Equity compensation represents an opportunity to accumulate wealth quicker than the average employee.
After years of helping clients monetize company stock, I've seen thousands of dollars lost to simple mistakes.
These are the 10 mistakes you need to avoid.
Unorganized Equity Grants
Most people know which types of equity they're granted, but they have no idea:
• What's vested and/or exercised
• Which grants have value
• When grants expire
Start with a detailed inventory of your equity and update it regularly.
This gives you a summary of your equity so you can begin forming a strategy.
No Monetization Strategy
Your equity is part of your compensation package. However, it's more complex than your salary, so you need a plan for converting equity into cash.
Have you thought about:
• Target price points to exercise options?
• Trading windows and blackout periods?
• The percentage of liquid assets you want to hold in company stock?
Most people haven't. This leads to suboptimal exercise/sell decisions and money left behind.
Going all-in on Company Stock
It's okay to hold a percentage of your wealth in company stock.
Unless you have enough wealth set aside for your lifetime, it's not okay to stake your livelihood on a single company. Here's why.
Over the 40-year period of 1980-2020, a concentrated position in a single stock would have underperformed:
• Cash 42% of the time
• The Russell 3000 index (3,000 largest US companies) 66% of the time
Fear of Missing Out (FOMO)
People often find themselves concentrated in company stock because they're so worried about missing the upside that they forget there's a downside.
However, there's a very real downside that's more common than you think.
As the chart above shows, 44% of companies in the Russell 3000 experienced a 70% decline from their peak and never recovered.
Remember that if you receive equity grants now, you'll likely receive future grants. They won't have as much upside built-in, but you can still benefit from booms in stock performance without putting your future at risk.
Poor (or no) Tax Planning
The various forms of equity are taxed differently at vesting, exercise, and sale.
Failing to plan for taxes results in:
• Surprise tax bills
• Under-withholding penalties
• Liquidity issues and forced sales
This usually stems from a lack of organization and understanding around the different types of equity.
Analysis Paralysis
Equity compensation can be overwhelming. Especially when you start to get into planning for tax consequences.
Don't become so fixated on minimizing taxes that you cost yourself more money in lost equity value.
More importantly, don't become so frustrated that you take no action at all.
Carta's 2022 Employee Stock Options Report found that 46.1% of in-the-money options expired worthless (source).
A lot of options may have gone unexercised because employees didn't have cash to exercise. However, 13% of employees said they didn't exercise because they were afraid to make a mistake or thought they already owned the shares.
Not Reading Equity Plan Documents
I get it. No one wants to read a PDF filled with legal speak and words that have no meaning to you.
However, these documents contain key information you need to know to understand the equity you have and the strategies available to optimize it.
Doing What Their Co-Workers Do
Your financial situation is unique to you.
Don't make an exercise or sell decision because of a lunch discussion with a co-worker. They may have a strong argument for their decision, but it was made with their own situation in mind. Not yours.
Your equity should be managed in conjunction with your personal circumstances.
Not Giving Equity Compensation a Purpose
Your equity is part of your financial plan.
It impacts your taxes, cash flow, savings, and lifestyle. Give your equity a purpose by determining how your equity will support your goals.
When your equity has a purpose, you can form an action plan for vesting, exercise, and sale without relying on emotion.
Using Equity as an Emergency Fund
Don't rely on your equity for quick liquidity.
One bad earnings report can crater your stock's price in the short term, leaving you with no choice but to sell at a loss. In addition, trading restrictions may prevent you from selling when you need to.
Your emergency fund should be held in cash so you can ride out the volatility of riskier assets like your company stock.
Conclusion
Failing to plan for your equity compensation is like saying no to a portion of your salary.
I've seen these mistakes cost employees thousands. Make sure you avoid them and create a plan for making the most out of your equity.
Disclaimer
Unrivaled Wealth Management (“UWM”) is a registered investment advisor offering advisory services in the States of Ohio, Pennsylvania, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
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