Equity compensation can be a big boon to your finances and dramatically increase your income relative to a straight salary. However, equity compensation isn’t the same thing as a standard salary. There is more to consider, and you need to have a plan for how to deal with employer equity as it vests.
Vesting: When Is The Money Officially Yours?
First thing’s first – if you know you’re vesting on a certain schedule, be aware of when your vesting dates and blackout dates are. These dates present you with a timeline of when the granted shares become yours, and when you have the ability to sell shares. Understanding this timeline is critical. Once the shares vest, they are yours. At this point, you can do whatever you want with them, unless the shares vest during a blackout period. In these cases, you’ll have to wait to sell them when the trading window reopens.
Of course, taxes are also a consideration. Your vesting schedule tells you when you will incur a tax liability – and could force you to take action. For example, when you receive restricted stock units (RSUs) you’ll incur an income tax liability on the value of the shares as of the day they vest. That happens whether you sell the shares or not. That distinction matters because if you plan to hold onto the shares, you need to make sure you have a plan for how to pay the taxes.
Realistically, even if you want to hold onto the shares you will probably need to sell at least a portion of them to cover your tax bill. This may come as a surprise to many who believe that their employer will withhold taxes for them. The truth is that most employers withhold a standard 22%, which is rarely enough to cover the full amount of taxes owed.
Too Much at Risk?
Take note of how concentrated your position is. Even if you have a feeling the value of your company’s stock will increase, it doesn’t pay to be over-concentrated. If you hold onto the shares and the price takes a sharp dive, you’ll miss out on what could have been a nice payout.
One way to evaluate your risk is to consider how much of your total investments are held in your company stock on a relative basis. Maybe you have $1 million worth of investments, and your company stock makes up $300,000 of that. That’s 30% of your total portfolio, and is VERY heavily concentrated. This level of concentration leaves you quite exposed to market volatility. Let’s look at another scenario: Your company stock is $50,000 of your total investable assets, or 5%. That is much more reasonable, and in line with the diversified portfolio you’re striving toward.
Remember: nobody is getting points for loyalty when it comes to company stock! Your decision to sell or hold should be based on your needs and what works best for you. Keep in mind, too, that, since you already work there, your income is dependent on the continued success of your company. If both your income and a sizable portion of your savings are connected to one company then you may be in a bind if something bad were to happen.
All or Gradual?
Selling your vested company shares isn’t an all or none proposition. You can keep all or even just a portion of them. You may look to sell some now if you know you will get more later. It’s not uncommon to be on a recurring schedule where you’re granted an increasing amount of stock as your career grows. If you don’t incorporate the annual vesting into your plan those stocks may pile up on you over time.
Consider, too, how that recurring schedule affects your desire to participate in the potential growth of the company. You don’t necessarily need to hold onto vested shares to do that. If you receive a regular stream of vesting shares then you are already participating in the company’s success. If the share price continues to rise then the value of the shares you receive in the future will be higher too. That’s actually a fundamental reason why employers use equity compensation – so employees are connected to the company’s performance.
Reach out for Help!
We know the decisions surrounding vesting equity can be difficult. That’s partly due to the nuance of the rules and how things are different from one type of equity compensation to the next. It’s also because there often aren’t clear-cut right and wrong answers. We would be glad to help you figure out the best approach for you.