Time to Read: 6 minutes
Not only does BWM Financial share our San Diego home with some of the most innovative companies in the nation including Qualcomm, Illumina, ViaSat, but we continue to see a huge expansion of start-ups and tech companies popping up around the county. And while an up-and-coming tech company typically requires the expertise of programmers, marketers, developers and more highly talented, qualified individuals, it can’t always afford the five- or six-figure salaries these employees have come to expect. In many cases, these start-ups will turn to a different option for employees: equity compensation. Below we’re outlining what equity compensation is and how it compares to its more traditionally used counterpart.
What Is Equity Compensation?
Equity compensation is compensation for employees in the form of a share of the company’s future profits. This could be through various stock options and/or performance shares, or whatever other arrangements the individual company has decided on.
Tech companies, especially when they’re just starting out, may not have the cash flow needed to cover the salaries of their employees. But, of course, they recognize the need for incentivizing and encouraging highly motivated individuals to join their team. That’s why some tech companies turn to equity compensation. Typically, this will be offered either in conjunction with a below-market salary offer, or no salary at all.
Pros of Equity Compensation
Being offered a portion of your company’s future profits is an exciting opportunity for workers and an important incentive for loyal employees to stick with one company for many years. Dependent on the success of the company, there’s an opportunity for these stock options to provide a bigger payout than a standard salary would.
Risks of Equity Compensation
But as is with any stock option, where there’s a chance for reward, there’s a risk as well. Compensation via stocks or other equity compensation could leave employees’ pay at the mercy of the market and the company’s performance. And while this is a risk that many understood when agreeing to the terms of their compensation, it can be hard to remember nothing is guaranteed.
In fact, it’s not entirely uncommon for tech industry employees to experience lifestyle creep, which is a rise in spending or standard of living paralleled with a rise in income, only to feel the crash hardest when their stock options perform poorly. You can read more about strategies for concentrated holdings here.
Additionally, it’s important for employees to understand the potential tax implications that equity compensation may have on their future earnings. These implications will vary dependent on the structure and specifics of the company offering the compensation. But in some cases, cashing out on your stock options may look like a big payout on paper, but taxes could be taking a sizeable chunk out of the check you were expecting to receive.
What Is Salary Compensation?
More commonly used throughout the rest of the workforce, salary compensation refers to the base pay one receives based on a predetermined hourly, weekly, monthly or yearly figure. With most salaries, you know exactly how much you are receiving and the number does not fluctuate based on the profits or losses of the company.
Pros of Salary Compensation
In a word: dependable. Every pay period, you know exactly how much you’re going to receive. This makes salary compensation a steady, dependable form of payment that allows you to plan ahead for future spending, saving, etc. because you know how much you can count on receiving on a regular basis.
Risks of Salary Compensation
While dependability is an obvious advantage of salary compensation, it can be considered a disadvantage as well. Why? Because with a salary, there’s really no chance for a greater payout than what you’re already earning. The only way to potentially earn more in this scenario is to take your paycheck and invest it on your own. In addition, pay grades and salary structures can mean you’re capped out at earning a certain amount. And, of course, there is still the risk of job layoffs or a company going under.
Joining the tech industry is an exciting opportunity for talented, dedicated individuals across the country. But as you navigate your compensation options, it’s important to remember both the risks and rewards of equity and salary compensation.
This content is developed from sources believed to be providing accurate information, and provided by BWM Financial. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Information presented on this site is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites.
Equity Compensation Webinar Transcript
We’re here today to discuss our most popular requests from our executive clients. What do I do with my stock options? RSUs, ESPP and other company stock compensation. I’m Jeff Brown, president of BWM Financial. And will be your guide through these complex questions. There’s a lot of information to discuss on the topic. So I’ll quickly cover and review the one-on-one basics on equity compensation for a refresh, but then move into key actionable takeaways, including how to test your savings need, monitor concentration, how to establish an objective sales strategy and ideas on long-term hold strategies and behavioral bias.
Basics of Restricted Stock Units (RSUs)
So let’s jump right into the basics of equity compensation. Today, we’ll be looking at employee stock options and restricted stock units. Company stock is usually granted in the form of stock options or RSUs. RSUs are trending more popular. So we’re starting here. It’s helpful to understand that RSUs are simply a bonus paid in stock instead of cash. You typically have a waiting period between the time that they are granted and when they are available to sell, called vesting. You are taxed as income when they vest just like a cash bonus. In fact, you can convert the shares to cash immediately by selling the shares right after they vest with no capital gains due. Or if you opt to hold the stock for a longer period of time, you could be subject to long-term capital gains. When deciding whether to hold or sell the vested RSUs, ask yourself this, if my company paid me a cash bonus today, would I use it to buy my company stock? If not, it could make sense to sell the RSUs as they vest.
Basics of Employee Stock Options (ESOs – Non-qualified Stock Options)
Employee stock options are still very common. The two main types of stock options are incentive stock options or ISOs and non-qualified stock options, or NSOs. ISOs are more complicated and much less common for larger companies. So for purposes of this webinar, we’ll be focusing solely on NSOs. If you have specific questions on ISOs, there’ll be an opportunity to get additional information at the end of this presentation. It’s helpful to think of non-qualified stock options as company stock on steroids and with an expiration date. Like RSUs, they typically have a vested period, but aren’t taxable to you at that point. Once NSOs vest, you have the option to exercise, purchase the shares, and then you are taxed. While cashless exercises and immediate sales are most common, if you do opt to exercise and hold the shares, they are subject to long-term capital gains. Now keep in mind, options are only valuable if your company’s stock price goes up before they expire. If the price stays the same or drops options are worthless. You have nothing to lose if the stock price declines or stagnates, but you have lots to gain if it performs well. Conversely selling, consider selling highly valuable options close to their expiration date. Modest drops in your stock price could wipe out significant value and you may not have time left to wait for the recovery.
Common Stock Option Fears
So now that we’ve covered the basics of how these work, let’s get into some specifics. After two decades helping people make the most of their company stock, here’s the common fears that we see. First, worried about selling at the wrong time. My company’s done so well. We’re about to release a new product and I don’t want to miss out on future growth. Well, I like to say treat stock like a relay race. Sell options and RSUs as your new shares vest. Therefore you’re taking some risk off the table, but still have room for future growth. You set price targets and you commit to them. Or my company stock was recently trading higher. I’m just going to wait for it to get back where it was. Well, unfortunately, markets do not care about previous prices. You always need to evaluate where things stand today and not worry about the past and make decisions based on that.
Tax Example for Non-Qualified Stock Options
Another big one is concerned with a large potential tax bill. For example, maybe next year I’ll be in a lower tax bracket or I’m just going to wait for long-term capital gains treatment so I can reduce my tax bill. We hear these concerns a lot and they’re really valid, but there’s simply no way around paying taxes. And I like to say don’t always let the “tax tail” wag the “investment dog”. So it might be useful to go through an example of this and how it could play out. So this is my tax example. We have a current stock price of $100 a share. The cost basis is $60 a share. There are 5,000 shares at play here. So the gross proceeds are $500,000 with $200,000 in gains. Now we’re just going to assume here that the current year combined capital gains tax rate is 40% and for whatever reason, next year it’s going to be 30%. So if we sell this year, we’re going to basically pay $80,000 in taxes. 40% of the $200,000 in gains. We’re going to get $420,000. We sell next year with our fictitious lower tax rate at 30%, we’re going to pay roughly $60,000 in taxes with net proceeds of about $440,000 making $20,000 more. The reality is the $20,000 in taxes is only a 4% change in the stock price. Alright? That is $4 a share on $100 stock price, that can happen any given day. Therefore going back to not always letting the “tax tail” wag the “investment dog”.
Unsure of What to Sell
Another one is people just don’t know what to sell. Should I sell my options, RSUs or ESPP. And for how much of each one of those? There are general themes around some of these. And you need to be partnering with a CPA and an advisor that knows your entire situation to get you the right answer. But there are some pretty clear cut ways to look at it. So for example, if you have equal cost basis RSUs and ESPP, you’re going to want to sell the RSUs first because there’s no discount taxes income. Typically you’re going to want to sell the highest cost basis stock first. And you’re going to want to sell options when it’s highly in the money and closer to expiration.
Unsure of What to do with Stock Option Proceeds
And that leaves us with our final concern, which is how much should I sell? Unsure what to do with the proceeds and what do I do to replace the growth that I got? Stock market looks high. This is all the uncertainty of around what to do.
How to Determine Amount of Stock Options to Sell – Hypothetical Demonstration
We think that is a perfect segue is to look at a demonstration of how we use your financial plan to solve for the total amount of company stock diversification needed in order to reach your life goals. Once we have this total figure, we’ll move on to the specific sales strategies. Keep in mind, this is just a hypothetical example. So in order to test specific concentration methods, we need to start with a detail-oriented financial plan. And that’s what you’re looking at here. You’re looking at a sample client, Simon and Sarah with a organized financial statement of the net worth, primarily looking at here, their investments as well as their real estate hidden behind the scenes. One key part of their net worth is you’ll see that they have roughly almost five, 4 1/2 million dollars in company stock in a combination of RSUs, options and employer stock purchase plan. As you’ll see, that as a very large percentage of their overall investments. Very standard for what we see with people at successful companies. That rolls into the true intentions of a client by looking at what they want out of money in terms of their goals and objectives. And what you’ll see here is this client is going to want pretty standardized stuff. Want to send their kids to college, they want to retire early, they want to have a nice retirement life, and we’re going to include some other things in here such as medical, et cetera. When you run the financial plan, you see this really great hockey puck stick of making a lot of money on their investments, but that isn’t the way we look at things. We like to look at things in terms of the probability of them being able to achieve their goals, which factors in what’s called a Monte Carlo simulation. So even though the client has a very high net worth with a very high potential growth rate, you’ll see that the probability of success is very low. And there’s a high probability of actually running out of assets with a very large dispersion based on that concentration in a very aggressive stock We’re going to do here is we’re going to test a few things. First off, one of the reasons people don’t sell their stock is they think, well, what if I want more stuff, right? What if I want to spend more money in retirement? Here, we’ll look at $15,000 a year for their early part of the retirement years till age 70. What if I want to buy a $500,000 ski cabin down the road? Obviously those are more expenses. So they might think they need for their stock price to go higher in order to achieve those goals. Because as your plan will show here, the probability of success with these increased amount of expenses is going to drop considerably. So then we move to how much money do we need to diversify out of the company stock into a diversified portfolio to increase that probability of success. First thing we’re going to do is we’re going to start with a round number. I put here sell 500,000 in restricted stock units and diversify that. You’ll see that that improves the probability of success to 70% which means there’s a 30% chance of them needing to make a change in their lifetime. We think that’s a little too high, so we’re going to effectively sell more. To make it simple, I’ll just give one more example. We’re going to sell another $1 million in RSUs. If you remember, there was 3 million total. So this is basically selling half of the RSUs, diversifying that and putting that into a diversified portfolio to see if that gets them enough. And you’ll see here, it gives them an 85% probability, which is right in our comfort zone. Only a 15% chance of needing to make a change at all during their lifetime. And from here, we can determine the appropriate strategy to sell the stock because we know what the price it is today is going to be a good starting point as it shows here.
How to Move from Total Needed to Stock Option Sales Strategy – Hypothetical Example
At BWM, we believe that your investments should be based around your financial plan and really answer the question, What is it all for? So once we have tested the total after tax amount, you need to diversify out of your company stock in order to reach your goals or make your financial plan successful. The question then shifts to how to do it in order to optimize the strategy. We think it makes sense to set up an objective sales strategy, just like the top executives do. Taking action now, but still allow yourself to capture the upside. Here’s how we do it. Scheduled selling and monitored limit orders. In our experience, the most successful diversification plans completely remove emotion from the sales. A schedule is prepared, agreed upon, and then executed. Ideally, this has done with limit orders or a fixed number of shares to sell each month. Before launching the strategy, we review the share types and tranches, how long you’ve owned each type for tax purposes, your overall tax situation, risk profiles for each of the asset buckets and personal preference. We also discuss questions around clients-specific strategies like which type of share should I sell first and what happens if I don’t have all my stock in one chunk? Like different tranches. And should I be waiting until next year for tax reasons? And more than that. These questions and considerations are always reviewed on a case by case basis with the clients and their CPAs. So here we’re going to look at a specific sales strategy. Once again, this could be done a multitude of ways. The key is having it to be emotionless, have there be a strategy and have it be consistent. So I have the hypothetical case facts here. The client has a 10,000 shares of company stock. They’re looking to diversify. The minimum amount of the sale price they’re going to accept is $65 per share. That’s based on their financial plan, ideally $85 a share, that makes their plan a home run. And so here’s an example of how it’s going to work, is that each Monday prior to the market opening, the following orders are going to be entered. And these are called limit orders. We’re going to sell 200 shares at $65, a share, 300 shares at $70 a share, 500 shares at 75, 750 at 80 and 2,500 shares at 85. Note that the current $65 strategy by selling that amount, it gets them the diversification needed over 50 weeks if it just stays at that price. So example of week one, see on the chart here, it never hits 65. So nothing happens. In week two, the stock price goes up. It triggers that $65 sale on Monday where we sell 200 shares and the stock continues to climb and sells 300 shares at 70 on Friday. Note that all of these orders are re-entered again for the following week. So the stock price stay high. So we’re going to be selling the 200 shares, but instead of selling at 65, the market price is 70. So it’s going to sell it at the higher price. The next order 300 goes off at 70. And then later in the week, it actually gets to 75, which triggers the third lot sale. Stock continues to do well in week four. So stock opens up at $78 on Monday. Therefore we sell the first three tranches at that $78 figure, the 200 to 300 and the 500. It gets to 80 a little later on the week, so 750 shares are sold at 80. And then week five, once again, it pops on Monday. We sell everything except for the last tranche at 84, we missed that by $1. So we sell the 300, the 200, the 500 and the 750. And then you can see later in the week, the stock price declines. And we sell that following week at 65 and 70, the summary of everything is we’ve sold a total of 5,500 shares. We’ve sold $425,000 worth of proceeds with an average of $77.36. This is an example of how a strategy can work. And remember that this could be adjusted as time goes on. The key is to have a strategy and stick to it.
Mindful Hold Strategy for Company Stock
Most people hear about these strategies and immediately see the benefit, but pause because there’s a desire to hold on to some of the stock long-term. We actually see the value in this perspective. So long as it’s coupled with the awareness around the accompanying behavioral biases. Now, our team specializes in working with executives, engineers, and scientists. So I know because we see it frequently that this is a section where you might be tempted to drop off, but stick with me because although these are less technical components of the strategies, I can’t tell you how many times we’ve seen these issues as the stumbling blocks to an otherwise successful strategy.
Behavioral Bias is Real
So we think it makes sense to hold back the number of shares, whatever makes sense. Whatever your financial plan calls and whatever you can tolerate. But we want to be aware of the biases as things move forward here. And I wanted to illustrate some of the things that we focus on here. At BWM Financial, it is one of our distinguishers, is training and behavioral finance, which is almost always a factor in divesting company stock. So here’s a couple of the main biases that occurs. One is overconfidence, which is overestimating the ability of your judgment. People that work at companies have deep knowledge of their company and proven success. And they might overestimate their own individual skill at providing the results in the company stock. Sometimes the company success and the stock price are two totally different things. Number two, is the status quo. I just got so much going on. I have too many different decisions to make. I’m just not going to make a decision. And that causes paralysis, right? So that’s why we think that having a strategy and a plan is going to make a lot sense to avoid the status quo bias that occurs. The recency bias is a big one, which is the factor of using recent performance as a predictor of future results. A lot of people adapt this way. They assume, oh, my stock’s been going great. It’s going to continue to happen into the future. But holders of individual stock are actually the least likely to diversify at attractive prices after periods of out-performance. They falsely believe that that performance is going to predict future prices. And then what happens? The stock price declines, then the clients want the stock to go back to where it was. And as I stated earlier, the market doesn’t care about the highs on the stock. The endowment bias, which is people tend to overvalue things they own or investments which they’re emotionally attached. So if you’re an early employee or it was very critical in establishing your success over time, you feel this attachment to the stock. And this sometimes create that bias that prevents the sale to take place. And then finally what’s called anchoring, which is being arbitrarily influenced by past stock prices. So fixating on achieving some historical stock price or round number before selling the shares. And we just think that doesn’t make sense. So most people think that it’s smart to reduce risk in a single stock, but it’s very, very hard to do.
What Experience Has Taught Us
And experience has taught us a few things. First, it’s important to understand what is it all for. If your employer stock has done extraordinarily well, and you’re hesitant to diversify, especially if you’re in a position to be financially dependent or to achieve your goals, you really have to think about why? Is there other goals you need to be putting on the table, or is it just the fact that it’s hard to do? Understanding what’s most important to you and your family is something that is critical that we help out with. And it’s probably the most important decision to ask yourself. Next, it is hard to sell when there’s not a tangible benefit. So consider using the proceeds from stock sales to either secure your retirement plan, regardless of what happens to the stock. Just consider it to fund specific goals like your kid’s education or a remodel or a home upgrade. So tying the sale of this price into these key defined goals is going to help make that decision. You might not have considered it, but if your portfolio is largely invested in your employer stock, you’re facing a double risk because you have your nest egg and your employment income, both tied to the same company. Remove emotion and stick to a system. Our executive clients oftentimes learn of non-public information about their company. Because of this, they’re restricted from selling shares, unless they have a detailed and rigid sales plan in place ahead of time, which they’re not allowed to change. They pick price targets, the number of shares to sell and the timeframe over which to sell. So they cannot make adjustments. Interestingly, these clients with their hands tied, consistently sell at better prices than the employees who are not required to commit to a plan. Our solution, act like an executive, develop a plan and stick to it. And most people feel the pain of loss is twice as much as the pleasure of gains. When you’re worried about how you might feel if you diversify shares of your company and the stock goes on to double in value, consider how much worse it might be if you feel like you failed to sell at a price and it was cut in half. Visualizing these two scenarios can help inform how much you sell. And you know what? Keep shares. Especially if you work for a good company. While it’s important to avoid the risks you cannot afford to, don’t go overboard. It might be beneficial to keep some percentage of your company stock invested and participate on the upside.
Next Steps
If you want to take the next steps to see how we can help you successfully translate your options and stock exposure into the fuel for living the life that you want, here’s what’s next. At the end of this video, we’ll direct you to a one-minute questionnaire about your financial circumstances and a link to our live calendar, where you can book a 15 minute virtual meeting with one of our lead advisors. On that call, one, cover your top priorities. How our team might be able to help and we’ll try to answer any questions you might have about how to approach your company stock strategy. If our services are the right fit for you, we’ll block off additional time to draft and provide a free written guide book that will give you valuable insight into three key areas. One, how much risk and exposure do you currently have in your portfolio now? Number two, is your company stock and full financial plan on track to fuel the life that you and your loved ones want to live? In other words, does it allow you to retire when you want, spend time with family or traveling, send your kids to school, et cetera. And finally, number three, do your current strategies align well with your intentions? Thank you very much for taking the time to watch. We hope you found this valuable and look forward to talking with you soon.
Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Equity Compensation Webinar Transcript
We’re here today to discuss our most popular requests from our executive clients. What do I do with my stock options? RSUs, ESPP and other company stock compensation. I’m Jeff Brown, president of BWM Financial. And will be your guide through these complex questions. There’s a lot of information to discuss on the topic. So I’ll quickly cover and review the one-on-one basics on equity compensation for a refresh, but then move into key actionable takeaways, including how to test your savings need, monitor concentration, how to establish an objective sales strategy and ideas on long-term hold strategies and behavioral bias.
Basics of Restricted Stock Units (RSUs)
So let’s jump right into the basics of equity compensation. Today, we’ll be looking at employee stock options and restricted stock units. Company stock is usually granted in the form of stock options or RSUs. RSUs are trending more popular. So we’re starting here. It’s helpful to understand that RSUs are simply a bonus paid in stock instead of cash. You typically have a waiting period between the time that they are granted and when they are available to sell, called vesting. You are taxed as income when they vest just like a cash bonus. In fact, you can convert the shares to cash immediately by selling the shares right after they vest with no capital gains due. Or if you opt to hold the stock for a longer period of time, you could be subject to long-term capital gains. When deciding whether to hold or sell the vested RSUs, ask yourself this, if my company paid me a cash bonus today, would I use it to buy my company stock? If not, it could make sense to sell the RSUs as they vest.
Basics of Employee Stock Options (ESOs – Non-qualified Stock Options)
Employee stock options are still very common. The two main types of stock options are incentive stock options or ISOs and non-qualified stock options, or NSOs. ISOs are more complicated and much less common for larger companies. So for purposes of this webinar, we’ll be focusing solely on NSOs. If you have specific questions on ISOs, there’ll be an opportunity to get additional information at the end of this presentation. It’s helpful to think of non-qualified stock options as company stock on steroids and with an expiration date. Like RSUs, they typically have a vested period, but aren’t taxable to you at that point. Once NSOs vest, you have the option to exercise, purchase the shares, and then you are taxed. While cashless exercises and immediate sales are most common, if you do opt to exercise and hold the shares, they are subject to long-term capital gains. Now keep in mind, options are only valuable if your company’s stock price goes up before they expire. If the price stays the same or drops options are worthless. You have nothing to lose if the stock price declines or stagnates, but you have lots to gain if it performs well. Conversely selling, consider selling highly valuable options close to their expiration date. Modest drops in your stock price could wipe out significant value and you may not have time left to wait for the recovery.
Common Stock Option Fears
So now that we’ve covered the basics of how these work, let’s get into some specifics. After two decades helping people make the most of their company stock, here’s the common fears that we see. First, worried about selling at the wrong time. My company’s done so well. We’re about to release a new product and I don’t want to miss out on future growth. Well, I like to say treat stock like a relay race. Sell options and RSUs as your new shares vest. Therefore you’re taking some risk off the table, but still have room for future growth. You set price targets and you commit to them. Or my company stock was recently trading higher. I’m just going to wait for it to get back where it was. Well, unfortunately, markets do not care about previous prices. You always need to evaluate where things stand today and not worry about the past and make decisions based on that.
Tax Example for Non-Qualified Stock Options
Another big one is concerned with a large potential tax bill. For example, maybe next year I’ll be in a lower tax bracket or I’m just going to wait for long-term capital gains treatment so I can reduce my tax bill. We hear these concerns a lot and they’re really valid, but there’s simply no way around paying taxes. And I like to say don’t always let the “tax tail” wag the “investment dog”. So it might be useful to go through an example of this and how it could play out. So this is my tax example. We have a current stock price of $100 a share. The cost basis is $60 a share. There are 5,000 shares at play here. So the gross proceeds are $500,000 with $200,000 in gains. Now we’re just going to assume here that the current year combined capital gains tax rate is 40% and for whatever reason, next year it’s going to be 30%. So if we sell this year, we’re going to basically pay $80,000 in taxes. 40% of the $200,000 in gains. We’re going to get $420,000. We sell next year with our fictitious lower tax rate at 30%, we’re going to pay roughly $60,000 in taxes with net proceeds of about $440,000 making $20,000 more. The reality is the $20,000 in taxes is only a 4% change in the stock price. Alright? That is $4 a share on $100 stock price, that can happen any given day. Therefore going back to not always letting the “tax tail” wag the “investment dog”.
Unsure of What to Sell
Another one is people just don’t know what to sell. Should I sell my options, RSUs or ESPP. And for how much of each one of those? There are general themes around some of these. And you need to be partnering with a CPA and an advisor that knows your entire situation to get you the right answer. But there are some pretty clear cut ways to look at it. So for example, if you have equal cost basis RSUs and ESPP, you’re going to want to sell the RSUs first because there’s no discount taxes income. Typically you’re going to want to sell the highest cost basis stock first. And you’re going to want to sell options when it’s highly in the money and closer to expiration.
Unsure of What to do with Stock Option Proceeds
And that leaves us with our final concern, which is how much should I sell? Unsure what to do with the proceeds and what do I do to replace the growth that I got? Stock market looks high. This is all the uncertainty of around what to do.
How to Determine Amount of Stock Options to Sell – Hypothetical Demonstration
We think that is a perfect segue is to look at a demonstration of how we use your financial plan to solve for the total amount of company stock diversification needed in order to reach your life goals. Once we have this total figure, we’ll move on to the specific sales strategies. Keep in mind, this is just a hypothetical example. So in order to test specific concentration methods, we need to start with a detail-oriented financial plan. And that’s what you’re looking at here. You’re looking at a sample client, Simon and Sarah with a organized financial statement of the net worth, primarily looking at here, their investments as well as their real estate hidden behind the scenes. One key part of their net worth is you’ll see that they have roughly almost five, 4 1/2 million dollars in company stock in a combination of RSUs, options and employer stock purchase plan. As you’ll see, that as a very large percentage of their overall investments. Very standard for what we see with people at successful companies. That rolls into the true intentions of a client by looking at what they want out of money in terms of their goals and objectives. And what you’ll see here is this client is going to want pretty standardized stuff. Want to send their kids to college, they want to retire early, they want to have a nice retirement life, and we’re going to include some other things in here such as medical, et cetera. When you run the financial plan, you see this really great hockey puck stick of making a lot of money on their investments, but that isn’t the way we look at things. We like to look at things in terms of the probability of them being able to achieve their goals, which factors in what’s called a Monte Carlo simulation. So even though the client has a very high net worth with a very high potential growth rate, you’ll see that the probability of success is very low. And there’s a high probability of actually running out of assets with a very large dispersion based on that concentration in a very aggressive stock We’re going to do here is we’re going to test a few things. First off, one of the reasons people don’t sell their stock is they think, well, what if I want more stuff, right? What if I want to spend more money in retirement? Here, we’ll look at $15,000 a year for their early part of the retirement years till age 70. What if I want to buy a $500,000 ski cabin down the road? Obviously those are more expenses. So they might think they need for their stock price to go higher in order to achieve those goals. Because as your plan will show here, the probability of success with these increased amount of expenses is going to drop considerably. So then we move to how much money do we need to diversify out of the company stock into a diversified portfolio to increase that probability of success. First thing we’re going to do is we’re going to start with a round number. I put here sell 500,000 in restricted stock units and diversify that. You’ll see that that improves the probability of success to 70% which means there’s a 30% chance of them needing to make a change in their lifetime. We think that’s a little too high, so we’re going to effectively sell more. To make it simple, I’ll just give one more example. We’re going to sell another $1 million in RSUs. If you remember, there was 3 million total. So this is basically selling half of the RSUs, diversifying that and putting that into a diversified portfolio to see if that gets them enough. And you’ll see here, it gives them an 85% probability, which is right in our comfort zone. Only a 15% chance of needing to make a change at all during their lifetime. And from here, we can determine the appropriate strategy to sell the stock because we know what the price it is today is going to be a good starting point as it shows here.
How to Move from Total Needed to Stock Option Sales Strategy – Hypothetical Example
At BWM, we believe that your investments should be based around your financial plan and really answer the question, What is it all for? So once we have tested the total after tax amount, you need to diversify out of your company stock in order to reach your goals or make your financial plan successful. The question then shifts to how to do it in order to optimize the strategy. We think it makes sense to set up an objective sales strategy, just like the top executives do. Taking action now, but still allow yourself to capture the upside. Here’s how we do it. Scheduled selling and monitored limit orders. In our experience, the most successful diversification plans completely remove emotion from the sales. A schedule is prepared, agreed upon, and then executed. Ideally, this has done with limit orders or a fixed number of shares to sell each month. Before launching the strategy, we review the share types and tranches, how long you’ve owned each type for tax purposes, your overall tax situation, risk profiles for each of the asset buckets and personal preference. We also discuss questions around clients-specific strategies like which type of share should I sell first and what happens if I don’t have all my stock in one chunk? Like different tranches. And should I be waiting until next year for tax reasons? And more than that. These questions and considerations are always reviewed on a case by case basis with the clients and their CPAs. So here we’re going to look at a specific sales strategy. Once again, this could be done a multitude of ways. The key is having it to be emotionless, have there be a strategy and have it be consistent. So I have the hypothetical case facts here. The client has a 10,000 shares of company stock. They’re looking to diversify. The minimum amount of the sale price they’re going to accept is $65 per share. That’s based on their financial plan, ideally $85 a share, that makes their plan a home run. And so here’s an example of how it’s going to work, is that each Monday prior to the market opening, the following orders are going to be entered. And these are called limit orders. We’re going to sell 200 shares at $65, a share, 300 shares at $70 a share, 500 shares at 75, 750 at 80 and 2,500 shares at 85. Note that the current $65 strategy by selling that amount, it gets them the diversification needed over 50 weeks if it just stays at that price. So example of week one, see on the chart here, it never hits 65. So nothing happens. In week two, the stock price goes up. It triggers that $65 sale on Monday where we sell 200 shares and the stock continues to climb and sells 300 shares at 70 on Friday. Note that all of these orders are re-entered again for the following week. So the stock price stay high. So we’re going to be selling the 200 shares, but instead of selling at 65, the market price is 70. So it’s going to sell it at the higher price. The next order 300 goes off at 70. And then later in the week, it actually gets to 75, which triggers the third lot sale. Stock continues to do well in week four. So stock opens up at $78 on Monday. Therefore we sell the first three tranches at that $78 figure, the 200 to 300 and the 500. It gets to 80 a little later on the week, so 750 shares are sold at 80. And then week five, once again, it pops on Monday. We sell everything except for the last tranche at 84, we missed that by $1. So we sell the 300, the 200, the 500 and the 750. And then you can see later in the week, the stock price declines. And we sell that following week at 65 and 70, the summary of everything is we’ve sold a total of 5,500 shares. We’ve sold $425,000 worth of proceeds with an average of $77.36. This is an example of how a strategy can work. And remember that this could be adjusted as time goes on. The key is to have a strategy and stick to it.
Mindful Hold Strategy for Company Stock
Most people hear about these strategies and immediately see the benefit, but pause because there’s a desire to hold on to some of the stock long-term. We actually see the value in this perspective. So long as it’s coupled with the awareness around the accompanying behavioral biases. Now, our team specializes in working with executives, engineers, and scientists. So I know because we see it frequently that this is a section where you might be tempted to drop off, but stick with me because although these are less technical components of the strategies, I can’t tell you how many times we’ve seen these issues as the stumbling blocks to an otherwise successful strategy.
Behavioral Bias is Real
So we think it makes sense to hold back the number of shares, whatever makes sense. Whatever your financial plan calls and whatever you can tolerate. But we want to be aware of the biases as things move forward here. And I wanted to illustrate some of the things that we focus on here. At BWM Financial, it is one of our distinguishers, is training and behavioral finance, which is almost always a factor in divesting company stock. So here’s a couple of the main biases that occurs. One is overconfidence, which is overestimating the ability of your judgment. People that work at companies have deep knowledge of their company and proven success. And they might overestimate their own individual skill at providing the results in the company stock. Sometimes the company success and the stock price are two totally different things. Number two, is the status quo. I just got so much going on. I have too many different decisions to make. I’m just not going to make a decision. And that causes paralysis, right? So that’s why we think that having a strategy and a plan is going to make a lot sense to avoid the status quo bias that occurs. The recency bias is a big one, which is the factor of using recent performance as a predictor of future results. A lot of people adapt this way. They assume, oh, my stock’s been going great. It’s going to continue to happen into the future. But holders of individual stock are actually the least likely to diversify at attractive prices after periods of out-performance. They falsely believe that that performance is going to predict future prices. And then what happens? The stock price declines, then the clients want the stock to go back to where it was. And as I stated earlier, the market doesn’t care about the highs on the stock. The endowment bias, which is people tend to overvalue things they own or investments which they’re emotionally attached. So if you’re an early employee or it was very critical in establishing your success over time, you feel this attachment to the stock. And this sometimes create that bias that prevents the sale to take place. And then finally what’s called anchoring, which is being arbitrarily influenced by past stock prices. So fixating on achieving some historical stock price or round number before selling the shares. And we just think that doesn’t make sense. So most people think that it’s smart to reduce risk in a single stock, but it’s very, very hard to do.
What Experience Has Taught Us
And experience has taught us a few things. First, it’s important to understand what is it all for. If your employer stock has done extraordinarily well, and you’re hesitant to diversify, especially if you’re in a position to be financially dependent or to achieve your goals, you really have to think about why? Is there other goals you need to be putting on the table, or is it just the fact that it’s hard to do? Understanding what’s most important to you and your family is something that is critical that we help out with. And it’s probably the most important decision to ask yourself. Next, it is hard to sell when there’s not a tangible benefit. So consider using the proceeds from stock sales to either secure your retirement plan, regardless of what happens to the stock. Just consider it to fund specific goals like your kid’s education or a remodel or a home upgrade. So tying the sale of this price into these key defined goals is going to help make that decision. You might not have considered it, but if your portfolio is largely invested in your employer stock, you’re facing a double risk because you have your nest egg and your employment income, both tied to the same company. Remove emotion and stick to a system. Our executive clients oftentimes learn of non-public information about their company. Because of this, they’re restricted from selling shares, unless they have a detailed and rigid sales plan in place ahead of time, which they’re not allowed to change. They pick price targets, the number of shares to sell and the timeframe over which to sell. So they cannot make adjustments. Interestingly, these clients with their hands tied, consistently sell at better prices than the employees who are not required to commit to a plan. Our solution, act like an executive, develop a plan and stick to it. And most people feel the pain of loss is twice as much as the pleasure of gains. When you’re worried about how you might feel if you diversify shares of your company and the stock goes on to double in value, consider how much worse it might be if you feel like you failed to sell at a price and it was cut in half. Visualizing these two scenarios can help inform how much you sell. And you know what? Keep shares. Especially if you work for a good company. While it’s important to avoid the risks you cannot afford to, don’t go overboard. It might be beneficial to keep some percentage of your company stock invested and participate on the upside.
Next Steps
If you want to take the next steps to see how we can help you successfully translate your options and stock exposure into the fuel for living the life that you want, here’s what’s next. At the end of this video, we’ll direct you to a one-minute questionnaire about your financial circumstances and a link to our live calendar, where you can book a 15 minute virtual meeting with one of our lead advisors. On that call, one, cover your top priorities. How our team might be able to help and we’ll try to answer any questions you might have about how to approach your company stock strategy. If our services are the right fit for you, we’ll block off additional time to draft and provide a free written guide book that will give you valuable insight into three key areas. One, how much risk and exposure do you currently have in your portfolio now? Number two, is your company stock and full financial plan on track to fuel the life that you and your loved ones want to live? In other words, does it allow you to retire when you want, spend time with family or traveling, send your kids to school, et cetera. And finally, number three, do your current strategies align well with your intentions? Thank you very much for taking the time to watch. We hope you found this valuable and look forward to talking with you soon.
Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Equity Compensation Webinar Transcript
We’re here today to discuss our most popular requests from our executive clients. What do I do with my stock options? RSUs, ESPP and other company stock compensation. I’m Jeff Brown, president of BWM Financial. And will be your guide through these complex questions. There’s a lot of information to discuss on the topic. So I’ll quickly cover and review the one-on-one basics on equity compensation for a refresh, but then move into key actionable takeaways, including how to test your savings need, monitor concentration, how to establish an objective sales strategy and ideas on long-term hold strategies and behavioral bias.
Basics of Restricted Stock Units (RSUs)
So let’s jump right into the basics of equity compensation. Today, we’ll be looking at employee stock options and restricted stock units. Company stock is usually granted in the form of stock options or RSUs. RSUs are trending more popular. So we’re starting here. It’s helpful to understand that RSUs are simply a bonus paid in stock instead of cash. You typically have a waiting period between the time that they are granted and when they are available to sell, called vesting. You are taxed as income when they vest just like a cash bonus. In fact, you can convert the shares to cash immediately by selling the shares right after they vest with no capital gains due. Or if you opt to hold the stock for a longer period of time, you could be subject to long-term capital gains. When deciding whether to hold or sell the vested RSUs, ask yourself this, if my company paid me a cash bonus today, would I use it to buy my company stock? If not, it could make sense to sell the RSUs as they vest.
Basics of Employee Stock Options (ESOs – Non-qualified Stock Options)
Employee stock options are still very common. The two main types of stock options are incentive stock options or ISOs and non-qualified stock options, or NSOs. ISOs are more complicated and much less common for larger companies. So for purposes of this webinar, we’ll be focusing solely on NSOs. If you have specific questions on ISOs, there’ll be an opportunity to get additional information at the end of this presentation. It’s helpful to think of non-qualified stock options as company stock on steroids and with an expiration date. Like RSUs, they typically have a vested period, but aren’t taxable to you at that point. Once NSOs vest, you have the option to exercise, purchase the shares, and then you are taxed. While cashless exercises and immediate sales are most common, if you do opt to exercise and hold the shares, they are subject to long-term capital gains. Now keep in mind, options are only valuable if your company’s stock price goes up before they expire. If the price stays the same or drops options are worthless. You have nothing to lose if the stock price declines or stagnates, but you have lots to gain if it performs well. Conversely selling, consider selling highly valuable options close to their expiration date. Modest drops in your stock price could wipe out significant value and you may not have time left to wait for the recovery.
Common Stock Option Fears
So now that we’ve covered the basics of how these work, let’s get into some specifics. After two decades helping people make the most of their company stock, here’s the common fears that we see. First, worried about selling at the wrong time. My company’s done so well. We’re about to release a new product and I don’t want to miss out on future growth. Well, I like to say treat stock like a relay race. Sell options and RSUs as your new shares vest. Therefore you’re taking some risk off the table, but still have room for future growth. You set price targets and you commit to them. Or my company stock was recently trading higher. I’m just going to wait for it to get back where it was. Well, unfortunately, markets do not care about previous prices. You always need to evaluate where things stand today and not worry about the past and make decisions based on that.
Tax Example for Non-Qualified Stock Options
Another big one is concerned with a large potential tax bill. For example, maybe next year I’ll be in a lower tax bracket or I’m just going to wait for long-term capital gains treatment so I can reduce my tax bill. We hear these concerns a lot and they’re really valid, but there’s simply no way around paying taxes. And I like to say don’t always let the “tax tail” wag the “investment dog”. So it might be useful to go through an example of this and how it could play out. So this is my tax example. We have a current stock price of $100 a share. The cost basis is $60 a share. There are 5,000 shares at play here. So the gross proceeds are $500,000 with $200,000 in gains. Now we’re just going to assume here that the current year combined capital gains tax rate is 40% and for whatever reason, next year it’s going to be 30%. So if we sell this year, we’re going to basically pay $80,000 in taxes. 40% of the $200,000 in gains. We’re going to get $420,000. We sell next year with our fictitious lower tax rate at 30%, we’re going to pay roughly $60,000 in taxes with net proceeds of about $440,000 making $20,000 more. The reality is the $20,000 in taxes is only a 4% change in the stock price. Alright? That is $4 a share on $100 stock price, that can happen any given day. Therefore going back to not always letting the “tax tail” wag the “investment dog”.
Unsure of What to Sell
Another one is people just don’t know what to sell. Should I sell my options, RSUs or ESPP. And for how much of each one of those? There are general themes around some of these. And you need to be partnering with a CPA and an advisor that knows your entire situation to get you the right answer. But there are some pretty clear cut ways to look at it. So for example, if you have equal cost basis RSUs and ESPP, you’re going to want to sell the RSUs first because there’s no discount taxes income. Typically you’re going to want to sell the highest cost basis stock first. And you’re going to want to sell options when it’s highly in the money and closer to expiration.
Unsure of What to do with Stock Option Proceeds
And that leaves us with our final concern, which is how much should I sell? Unsure what to do with the proceeds and what do I do to replace the growth that I got? Stock market looks high. This is all the uncertainty of around what to do.
How to Determine Amount of Stock Options to Sell – Hypothetical Demonstration
We think that is a perfect segue is to look at a demonstration of how we use your financial plan to solve for the total amount of company stock diversification needed in order to reach your life goals. Once we have this total figure, we’ll move on to the specific sales strategies. Keep in mind, this is just a hypothetical example. So in order to test specific concentration methods, we need to start with a detail-oriented financial plan. And that’s what you’re looking at here. You’re looking at a sample client, Simon and Sarah with a organized financial statement of the net worth, primarily looking at here, their investments as well as their real estate hidden behind the scenes. One key part of their net worth is you’ll see that they have roughly almost five, 4 1/2 million dollars in company stock in a combination of RSUs, options and employer stock purchase plan. As you’ll see, that as a very large percentage of their overall investments. Very standard for what we see with people at successful companies. That rolls into the true intentions of a client by looking at what they want out of money in terms of their goals and objectives. And what you’ll see here is this client is going to want pretty standardized stuff. Want to send their kids to college, they want to retire early, they want to have a nice retirement life, and we’re going to include some other things in here such as medical, et cetera. When you run the financial plan, you see this really great hockey puck stick of making a lot of money on their investments, but that isn’t the way we look at things. We like to look at things in terms of the probability of them being able to achieve their goals, which factors in what’s called a Monte Carlo simulation. So even though the client has a very high net worth with a very high potential growth rate, you’ll see that the probability of success is very low. And there’s a high probability of actually running out of assets with a very large dispersion based on that concentration in a very aggressive stock We’re going to do here is we’re going to test a few things. First off, one of the reasons people don’t sell their stock is they think, well, what if I want more stuff, right? What if I want to spend more money in retirement? Here, we’ll look at $15,000 a year for their early part of the retirement years till age 70. What if I want to buy a $500,000 ski cabin down the road? Obviously those are more expenses. So they might think they need for their stock price to go higher in order to achieve those goals. Because as your plan will show here, the probability of success with these increased amount of expenses is going to drop considerably. So then we move to how much money do we need to diversify out of the company stock into a diversified portfolio to increase that probability of success. First thing we’re going to do is we’re going to start with a round number. I put here sell 500,000 in restricted stock units and diversify that. You’ll see that that improves the probability of success to 70% which means there’s a 30% chance of them needing to make a change in their lifetime. We think that’s a little too high, so we’re going to effectively sell more. To make it simple, I’ll just give one more example. We’re going to sell another $1 million in RSUs. If you remember, there was 3 million total. So this is basically selling half of the RSUs, diversifying that and putting that into a diversified portfolio to see if that gets them enough. And you’ll see here, it gives them an 85% probability, which is right in our comfort zone. Only a 15% chance of needing to make a change at all during their lifetime. And from here, we can determine the appropriate strategy to sell the stock because we know what the price it is today is going to be a good starting point as it shows here.
How to Move from Total Needed to Stock Option Sales Strategy – Hypothetical Example
At BWM, we believe that your investments should be based around your financial plan and really answer the question, What is it all for? So once we have tested the total after tax amount, you need to diversify out of your company stock in order to reach your goals or make your financial plan successful. The question then shifts to how to do it in order to optimize the strategy. We think it makes sense to set up an objective sales strategy, just like the top executives do. Taking action now, but still allow yourself to capture the upside. Here’s how we do it. Scheduled selling and monitored limit orders. In our experience, the most successful diversification plans completely remove emotion from the sales. A schedule is prepared, agreed upon, and then executed. Ideally, this has done with limit orders or a fixed number of shares to sell each month. Before launching the strategy, we review the share types and tranches, how long you’ve owned each type for tax purposes, your overall tax situation, risk profiles for each of the asset buckets and personal preference. We also discuss questions around clients-specific strategies like which type of share should I sell first and what happens if I don’t have all my stock in one chunk? Like different tranches. And should I be waiting until next year for tax reasons? And more than that. These questions and considerations are always reviewed on a case by case basis with the clients and their CPAs. So here we’re going to look at a specific sales strategy. Once again, this could be done a multitude of ways. The key is having it to be emotionless, have there be a strategy and have it be consistent. So I have the hypothetical case facts here. The client has a 10,000 shares of company stock. They’re looking to diversify. The minimum amount of the sale price they’re going to accept is $65 per share. That’s based on their financial plan, ideally $85 a share, that makes their plan a home run. And so here’s an example of how it’s going to work, is that each Monday prior to the market opening, the following orders are going to be entered. And these are called limit orders. We’re going to sell 200 shares at $65, a share, 300 shares at $70 a share, 500 shares at 75, 750 at 80 and 2,500 shares at 85. Note that the current $65 strategy by selling that amount, it gets them the diversification needed over 50 weeks if it just stays at that price. So example of week one, see on the chart here, it never hits 65. So nothing happens. In week two, the stock price goes up. It triggers that $65 sale on Monday where we sell 200 shares and the stock continues to climb and sells 300 shares at 70 on Friday. Note that all of these orders are re-entered again for the following week. So the stock price stay high. So we’re going to be selling the 200 shares, but instead of selling at 65, the market price is 70. So it’s going to sell it at the higher price. The next order 300 goes off at 70. And then later in the week, it actually gets to 75, which triggers the third lot sale. Stock continues to do well in week four. So stock opens up at $78 on Monday. Therefore we sell the first three tranches at that $78 figure, the 200 to 300 and the 500. It gets to 80 a little later on the week, so 750 shares are sold at 80. And then week five, once again, it pops on Monday. We sell everything except for the last tranche at 84, we missed that by $1. So we sell the 300, the 200, the 500 and the 750. And then you can see later in the week, the stock price declines. And we sell that following week at 65 and 70, the summary of everything is we’ve sold a total of 5,500 shares. We’ve sold $425,000 worth of proceeds with an average of $77.36. This is an example of how a strategy can work. And remember that this could be adjusted as time goes on. The key is to have a strategy and stick to it.
Mindful Hold Strategy for Company Stock
Most people hear about these strategies and immediately see the benefit, but pause because there’s a desire to hold on to some of the stock long-term. We actually see the value in this perspective. So long as it’s coupled with the awareness around the accompanying behavioral biases. Now, our team specializes in working with executives, engineers, and scientists. So I know because we see it frequently that this is a section where you might be tempted to drop off, but stick with me because although these are less technical components of the strategies, I can’t tell you how many times we’ve seen these issues as the stumbling blocks to an otherwise successful strategy.
Behavioral Bias is Real
So we think it makes sense to hold back the number of shares, whatever makes sense. Whatever your financial plan calls and whatever you can tolerate. But we want to be aware of the biases as things move forward here. And I wanted to illustrate some of the things that we focus on here. At BWM Financial, it is one of our distinguishers, is training and behavioral finance, which is almost always a factor in divesting company stock. So here’s a couple of the main biases that occurs. One is overconfidence, which is overestimating the ability of your judgment. People that work at companies have deep knowledge of their company and proven success. And they might overestimate their own individual skill at providing the results in the company stock. Sometimes the company success and the stock price are two totally different things. Number two, is the status quo. I just got so much going on. I have too many different decisions to make. I’m just not going to make a decision. And that causes paralysis, right? So that’s why we think that having a strategy and a plan is going to make a lot sense to avoid the status quo bias that occurs. The recency bias is a big one, which is the factor of using recent performance as a predictor of future results. A lot of people adapt this way. They assume, oh, my stock’s been going great. It’s going to continue to happen into the future. But holders of individual stock are actually the least likely to diversify at attractive prices after periods of out-performance. They falsely believe that that performance is going to predict future prices. And then what happens? The stock price declines, then the clients want the stock to go back to where it was. And as I stated earlier, the market doesn’t care about the highs on the stock. The endowment bias, which is people tend to overvalue things they own or investments which they’re emotionally attached. So if you’re an early employee or it was very critical in establishing your success over time, you feel this attachment to the stock. And this sometimes create that bias that prevents the sale to take place. And then finally what’s called anchoring, which is being arbitrarily influenced by past stock prices. So fixating on achieving some historical stock price or round number before selling the shares. And we just think that doesn’t make sense. So most people think that it’s smart to reduce risk in a single stock, but it’s very, very hard to do.
What Experience Has Taught Us
And experience has taught us a few things. First, it’s important to understand what is it all for. If your employer stock has done extraordinarily well, and you’re hesitant to diversify, especially if you’re in a position to be financially dependent or to achieve your goals, you really have to think about why? Is there other goals you need to be putting on the table, or is it just the fact that it’s hard to do? Understanding what’s most important to you and your family is something that is critical that we help out with. And it’s probably the most important decision to ask yourself. Next, it is hard to sell when there’s not a tangible benefit. So consider using the proceeds from stock sales to either secure your retirement plan, regardless of what happens to the stock. Just consider it to fund specific goals like your kid’s education or a remodel or a home upgrade. So tying the sale of this price into these key defined goals is going to help make that decision. You might not have considered it, but if your portfolio is largely invested in your employer stock, you’re facing a double risk because you have your nest egg and your employment income, both tied to the same company. Remove emotion and stick to a system. Our executive clients oftentimes learn of non-public information about their company. Because of this, they’re restricted from selling shares, unless they have a detailed and rigid sales plan in place ahead of time, which they’re not allowed to change. They pick price targets, the number of shares to sell and the timeframe over which to sell. So they cannot make adjustments. Interestingly, these clients with their hands tied, consistently sell at better prices than the employees who are not required to commit to a plan. Our solution, act like an executive, develop a plan and stick to it. And most people feel the pain of loss is twice as much as the pleasure of gains. When you’re worried about how you might feel if you diversify shares of your company and the stock goes on to double in value, consider how much worse it might be if you feel like you failed to sell at a price and it was cut in half. Visualizing these two scenarios can help inform how much you sell. And you know what? Keep shares. Especially if you work for a good company. While it’s important to avoid the risks you cannot afford to, don’t go overboard. It might be beneficial to keep some percentage of your company stock invested and participate on the upside.
Next Steps
If you want to take the next steps to see how we can help you successfully translate your options and stock exposure into the fuel for living the life that you want, here’s what’s next. At the end of this video, we’ll direct you to a one-minute questionnaire about your financial circumstances and a link to our live calendar, where you can book a 15 minute virtual meeting with one of our lead advisors. On that call, one, cover your top priorities. How our team might be able to help and we’ll try to answer any questions you might have about how to approach your company stock strategy. If our services are the right fit for you, we’ll block off additional time to draft and provide a free written guide book that will give you valuable insight into three key areas. One, how much risk and exposure do you currently have in your portfolio now? Number two, is your company stock and full financial plan on track to fuel the life that you and your loved ones want to live? In other words, does it allow you to retire when you want, spend time with family or traveling, send your kids to school, et cetera. And finally, number three, do your current strategies align well with your intentions? Thank you very much for taking the time to watch. We hope you found this valuable and look forward to talking with you soon.
Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
