ISOs. To drive my initial point home further, this is another reason to carefully identify the shares you want to sell.

Watch out for wash sales

A wash sale occurs when you sell a stock for a loss, and you also purchase a substantially identical stock within 30 days before or after the sale. You might be thinking, “why would I ever sell my stock for a loss?” Without getting into the weeds of tax planning, the IRS allows you to use capital losses to offset capital gains, resulting in a lower capital gains tax. In the investment world, this is called tax-lost harvesting.

Under wash sale rules, the loss and holding period are carried over to the new replacement shares. For example, let’s say you sold shares of company stock for a loss. Any RSU vesting, ESPP purchases, or option exercises can trigger the wash sale rules if they occur within 30 days of the sale. That is to say, your cost basis from the shares that were sold will be added to the cost basis of the new shares, resulting in a higher cost basis.

Know your company’s post-termination rules for stock options

For the most part, employees typically have 90 days to make a decision and exercise their vested stock options when they leave a company. If you can’t get together the necessary cash and plan for the tax implications for the exercise, you’re likely out of luck. All those vested stock options representing years of hard work will expire, and be rendered useless.

Some companies view this is as a serious burden that many Millennials in the startup world face when they leave a company. Thankfully, there are leaders like Pinterest, Coinbase, and Asana, who have extended post-termination exercise (PTE) windows that reflect their culture and gratitude to employees.

P.s. I found a list of over 150 companies, all of which have extended PTE windows far more than the standard 90 days. I’ve only shared it in my weekly newsletter with The Equity Shop community 😜

Get with the program!

Deciding Between Salary and Equity

There was a pretty enlightening trend on Twitter a few days ago, where folks in tech were sharing and comparing their compensation. For me, it cemented the idea that compensation in the tech industry is highly situational. What an employer may offer in base salary, equity, bonuses, and other benefits, largely depend on the role being filled, and where the company and employee are located. There is no one size fits all. To say the least, company strategies for compensation can be far from simple. Considering this, most tech companies offer equity as part of the compensation package, but employees rarely understand the value or how it fits into their financial plan. If faced with the opportunity to negotiate a better offer, how do you decide between salary and equity?

Salary vs. Equity: What’s The Difference

The advantage of being paid a base salary is that its a fixed amount of income that you can expect and plan your future around. Alternatively, in the context of compensation and investment, equity represents ownership in the company in the form of stock. Generally, the return on equity is often linked to company growth and performance. The purpose of equity compensation from an employer’s perspective is threefold: to attract and retain talent, align incentives, and reduce cash spending.

Attract and retain talent. When a company demonstrates or has good predictability to manifest financial success, employees are incentivized to work for the company in hopes of their equity being worth a substantial amount of money in the future.
Align incentives. Startups are usually strapped for cash, but even companies that can afford to pay higher salaries may prefer to give employees equity. The idea is that employees will work harder to achieve financial success for the company and increase the future value of their equity. In this way, equity can align employee incentives with company interests.
Reduce cash spending. By awarding equity, a company can often pay less in salary compensation to employees now, with the hope of rewarding them with equity later. The cash savings can then be allocated toward other investments or operating expenses.

Types of Equity Compensation

Both private and public companies offer equity compensation for myriad reasons. Equity compensation can be granted in many forms, each with unique characteristics, benefits, challenges, and importantly varying tax implications. These characteristics will impact your overall financial plan, so you’ll want to identify your specific equity compensation type to understand its benefits and potential challenges.

From my experience, most Pre-IPO startups offer equity in the form of incentive stock options and non-qualified stock options. On the other hand, most Post-IPO and mature companies grant equity in the form of Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs). Recently, I’ve seen a few companies offer cash as an alternative, RSUs, at-the-money stock options, and out-of-the-money stock options — and gives the employee the choice to select what best fits their needs.

For instance, let’s say you have a low-risk tolerance, and you’re starting a family or planning a wedding, the cash alternative would likely be the best choice. But if you’re in a financial position to take on more risk, taking the RSUs or even a mix of RSUs and stock options is likely the best strategy. Though I haven’t seen it in many plans, it’s a fantastic opportunity to further align your equity with your financial plan, and I sure hope it becomes widely adopted.

With that said, if you’re deciding between salary and equity here are some things to keep in mind:

Can you maintain your lifestyle on a lower salary?

Although they’re not mutually exclusive, equity compensation often goes hand-in-hand with a below-market salary. It’s critical to know your minimum number. If you can reshuffle your priorities and costs, so your reduced salary doesn’t make a significant difference in your lifestyle and ultimately your goals, then you’ve mediated much of the pay cut. It’s worth noting that cutting down might be a bit more challenging to do if you live in a high-cost city like New York City or San Francisco, where living expenses can put a dent in your income.

What does your four-year career plan look like?

Awards of equity compensation are almost always subject to a vesting schedule. Vesting simply means that an employee is required to wait a specific amount of time before gaining full rights to the shares in the equity grant. The most common vesting schedule I’ve seen is four years, on a monthly basis, with a one year cliff. In essence, this means that 25% of stock vests each year for the first four years of that employees’ time at the startup, in monthly or sometimes quarterly increments. Generally, if an employee resigns or is terminated immediately, they get no equity. If they stay for years, they’ll get most or all of it. In any event, be sure to keep your career plans in mind when deciding between salary and equity.

How strongly do you believe in the company and its mission?

The main risk associated with equity compensation is that there is no guarantee that you’ll gain from your equity’s appreciation in value. Many variables can influence whether your equity stake will actually pay off. Is it worth it to sacrifice a portion of your salary for the potential at winning big in the future? You’ll have to put your VC hat on because the answer will come down to how optimistic you are in the company’s future.

Negotiating Your Offer

Everyone wants to walk away from the negotiation table with the feeling like they’ve won. When deciding between salary and equity, the key is to win at the right things. After you’ve done your research, take some time to determine what matters to you.

For startups, cash is the most precious resource, and founders may welcome individual requests to trade salary for more equity. Assuming you are offered a market rate salary and equity, and your employer is willing to make some trade-offs, you will need a framework to help you judge how much equity makes sense.

Your strategy will depend on the stage of the company you plan to join.

For early-stage startups, you’ll want to find out the company’s current valuation as well as the amount of shares outstanding. If you divide the company’s valuation by the number of shares outstanding, you will derive at the price per share. You can then divide the amount of salary you’re willing to sacrifice by the price per share to determine the number of stock options you should receive.

For example, imagine you’re offered $100k to join a promising early-stage startup and choose to forgo $10,000 of your salary for more equity. Assuming the company can raise at a $5 million valuation and there are 1 million outstanding shares, the company can raise money at $5 per share, and you can receive 2,000 additional shares for your willingness to sacrifice $10,000 of your salary.

For mid-stage Pre-IPO startups, the trade-off should be based on the number of shares an employee could purchase at the current stock option price. Let’s say an employee wanted to forgo $10,000 of salary for the opportunity to buy more shares, and the current option price was $2 — the company will likely advocate granting an additional 5,000 shares.

As I mentioned beforehand, tax ramifications of equity can be far more complicated than salary earnings. Equity compensation can be quite convoluted — but with the appropriate resources and a viable strategy in place, you may be able to leverage your equity within your financial plan to meet your goals sooner than you know.

IPO, Direct Listing, and Your Employee Shares

These days startup companies are staying private longer as they are consistently raising more substantial amounts of capital through private funding. For the sustainable and enduring companies that choose alternative financing options, therein lies the public market. The public market, people like you and I, hold companies to a higher standard of accountability — for financial discipline, disclosure, meeting company goals, strategic direction, and even social responsibilities. While many companies choose to enter the public market through the traditional IPO process, some prefer the direct listing route. But what do IPOs and direct listings have to do with your employee shares? Everything.

Direct listings seem to be an emerging trend to enter the public markets as opposed to the traditional IPO process. If you haven’t heard the news as yet, Asana, a software startup focused on project management, is one of those few companies that opted for a direct listing. In doing so, Asana will be the 3rd recent company to choose this alternative route after Spotify and Slack.

As a startup employee with hopes of a successful exit, whether your company decides to do an IPO or direct listing makes a difference in your employee shares. Before we dive into the how, let’s first get into the basics of IPOs and direct listings and why they matter.

Initial Public Offerings (IPO)

When companies elect the IPO process, new shares are created, and there’s a ton that goes on behind the scene en route to the first trading day in the public market. For instance, in a traditional IPO, one or more investment banks serve as underwriters — financial experts who quarterback many aspects of the offering. Their role ranges from filing S-1 paperwork with the SEC to setting up roadshows, to garner interest from the investment community and raise capital. Believe it or not, but the investment banks also set the IPO price, buy shares from the company to sell to various institutional investors in their distribution network, who will then sell the shares to individual investors in the public market. In a sense, they provide a safeguard if the demand for the stock is weaker than expected.

Why do investment banks do all of this, you ask? Because they earn a percentage of how much the company raises from institutional investors during the IPO process. Go figure. Generally, on opening day, investors will keep an eye on the stock’s opening and closing price and compare it to the IPO price. Typically, it’s a good sign if the opening stock price is above the IPO price, but not too much higher as this could signal money left on the table due to a low IPO price target. In other words, the company could have sold the shares to investment banks at a higher price, resulting in raising more capital.

Direct Listings: An Alternative to IPO’s

As with most systems and industries, the legacy IPO process is also ripe for innovation. A direct listing is exactly as the name annotates: direct. Rather than creating new shares, employees and investors sell their existing shares directly to the public. Selling existing shares prevents the value of your employee shares from diluting when entering the public market. Unlike IPOs, direct listings have no intermediary underwriters or roadshows, and no setting a price range on the company’s stock — hence making the process faster and less costly.

This cost-efficient advantage comes at a cost to you and your employee shares because there is no support or guarantee of the share sale and potentially minimizes the number of long-term investors. The availability of shares is dependent upon early investors, such as yourself, while the price is purely dependent upon public market demand. As a result, there could be market swings and more volatility associated with the stock price.

The Lock-Up Period

Lastly, a significant impact of IPOs, direct listings, and your employee shares is in the lock-up period. In a traditional IPO, existing company shareholders agree to a period, usually 180 days from the date of the IPO pricing, where they are restricted from selling or hedging their shares. Although the SEC does not require lock-up periods, investment banks usually ask for this restriction because it allows for a set period for the company’s shares to trade and establishes a track record during the six-month window.

The direct listing process does not have a lock-up period. Since no new shares are issued, transactions will only occur if existing shareholders are seeking liquidity and choose to sell some or all of their shares.

The Demanding Public Markets

IPOs are unpredictable. Sometimes things work out the way we’d hoped and sometimes they don’t. As an investment advisor, I can tell you that the public markets will look for evidence of a strong, healthy, thriving startup — and superb growth and profitability are some of the best indicators of this.

It can be easy to become enthusiastic or even anxious about the possibility of your company successfully going through an IPO or direct listing. Not only may a successful entrance into the public market lead to increased liquidity for your employee shares, but an appreciation of the stock price might also lead to the generation of considerable wealth. The biggest mistakes I see made with equity compensation are getting caught up in the emotions of a liquidity event like an IPO or direct listing, and misunderstanding the technicalities to optimize stock decisions.

You Are The YOU Expert

As much credit as I like to give myself for establishing a niche and becoming an expert on equity compensation, you are the YOU expert. If you manage to amass a significant amount of wealth from the equity in your employer’s company, what would you do? Better yet, how would that make you feel? Would you do anything differently with your time? You may not have the answers now, but the best part is that you don’t have to figure it out on your own. That’s where a trusted financial planner comes into play, someone you can be vulnerable with — who you can share your goals, dreams, and ideas with.

Because of the unpredictability of life and the complexity of financial markets, it is imperative to work with an advisor who will help you to achieve your financial and life goals. Financial life planning is less about returns on investments, as it is about your values, priorities, circumstances, and aspirations — and designing your unique version of independence. You see, building a foundation is all in the intrinsic details. Be that as it may, personal values will drive behavior and help guide the decisions that we make. So I ask, when you achieve the financial freedom you’re working so hard towards, what are you going to do with it?

Year-End Planning For Stock Compensation

As tempting as it may be to take your foot off the gas pedal and enjoy the holiday season, year-end is a key time for financial and tax planning. For Millennials in tech, year-end planning for stock compensation should focus on both the big picture and the details. If you haven’t taken the time to update your plan, this should be a good reminder. Even if you have been proactive with updating your financial plan, it is still an excellent time to strategize and game plan for the upcoming year. Taking a few moments to plan smarter can help you take advantage of wealth-building opportunities and get you closer to accomplishing your goals.

Create a Year-End Stock Compensation Checklist

To build meaningful wealth is to be intentional with your time and resources. Believe me when I say that it will never happen incidentally. So, as part of your year-end planning for stock compensation, here are a few things you’ll want to take a look at:

holdings and grants of stock options, restricted stock/RSUs, and other company stock
exercises, vestings, and ESPP purchases in the current year
scheduled vestings for the upcoming year in addition to salary contributions assigned to ESPP purchases
expiration dates for any outstanding stock options and deadlines for option exercises
trading windows, blackouts, company ownership guidelines, and post-vest holding period requirements/opportunities
brokerage firm statements
expected new grants in the year ahead
any estimated salary withholding adjustments needed for the year ahead in the Form W-4

Know Your Inventory

Begin with the end in mind. With a keen focus on your life and financial goals, you can design your equity compensation strategy to support and achieve those goals. Start by taking inventory of your holdings, including RSUs, ESPPs, ISOs, NQSOs, and company stock holdings in taxable and retirement accounts. Identify your holdings and the cost basis of owned shares, and you can quickly identify which shares to sell to fund your goals. Not to mention, maintaining your inventory will also help manage the tax impact, avoid losing shares to expiration, and reduce the risk that is associated with holding company stock.

Subsequently, consider the likely length of time of employment with the company. The expected longevity helps determine the value of the equity offering. Review your employer stock award notices to determine potential outcomes in the event you decide to jump ship. For instance, the impact for stock options could range from forfeiture of all vested and unvested grants upon separation to retention of all grants to the original expiration date. For restricted stock and RSUs, the impact may range from forfeiture of unvested grants to continued vesting per the original schedule.

How Much Company Stock Is Too Much?

There truly is no one answer. Some financial experts recommend that no more than 10% of your portfolio should be invested in your company stock, while others may have a contrarian perspective and elect for a concentration strategy rather than diversify.

Storytime: I once got into an “internet discussion” with someone who believed it is best to invest with your heart because it pays off. They noted that if you believe in your company enough to maintain your entire position, it contributes to something greater than your financial stability — your throughput. You innately work with more diligence because your financial freedom is aligned to company growth. While I don’t wholly disagree, I think an individual’s circumstance undoubtedly plays a role. If you’re a young 20-something with little responsibility (relatively speaking), earning a decent income from a tech pioneer, then sure, maybe a concentration strategy is a good idea for the short-term. But if you’re looking to build sustainable wealth, or perhaps planning for retirement, education, or any irrefutable goal, then diversification is likely the best path.

Here’s the bottom line: owning company stock may allow you to share in the financial success of your company. But it also carries the risk that their financial problems will become your financial problems. In the event your company falters, not only might your investments tumble, but you might also find yourself out of work concurrently. Be smart about the degree to which you’re willing to tie your finances to a single company, even if it’s likely to be the next rocket ship.

The Timing of Taxes & Income Shifting

Keep a schedule of vested and unvested shares and their expiration dates. Request your company’s open selling windows so you can exercise “in the money” options before expiration, if feasible. Unlike stock options, which trigger taxes when exercised, RSUs and restricted stock generally give you no control over the timing of your taxes. As a result, taxation occurs when the shares vest.

However, there are two exceptions to this general rule:

Choosing to be taxed at grant, as opposed to at vesting, by making a Section 83(b) election.
Having a particular type of restricted stock unit that lets you defer delivery of the shares.

When the shares vest, you own the stock outright and have taxable W-2 income, along with your other compensation income during the year. In that case, it might be a good idea to time and shift other income around this restricted stock/RSU income to avoid getting bumped up to a higher income tax rate, or triggering the Medicare surtax.

At any time when you are considering exercising stock options or selling stock at year-end, you want to understand your tax rates, trigger points, and any shortfall in withholding. In general, you want to:

Keep your annual income under the thresholds for higher tax rates.
Recognize income at times when your annual income and tax rates may be lower.

Since you can control the timing of stock sales and option exercises, and you know when restricted stock and RSUs will vest, multi-year planning is especially valuable as it pertains to equity compensation. Primarily, in your year-end planning for stock compensation, you are looking to identify methods to shift income between years so that you are paying less in taxes over your lifetime. Money you don’t have to pay in taxes is money you can invest or spend, responsibly of course.

It’s All About You

Although it’s an important consideration, taxes should never be the only reason for exercising options or selling vested shares — or waiting to do so at year-end. Consider your investment objectives and expectations for stock price performance, but more importantly, your personal goals. How can you use equity compensation to UX design your financial life? If money were not an issue, what would you want your life to look like? What do you want to be? Whether it involves embarking on a business venture or settling down to start a family, the combination of your goals and well-designed equity compensation strategy have the power to change your life.

Introduction to Stock Purchase Plans

In the world of tech, it’s common—and frequently expected—that startups offer their employees’ company stock as part of their compensation package. If you’re a Millennial in tech, and your company offers an employee stock purchase plan, then take note because you’re sitting on an opportunity of wealth. Your employee stock purchase plan, or ESPP, might be one of the best benefits in your compensation package. Personally, it’s one of my favorites. If your employer offers an ESPP and you are not participating, you may be leaving thousands of dollars on the table. To maximize your ESPP’s value, it is critical to know some key dates and terms and understand the plan’s mechanics. Enter: an introduction to stock purchase plans.

ESPP 101: The Nuts and The Bolts

You know the saying, “there’s no such thing as a free lunch?” That doesn’t apply here because your ESPP is essentially free money. For this reason, most tech companies will use it to attract, reward, and incentivize their best talent. At it’s simplest, an employee stock purchase plan offers a way for tech employees to purchase company stock seamlessly and on favorable terms. Primarily, they allow participants regular, ongoing purchases of company stock through accumulated after-tax payroll deductions.

Moreover, participants can purchase company stock at a discount from the stock market price available to the general public. This discount is the free money I was referring to a moment ago. I’ve reviewed plenty of compensation packages for the Millennials in tech we serve as clients and have seen discounts ranging from 5% and 15%.

A Deal Too Good To Be True

What makes an employee stock purchase plan so appealing is the potential for both a discounted price and a lookback provision. As the name implies, the lookback feature allows employees to purchase shares based on the price at the beginning or end of the offering period, whenever share prices are lower.

For instance, let’s say the stock price is $100 per share at the start of the offering period. Your purchase price is $85 per share with the 15% discount.

If the stock price goes to $200 per share, you’ll earn a hefty 135% ($200-$85/$85).
Even if the stock price stays at $100, you’ll earn a 17.65% return from the discount ($100-$85/$85).
Even if the stock price drops to $50 at the end of the offering period, your discount gives you a favorable purchase price of $42.50, as a result of the lookback feature.

As far as Uncle Sam is concerned, the money deducted from your paycheck will be taxed like the rest of your salary. However, for Millennials in tech who can delay instant gratification, you’ll be rewarded with preferential tax treatment from the IRS. Correspondingly, if you are willing to hold the shares for at least two years from date of grant and one year from the purchase date, any tax liability is deferred until the shares are sold. Like my mom used to tell me growing up, “patience is a virtue.”

A noteworthy reminder: if your company pays dividends to its shareholders, the deal gets even better. You’ll receive a check for the dividend amount each quarter for the stock you hold. If your company has a dividend reinvestment program, you have yet another opportunity to take advantage of dollar-cost averaging to buy even more shares of company stock.

Key Dates In Your ESPP

Now that we’ve touched on the mechanics, let’s get familiar with key dates, events, and terms associated with most ESPP’s. It’s helpful to think of these key dates as a timeline of the typical stock purchase plan’s life cycle.

Enrollment date: Known as the grant date is usually the first day of the offering period. The grant date is vital in ESPPs that are qualified plans, and it starts the clock for tax purposes.

Enrollment or offering period: During this period, payroll deductions are accumulated to purchase company stock. Most ESPP’s have offering periods that last anywhere from 6 months to 24 months.

Purchase period: Purchase period: Some tech companies use the terms “offering period” and “purchase period” interchangeably when the time frames are identical. Alternatively, when companies establish an offering period of longer than six months, there are usually interim purchase periods. Your company will purchase your shares at the end of the two six-month periods within the 12-month offering period. For example, a single offering period could be from January 1 to December 31. In this scenario, the first purchase period might start on January 1 and end on June 30. The second purchase period might start on July 1 and end on December 31.

Purchase date: Payroll deductions accumulated during the offering period will be used to purchase shares of company stock at the discount price on the purchase date. The purchase date is pre-determined and is usually the last business day of the offering or purchase period.

Reaping The Benefits

Investing in any individual stock is relatively risky: we all can acknowledge that. The most significant risk by far is not having a strategy or game plan to manage your shares as they begin to accumulate. Markets go up, and markets go down. It’s inevitable. In fact, this volatility is what causes an efficient market to demand higher returns for those who can keep faith. With risk comes reward, and hanging on for the long term is more often than not, rewarding. It’s unlikely to become wealthy overnight by participating in a stock purchase plan. Nevertheless, over time, the gains can be attractive. All the more reason for Millennials in tech to develop a holistic approach to stock compensation. If you’re not sure how or where to start, we’d be more than happy to help!

A Holistic Approach To Stock Compensation

In the startup world, it’s no anomaly for companies to offer stock compensation as a means of attracting, motivating, and retaining employees. For those Millennials in tech fortunate enough to be provided equity, the rewards can be a significant wealth-building opportunity. Receiving stock options or other common types of equity compensation can feel like a windfall, but real happiness and success begins with discussions centered around how equity compensation can play a role in your financial life, alongside your values and goals. This sort of financial life planning is what I like to call a holistic approach to managing stock compensation.

Know Your Why

Money and wealth themselves are certainly not the end goal; they’re simply tools that provide the means to your goals. While accumulating wealth can improve your quality of life, there is more to stock compensation than becoming financially well. When you know your why, your efforts point toward something of higher value. What truly matters is what you do with that wealth and how you fit it into funding your personal life goals. When your purpose drives the process, it’s much easier to stay focused on the journey.

Using Equity Compensation to Fund Your Goals

When you receive a stock grant or acquire employer company stock, you gain an ownership interest in the company. Whether you participate in an ESPP or have grants of stock options or RSUs, when your company’s stock price increases your wealth increases, and perhaps substantially.

If you’re looking for a holistic approach to managing your stock compensation, therein lies financial planning. Real financial planning should start with identifying goals. What do you want to do with the proceeds from the eventual sale of the stock? Understand what you want and need out of life – and the role equity compensation can play in building your wealth toward those life goals. For many Millennials in tech, that could look like starting a business, creating a nest egg for your heirs, providing meaningful experiences for yourself and your family, and the list goes on.

Managing your stock compensation meshes with the many moving pieces of your financial life. These areas may include cash-flow needs, retirement security, income taxes, investment strategy, estate planning, and job tenure, along with company and legal requirements (i.e., lockup periods).

Understand What You Own

There are different forms of equity compensation, so it’s crucial to know what you own. Stock options give you the option to buy company shares at the exercise price, while RSU’s involve a direct transfer of shares to grant recipients.

The intricacies of equity compensation taxation can easily catch the smartest, most organized person by surprise, so it’s essential to determine how you will handle them over time. Some factors that can affect your tax bill include:

Whether you have ISOs, NSOs, or RSUs
How long you’ve held the stock
Your income bracket
The price when you bought the stock and how much they’re worth when you sell them (if they were options)
State of residency

Remain aware of your choices, the term of your options, vesting rules, and the tax and lost-gains consequences of your exercise decisions. Once you’ve figured out how your equity compensation works and how it will be taxed, you can then decide what it’s worth.

Diversification Matters

It’s natural to be excited about the value of your company — after all, you work there for a reason! Considering human nature, it’s not uncommon for employees to be overconfident in their estimates of their company’s performance. “But what if I work for a tech giant or unicorn?” I hate to break it to you, but even the top dogs can fall victim to a market decline or some other unforeseen event when you need the money.

Having an ownership interest in any company means that you’re taking on the potential risks and rewards of being a shareholder. By owning company stock, you’re subject to both general market risk and company-specific risk (i.e., significant drop in share prices due to weak quarterly earnings report). It’s essential to be aware of the risk of overexposure when managing company equity.

An advantageous approach to reducing the risk of concentrated positions is to sell the stock and diversify it into other investments. That doesn’t mean you have to sell all the stock and it certainly doesn’t have to happen right away. You might want to diversify over the course of a few years, and you’ll want to do it in the most tax-efficient way. Along with a trusted financial planner, you’ll also want to add a knowledgable tax professional to your arsenal. Trust me, this is a decision you won’t regret.

New Job? Here’s 3 Options For Your Old 401(k)

When you hit your 30s, it’s likely that you’ve had a few jobs and you have a few 401(k)s floating around – and it’s not uncommon to forget about what you have or even where it is.

And so, one of the most common questions that often arises is what should we do with our old 401(k)? When it comes to your options, there are three main things you can do: leave it with your old employer, move it to your new employer, or move it into your personal IRA.

Leave It Where It Is

There’s many companies out there that will allow you to keep your retirement savings in their plans after you leave your job. Since this option requires no action, it is often chosen by doing nothing. Because 401(k) plans are provided by a 3rd party (plan providers like Fidelity, Vanguard, Transamerica etc.) on behalf of your employer (the plan sponsor), there is usually an additional layer of fees on the account.

Also, although you may be familiar with the investment choices in your plan, in most 401(k) plans, the investment choices are limited to a small selection of the investing universe. And if you have more than one old retirement plan from previous employers, it becomes challenging to keep track and make sure the investments are all working together.

You can probably tell that this is our least favorite option.

Move It To Your New Employer’s Plan

For simplicity, transferring your old 401(k) to your new plan could make it easier to track your retirement savings.

Your new plan will give you the option to rollover (move) your old plan into your new one. Generally, the smartest move is to evaluate the fees charged by the investment funds and go with the plan that offers the most cost-efficient option.

Move It To Your Personal IRA

We’re huge fans of consolidating all of your 401(k)s into one account. Our top recommendation is to roll it over into an Individual Retirement Account (IRA), which is just a type of retirement account that you open up yourself, rather than with your employer. A big benefit is that the IRA offers flexibility and an entire investing world of 8,000 different mutual funds to choose from. In your 401k you only have the option of about 10 – and these options aren’t always the best ones.

How Do I Rollover a 401(k)?

When you contribute money to a retirement plan, certain rules prevent you from accessing those funds until later in life, usually age 59 ½ – and if you try to access the money sooner, you will have to pay taxes and penalties (with a few exceptions). It’s good to note that you’ll want to contact your old employer and do something called a direct transfer rollover. This way, the check will not come directly to you and you will avoid any penalties or taxes.

If you need help deciding on which option is best for you, we can help!