Anthony Saffer VP / Financial Advisor CFP®, CKA®,

Alex Okugawa  / Financial Advisor CFP®, CKA®, CEPA® 

Alex Okugawa 0:00
Equity compensation can be a great way to build wealth, but you need to know the rules. If you’re a working professional working for a company that is offering equity compensation, such as stock options or restricted stock units, you’re going to want to stay tuned.

Alex Okugawa 0:26
Okay, so employee stock commonly through like restricted stock units, or incentive stock options can be a great way to build wealth. But first, let’s talk about why a company might even offer these in the first place

Anthony Saffer 0:41
they’re offering ownership to employees can incentivize and attract that that top talent, right? And that’s what you need for a company to grow. The other thing is that as employees pay for these options are these are this ownership thing, cash comes back to the company, and they can reinvest that into the growth of company.

Alex Okugawa 0:55
Absolutely. So it’s a great way to build wealth for the employee, it’s also a great way to incentivize and retain talent for the company. But there can be a lot of nuanced rules with these options and units. And so you have to be aware of that.

Anthony Saffer 1:10
Yeah, there’s so many different ways to offer that ownership, whether it’s incentive stock options, nonqualified stock options, RSUs restricted stock, all these things are different methods to be able to offer that that ownership and they all have different rules. So there may be one method that you are offered, or it may be multiple different methods. And you have to be able to know the rules and create a plan from that.

Alex Okugawa 1:33
Yeah, very, not very often do you see a case where an employee’s offer just one type, sometimes they mix and match leaves a couple different methods. And you have to be aware, just to give you a quick example, of knowing the rules, like with restricted stock, you might be able to take advantage of a special strategy called an 83(b) election. But you have to be aware of the timing, you have to make this selection within 30 days of grant. And for a lot of people 30 days is pretty darn quick. And for something I don’t know anything about, that’s a short period of time to make a decision that could have a potential for a really big tax impact. So that’s just one example of knowing the rules. The other thing that we need to take into consideration is the tax consequences.

Anthony Saffer 2:14
Yeah. Because, like you mentioned with the 83(b) election, well, that’s a strategy you can employ. It could be based on the timing where you know, as you exercise, you need to hold it for a year to get that long term capital gains rate. And, you know, capital gains are generally at a lower rate if you hold them for more than a year. Yeah. And then now we’re also facing this tax proposal where capital gains could could change as well. And so it’s really trying to stay on top of that.

Alex Okugawa 2:39
And like you said before, you know, just trying to make sure we don’t let the tax tail, wag the dog, yes, taxes are important. And we want to make them a big consideration into our strategies. But we don’t want it to be the be all end all when looking at the overall equity compensation,

Anthony Saffer 2:55
Right. And that’s where you need to know what situation you’re in. If you’re working in a startup. And you’re basically buying sock for you know, pennies at this point, the valuation is very low, that really could help determine your strategy, right, you’re not going to buy something for, you know, six or seven cents, if that’s what the share price is, and then try and sell it for eight cents, you’re waiting for that big that big payday and holding on to it. Whereas somebody that’s maybe working with a more mature company, their stock price is more mature, then maybe you are buying it at a certain point, perhaps getting a discount on it. And then after a certain amount of time, you’re selling it to diversify elsewhere.

Alex Okugawa 3:31
Absolutely. And so and so related to that point. I’d say the final point here is just understanding your overall strategy, objectives, and really mapping out a multi year game plan because this isn’t just a one year event, this isn’t a one time thing we want to look at. We want to see how do we map this out over the next several years to help you maximize your equity comp?

Anthony Saffer 3:52
Yeah. And that’s where a financial plan comes in. Right? It’s looking at your personal objectives. Because what you determine as your strategy may not be what your coworker does, right? It’s based on your uniqueness, and looking at your situation and saying how can I best achieve my goals based on this situation? And what I’m offering?

Alex Okugawa 4:09
Absolutely. So to recap, we said the big things you need to know is number one, knowing the rules, right? What are the rules of the game? And how do you need to play this? Number two is the tax consequences, how do you navigate the tax code to maximize the benefits for you and then number three, you know, take this all into consideration to your overall financial plan, and really mapping out a multi year strategy and not just being hyper focused on one year. So this is the kind of stuff that we help working employees with, you know, again, equity ownership is a fantastic way to build wealth potentially could be life changing multi generational wealth. If you’d like to learn more and understand how we help families through this process, you can visit our website or give us a call, we’d love to talk with you.

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