Stock options, RSUs, and ESPPs are all valuable forms of equity compensation. They are often used to align the incentives of both an employer and its employees. If you own company stock, you may have experienced market volatility, and have seen firsthand how swiftly change in the stock price can change the value of your equity. Amid a strong economy and thriving stock market, the stock price can skyrocket. Possibly to such an effect that it can create a concentrated position in your company’s stock — the opposite of diversification. And in all honesty, this concentration isn’t necessarily a bad thing. It genuinely depends on your unique circumstances and goals.
As quickly as your company’s stock price rises, they can fall, and in unsettling ways. As you can imagine, that will affect the value of your equity grants and holdings of company stock. When the market becomes uncertain, and things aren’t going well for your company’s stock, it’s important to remember that equity compensation is a long-term deal. Thankfully, there are a few behavioral tricks at your disposal when dealing with volatility in your company’s stock.
Understand What You Have And How It Works
It’s critical to be familiar with the type of equity compensation you have, whether non-qualified stock options, incentive stock options, restricted stock, restricted stock units (RSUs), or an employee stock purchase plan (ESPP). The nature of the equity compensation type will affect its perceived value and ultimately shape your expectations.
Let’s take a look at stock option grants. Most of them have a 7-10 year life or exercise window. Even if your company’s stock price were to fall or fluctuate soon after receiving the grant, stock options have significant leverage if the price rises later. Although there aren’t any guarantees in the world of investing, the potential upside can be very rewarding. On the other hand, RSUs always have value when they vest and belong to you outright. If you’re at a company like Spotify, where you can select a mix of equity types, RSUs can balance out some of that volatility that is inherent with stock options.
Play The Long Game
When thinking about equity compensation, stop expecting quick riches. Even the rocket ships and unicorns require time, patience, and dedication. If it helps, try to think of equity comp as a tortoise rather than a hare. I understand this perspective is easier said than done, but that’s even more reason to develop a financial plan that considers your values and goals when dealing with volatility with your company’s stock. Ultimately, this is the essence of holistic financial planning. At best, you will gain clarity and confidence in your financial life and decision-making in good AND bad markets. At worse, you’ll have a back-up plan tucked if and when plan A doesn’t come into fruition.
Volatility Can Present Opportunities
Volatility and your company’s stock go hand in hand. Not to mention, it can also present a valuable opportunity to assess your tolerance for risk in real-time. When in volatile markets, evaluate your comfort level with financial risk, and gauge how you feel about your asset allocations, including company holdings and retirement accounts. If you find it too challenging to deal with volatility in your company’s stock, you may want to consider diversifying some or all of your portfolio. You’ll likely be less worried about volatility when your financial future is less dependent on a single company or stock.
Manage Your Expectations
Your cash flow is best tied to your base salary, not to investments in your company’s stock. Moreover, relying on gains from equity grants can lead to altering feelings of ecstasy and anxiety — a rather unhealthy combination. If you must sell company stock for cash to pay for living expenses or other urgent financial demands, there are a few key areas of financial planning first to understand.
It’s a personal preference in my household to separate investment income from our lifestyle needs as it provides an additional layer of protection against stock price volatility. We don’t depend on stock options or RSUs to cover regular expenses. Instead, we’ve earmarked it for flexible goals like going on vacations or buying our dream cars. In that way, we’re not let down if the stock price tanks and our lifestyle wouldn’t be largely affected.