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 😜

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If I Were A Millennial In Tech

When I first launched Deane Financial, I was fortunate to leverage my fiancée’s design insight to build a wealth management firm exclusively for Millennials in tech. From the holistic lens of my business, service design plays a vital role in encouraging varying levels of innovation within the firm — whether it be incremental, adjacent, or disruptive. As you can imagine, my method of doing things is a bit different. I spend a good deal of time thinking like my niche to build the ideal firm that serves them. I’ll admit, sometimes I get so entrenched in the tech world, I feel like I’m in the industry myself. So, I thought, why not put myself in your shoes for this week’s blog post on personal finance?

So, here it is.

If I were a Millennial in tech, here’s what I would be doing right now when it comes to my financial life. 

Develop multiple streams of income

If we’re similar and your goal is financial independence, the roadmap is simple. Multiple streams of income. Once Kem became a designer, it didn’t take long for me to notice the potential Millennials in tech possessed when it came to their earning power. Like some Millennials, I like to reward myself with expensive nice things, but only when it’s earned. And I hate feeling like I need to cut back on expenses if I want to meet my financial goals. So, if I were a Millennial in tech, I would focus on the alternative. Things I can do to earn more income. 

Thankfully, we live in the age of the internet, where information spreads at zero marginal cost. If you have a personal brand, and you’re willing to put in the work, there are plenty of ways to develop multiple streams of income. For instance, if you have a technical skillset like design or engineering, you can do freelance projects making apps and SaaS products. If the educational route is more fitting, you can create online courses or ebooks. You can even do live trainings. Because I’ve been to a few and had great experiences, I would look to partner with specific organizations and host events like design sprints and hackathons. And because I’m all about passive income, I would be a Shopify Developer Partner. Without a doubt. 

Automate my financial life

Financial success is a lot like designing and engineering. It requires seamless systems and processes that promote end-user satisfaction. Considering my day-to-day responsibilities, keeping long-term goals in mind at all times requires entirely too much willpower and effort. Thankfully, having a process in place that replaces willpower makes it easier for me to remain disciplined. On a high-level, there are three personal finance rules that I live by:

  1. Spend less than I earn
  2. Spend money on the things that align with my values
  3. Prioritize saving and investing

While these standards aren’t always easy to follow, I’ve found that automating my finances gives me an enormous advantage. For me, it’s the best strategy to lock in future behavior as opposed to relying on willpower in the moment. Be that as it may, when saving and investing, it’s more than a goal that I’m hoping for. It’s an outcome that is virtually guaranteed. 

Here’s what it looks like in 5 simple steps:

  1. Compartmentalize my accounts. For example, I have three checking accounts — a joint account with Kem for our monthly bills, a personal account, and a business account. I also have a Roth IRA for retirement, and online saving accounts for my goals (buy a home, wedding, vacations, etc.)
  2. Set up my entire direct deposit to go to my primary checking account for fixed expenses. 
  3. Set up automatic transfers from my primary checking account to my secondary checking account for my personal allowance. This will be for day-to-day spending, variable expenses, shopping, etc. 
  4. Set up automatic transfers from my primary checking to my various savings and investment accounts for future goals.
  5. Because I’m all about simplicity, I would use a budgeting app like Tiller Money or TrueBill to track and review my expenses regularly.

Use company stock to fund my goals

This should be no surprise to you. If I were a Millennial in tech, I would make it a priority to know the ins and outs of my stock compensation plan.  Since company stock awards can vary widely, my first step to understanding its true value is identifying the specific plan type. Next, I would get familiar with key terms, important dates, tax consequences, trading restrictions, and the inner workings of my stock plan. 

Equity indeed has the potential to be a useful wealth-building tool due to the growth of the underlying company stock. But because uncertainty is inherent, I view it separately from salary and would resist the urge to perceive it as a “lottery ticket.” Instead, I would utilize a holistic approach to manage my stock compensation — amassing equity to meet my short and long-term goals. 

By clearly defining in advance events, dates, and price ranges that will trigger specific actions with company stock — I will be making investment decisions more straightforward and seamless. In fact, I have more of a rules-based personality, so I would likely create a decision flowchart to implement this aspect of my financial plan. Most importantly, if I were a Millennial in tech, I would review my financial plan periodically and adjust for any changes in my goals and circumstances.

Build an opportunity fund

We all know about the importance of saving to build an emergency fund. But what if I’ve been diligent with building financial stability and I already have that covered? What’s next? The way I see it, if I’ve saved for inevitable but unpredictable adverse events, I should also save for inevitable but unpredictable good events. This is the moment when my bonuses and an opportunity fund makes its way into the picture. I like to think of opportunity funds as a competitive advantage, particularly in economic downturns. In moments of fear and uncertainty, the best investment opportunities will go to those with lots of cash. 

For instance, as my personal and professional network expands, I am molding relationships with more people who might be starting a business or getting involved with an investment. I’m a calculated risk-taker, so I like to have money set aside to take advantage of opportunities. Under those circumstances, the two things I refrain from doing is pulling money from my retirement nest egg and dipping into my emergency savings. Given these points, this opportunity fund is strictly for “risky” investments that align with my tolerance and capacity for risk. 

As for where I would keep it? It would likely be in a money market mutual fund that invests in high-quality, short-term debt. They are considered a favorable place to park cash because they’re much less volatile than the stock markets, and is one of the safer investments you can make. Because you can earn interest of 1%-3% a year, these funds are useful for investors who want to protect their assets, but still earn interest. There may also be tax benefits since some money market funds hold municipal securities that are not included in federal and state taxes. Win, win if you ask me. 

Tips for Millennials in Tech to Survive a Recession

In last week’s issue of The Equity Shop Newsletter, I dropped a few gems that Millennials can act on now to survive a recession. For this blog post, I want to dive a little deeper into those tips to help Millennials in tech prepare for what appears to be the next economic downturn. So let’s get into it.

1. Understand the economics of the company you work for

Educate yourself on the business model of your employer. How does the company make money? How will an economic downturn impact them? These questions are especially crucial for startup employees and even those anticipating IPOs. A loss of income represents the most significant risk for Millennials, and it illustrates the need to maintain an emergency fund. Think of it as your personal runway. All in all, understanding the risks that your company faces will provide insight into how a change in the economy could affect your job security. 

2. Diversify your income

When we think of diversification, we often focus on investment allocations. When, in fact, it can be applied to sources of income as well. Because the loss of income is one of the biggest threats in a recession, having multiple streams of income can mitigate that threat. We live in an age where information spreads at zero-marginal cost, and you can reach anyone with an Internet connection — 24/7. As a Millennial in tech, there’s plenty of ways to monetize your demanding skillset and experience. I highlighted a few of them in a post on LinkedIn a few weeks ago. 

3. Pay Down Your Debts

While I understand the idea behind using credit cards for travel and Uber eats points, be mindful not to carry any outstanding balances. If you don’t pay off your balance every month, interest charges will keep eating away at your income. Remember, it’s your spending, not your income that determines financial success. So, pay down as much debt as you can. It will help free up money that you can use in the future. 

4. Save as much as you can

The best opportunities come when you are one of the few with cash. If you have cash sitting on the sideline, this is the moment you’ve been waiting for. The stock market is the only market where things go on sale, and people run out of the store. Ironic, isn’t it? Having the wherewithal to invest when the market is down, and prices are low, is advantageous, because you could get a bargain. Generally, during recessions, even the most sustainable companies can be affected and suffer earnings hiccups. Accordingly, you can take this opportunity to buy a few winners for the long term. For DIY investors, it’s advisable to set buy-limit orders to ensure owning stocks on your terms. 

5. Increase retirement contributions and equity exposure

If your financial situation allows, now is as good time as any to increase your contributions to your 401(k), or any other employer-sponsored plan. If you’re a young investor, it’s safe to say that you are in this for the long run, and it’s likely you wouldn’t need this money until retirement. In that case, it might benefit you to increase your equity exposure as well. Doing these two things will help ensure you reap the benefits of participating in the next bull market. 

6. Set up a systematic investing plan

Investing is simple, but it’s not easy. While I don’t agree that a single best strategy exists, I do believe in the efficiency of the market. For that reason, my personal approach is to continuously buy globally diversified assets while paying low fees through passive investment vehicles. In other words, I believe time in the market outperforms timing the market. This strategy is known as dollar-cost averaging. It’s a perfect recipe for young investors and Millennials in tech seeking to turn income into wealth. It is also a way for investors to mitigate short-term volatility in the broader equity market.

Here’s how you can get started:

  • Decide on a fixed dollar amount that you are comfortable investing every month or every pay period. 
  • Select investments that align with your risk tolerance and time horizon. If you’re new to investing, index funds are a great start.
  • Set up automatic contributions from your checking account to your investment account. 

Believe it or not, setting up automatic contributions is arguably the most crucial step of the process. Why? Simply because each habit or task that we hand over to the authority of technology frees up time and energy to pour into the next stage of our growth. Kem and I have been using this strategy to save toward our joint goals and have recently increased the amount we’re investing each month to take advantage of low prices.

7. Start an automatic dividend reinvestment plan

For those Millennials in tech already investing, make sure your ETFs, mutual funds, and stocks are set to reinvest dividends automatically. Otherwise, dividend payments will be sitting in a money market fund earning next to nothing. If you want to turn your income into wealth, you must put your money to work. 

8. Take advantage of low interest rates

The Federal Reserve, aka the Fed, is the US central banking system that is tasked with influencing monetary policy, supervising and regulating banks, and maintaining financial stability. On Sunday, the Fed lowered interest rates to 0% as a means of dampening the effects of COVID-19. This is the lowest interest rate we’ve seen since 2008-2015 when the financial crisis occurred. With talks of a recession looming, interest rates will likely be at an all-time low. That being the case, it may be a good time to start shopping around for your first home if you’ve spent the necessary time saving and planning. 

Similarly, refinancing or consolidating your loans may position you to take advantage of the lower rates offered by lenders. In the end, you’ll spend less in repayment over the term of the loan. Keep in mind that refinancing your student loans largely depends on the type of loan (federal vs. private). For instance, certain protections, like the student loan forgiveness program or payment plans based on income, only exist with federal loans. You should know the specifics of your student loan to assess whether or not it is beneficial to refinance. 

9. Don’t let fear drive your decisions

For many Millennials who graduated into the worst job market in modern times, recessions can be frightening to deal with emotionally. And that’s 100% normal. When your emotions get the best of you, you’re susceptible to making costly mistakes. Don’t let panic or fear get the best of you in these times. Instead, prepare for it now by putting together a comprehensive financial plan. 

The Impact of Stock Options on Cash Flow

Turning stock option contracts into real money takes some know-how. I’ll be the first to admit, managing your stock options involves a long list of financial goals, opportunities, and even constraints. Be that as it may, understanding how the fundamentals of stock options mesh with other aspects of financial planning is paramount to achieving your goals. I’ve written about the basics of stock options, including the ins and outs of taxation — but for this post, I want to highlight the not-so-apparent impact of stock options on cash flow. 

Stock Options Are An Expense

As you might recall, stock options have the potential to be a wealth-building tool due to the growth of the underlying company stock. This ongoing buildup of equity proves to be a viable resource to meet both short and long term financial goals. On the other hand, stock options don’t come without a price. When you exercise the right to buy your employee stock options, you must pay the exercise price via a cash exercise or cashless exercise. 

Knowing your options may seem easy in theory, but evaluating which strategy to employ significantly depend on your unique circumstances. Not only can the math behind the scenes of a cash or cashless exercise get tricky, but the decision to exercise stock options also have an impact on cash flow, and how many shares you will own after the exercise is complete. 

As Millennials, a considerable portion of your net worth is likely associated with your equity compensation, so you owe it to yourself to assess and act on the strategy that yields the most value as it pertains to your goals. 

Option 1: Cash Exercise

If your goal is to own as many shares as possible, a cash exercise may be the best choice. Compared to a cashless exercise, a cash exercise is quite simple:

  1. You purchase shares of company stock using the agreed-upon exercise price per share. 
  2. The total price you pay is the exercise price per share multiplied by the number of shares you want to exercise. 
  3. Send your company or your custodian (the financial institution where your stock is held) the cash amount equal to the total price of the options exercised. It is also common to write a check.

Considering this process, a cash exercise is an out-of-pocket cost, where funds will need to be readily available. Depending on the number of options exercised and the exercise price, you can end up with out-of-pocket costs into the hundreds of thousands of dollars. Needless to say, financial planning is critical here.

Unfortunately, many startup employees may not have that type of cash laying around, making the cash exercise somewhat obsolete. In turn, this often causes employees to be priced out of the stock options, electing for a cashless exercise. And if you need me to say it, yes, it’s a bad idea to take out loans to cover the costs of the shares. 

If you’re lucky and forward-thinking, you’ll likely take the initiative to devise a plan to accumulate the amount of cash needed to exercise your stock options.

Here are some things to know before you perform a cash exercise:

  • A cash exercise maximizes the number of shares you will own after the transaction, thus effecting your portfolio. 
  • The shares you own may lead to a more concentration position.
  • A cash exercise requires liquidity for the up-front cost of shares.
  • If you have ISOs, a cash exercise may trigger the Alternative Minimum Tax.

Option 2: Cashless Exercise

A cashless exercise is frequently the default option if you don’t have the actual funds to pay for the shares. Primarily, with this alternative, you are exercising and selling the shares simultaneously. In doing so, you are covering the costs of exercising the shares with the proceeds of the sale. 

Here are some focal points of a cashless exercise:

  1. You purchase shares of company stock using the agreed-upon exercise price per share. 
  2. The total price you pay is the exercise price per share multiplied by the number of shares you wish to exercise. 
  3. Instead of paying in cash, you’ll immediately exercise and sell some of your shares. You’ll also exercise and hold some of your shares.
  4. The amount you exercise and sell will depend on the total cost to exercise the shares.

Under these circumstances, you can design cashless exercises to cover the costs of purchasing the shares, the tax liability you incur when exercising the shares, or both. 

Develop a Plan

Planning strategies for stock compensation begin with a “financial plan first” mindset. Always keep in mind that your stock option strategy must integrate with every other part of your financial picture, specifically your cash flow, investing plan, and tax strategy. Decisions about your equity compensation can only be optimized through the lens of your current circumstances and hopes for the future. Get proximate with your true desires, and the role stock options can play in building your wealth to achieve your life goals. After all, if you don’t plan for it, who will?