5 Questions to Ask About Your Equity Compensation
1. WHAT TYPE OF GRANT(S) DID YOU RECEIVE?
It sounds like common sense, but plan documents can be massive and confusing with their investment jargon and legalese. It’s important to work through your plan document to fully understand what type or types of grants you’ve received and the tax implications of each type.
TYPES OF EQUITY COMPENSATION
- Restricted Stock
- Restricted Stock Units (RSUs)
- Incentive Stock Options (ISOs)
- Nonqualified Stock Options (NQSOs)
- Stock Appreciation Rights (SARs)
- Performance Shares
You can also be given the opportunity to take part in an Employee Stock Purchase Plan (ESPP), which doesn’t include options but requires planning all the same! Each of the types of grants mentioned above comes with its own intricacies and tax consequences relating to your income, capital gains and even the Alternative Minimum Tax. Bottom line -understanding which types you have been granted is vital to your planning.
2. WHAT IS YOUR VESTING SCHEDULE?
The vesting schedule has different tax implications depending on the option type, but it provides the timeframe and dates for when:
- You may exercise your options (ISOs, NQSOs)
- The forfeitures on your Restricted Stock lapse
- When you receive the shares granted with your RSUs
Each grant will have a vesting schedule and can be either time based, or performance based. Time based schedules follow either a graded (you receive equal parts of the grant over a period of years) or cliff (you receive all of the grant after X years) schedule. Performance based schedules are tied to performance goals and metrics related to your role or to stock market targets if your company is public. The vesting schedule can also be found in your plan document.
3. IS THERE AN EXPIRATION DATE?
Stock options and Stock Appreciation Rights typically include expiration dates After this date option is forfeited by the holder.
10 years is the typical term most companies use, but you can be subject to shorter time frames such as five or seven years. The expiration date specifics can be found in the grant agreement and stock plan. No one wants to watch money slip away because they were unaware of the expiration date. Additionally, waiting until the last minute can prove costly if your company imposes blackout periods or forces you to exercise at an inopportune time. Knowing the expiration dates can help you avoid missing out on compensation you’ve worked hard for.
4. WHAT HAPPENS IF I LEAVE MY JOB?
Job hopping has become prevalent as employees search for the company whose culture, values and growth opportunities align with what they are looking for (now the vesting schedules make sense). I’ve been there myself! Leaving a job can impact what you receive and provides its own complications regarding post-termination exercise rules.
BASIC JOB TERMINATION CONSIDERATIONS
- What happens to your options if you leave before they are fully granted?
- Do you forfeit your RSUs or Restricted stock if you leave before the vest date?
- Does vesting stop on the date you give your notice or on your final day?
Pursuing new opportunities is exciting and often a bit disorienting. These are the basic considerations if you are planning on jumping ship and want to make sure you are protecting your outstanding grants. Keep your equity compensation in mind as you are formulating your exit strategy from the company and plan wisely!
5. HOW DO MY GRANTS FIT IN WITH MY FINANCIAL GOALS AND LIFE EVENTS?
Equity compensation is a fantastic benefit and can be a game changer in terms of wealth accumulation. Joining a startup is a risky proposition. You should be rewarded for all the time and hard work you’ve put into building and growing the productor service your company provides. Understanding your overall financial plan, goals and upcoming life events can ensure that you are using your well-deserved compensation to live the life you want now while adequately preparing for your future.
Understanding which goals you would like to fund with your equity compensation income makes it easier to figure out how much of your company’s stock to hold on to. This will help you avoid overconcentration by selling shares to raise the cash needed to fund specific goals, investments, and risk reduction strategies.
It’s important to realize that your company also provides your income. Diversifying your cash flow and investments can help blunt the effects of an adverse event such as a job termination or disability.
Disclaimer: The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. This content is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Hereford Financial disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.