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:

  1. Choosing to be taxed at grant, as opposed to at vesting, by making a Section 83(b) election.
  2. 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.

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