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What do I do with my stock options and stock plans?

“Stock options” can mean a variety of different things: they might refer to trading options contracts on publicly-traded companies, or employee stock plans, which are stock incentives for employees of an organization. I’m going to focus on employee stock plans in this blog post. 

Coca-Cola commercial shows one man’s results of simply asking the question “and?” at the end of his conversations. He does this at the end of an interview and - voilà - he is offered stock options along with his new job.  After watching the commercial, they probably think, “What are they, where can I get these “stock options”, and what do I do with them?.” Employee stock options can be a very valuable incentive to attract and retain employees. I have seen an uptick of clients and prospective clients that have various types of stock plans offered by their employer and would like to help people understanding them further. These are often used to keep and retain clients in newer technology and biotechnology firms.  Here in Madison, we’ve seen plans emerge at companies such as Epic Systems or Exact SciencesShopbop, a Madison business acquired by Amazon in 2006, also has employee stock programs. 

At a high-level, there are two categories of stock incentives: 1) stock awards that are granted to you and 2) stock programs that you buy into. Let’s dive into some of the types of stock incentives that I see most often.

Stock awards that are granted to you

The most common type of stock award that I see with my clients are Restricted Stock Units (RSUs). RSUs are “given” to you - with some strings attached (hence why “Restricted” is in the title). They will be subject to a vesting schedule, meaning that you will own the stock over time, not immediately when the RSUs are granted to you. A 4-year vesting schedule is common. For example, if you were granted 100 shares of RSUs with a 4-year vesting schedule, you would own 25 shares of the stock after one year of continued employment, 25 additional shares of the stock after two years, etc. until you are 100% vested. 

Another form of a stock award that are granted to my clients are Stock Appreciation Rights (SARs). As the name suggests, SARs are valuable to employees when the company stock appreciates. Note: you do not directly own the stock of the company! You are rewarded when the company performs and the stock price increases. During these times of an increasing stock price, you would most likely receive additional cash compensation, but could see stock compensation, as well. SARs are likewise subject to a vesting schedule and expiration. 

Stock programs that you buy into

Employee Stock Purchase Plans (ESPP) allow employees to purchase their company stock - typically at a discount. There is typically a window of time where you will have to make a decision on whether you want to participate in the ESPP and to what extent. 

Stock options give an employee the right to buy company stock at a predetermined price (the “strike price”). They can be valuable when the strike price is lower than the market value of the stock but can also be worth nothing when the strike price is higher than the market value of the stock. Stock options  may technically be granted to you, but ultimately it will be up to you to decide if and when it makes sense to exercise the option (buying the stock). 

I have seen many people receive their compensation package upon starting a new job and get excited about the idea of having stock plans available to them. This makes sense (and also the reason that these plans are in place): employees feel that they have skin in the game and that their valuable contributions to the company can be rewarded. However, I have also seen poor management of the programs that are available. Here are some of the potential traps of stock programs:

Over-exposing your net worth to a single organization. With high risk comes high reward. Many outrageously successful people “bet the house” on a single idea or company and have made a ton of money because of it. For a typical investor that has stock plans available to them, it can be easy to over-concentrate their portfolio and lack diversification. 

Unforeseen tax ramifications. Many of the plans mentioned above have the ability to defer taxes. Some people get caught in realizing a large taxable event that could have been avoided while others know that a taxable event will be coming by exercising their positions but do not understand how they might be able to realize a long-term capital gain instead of a short-term capital gain, which could save a lot of money in taxes.

Not being cognizant of vesting schedules. Don’t leave money on the table! When deciding on a potential job change, be sure to consider your vested/unvested amounts of stock, options, and 401(k) assets. 

Stock plans and stock options can be a very valuable asset but require planning and should be included in an individual or family’s entire financial picture. I would encourage those that have stock plans or options available to them to strategize with a financial planner and an accountant. Consulting these professionals could provide significant tax savings, a level of risk management, or both. 

Please reach out if my team or I can help you gameplan around your specific situation. 

Mitch