Equity compensation A guide for navigating stock options, RSUs, and other equity awards by Tim Lonergan, Sr. Financial Planner, and Katja Tarleton, Financial Planner
by Tim Lonergan, Sr. Financial Planner, and Katja Tarleton, Financial Planner
Today’s compensation packages often extend well beyond salary to include annual bonuses, benefits, and various forms of equity. While equity awards can create meaningful long-term wealth opportunities, they can also introduce new financial complexities.
What are the main types of equity compensation?
Equity compensation can take several different forms. Some awards provide employees with actual shares of company stock, while others offer the right to purchase shares in the future at a predetermined price.
The type of equity you receive may influence when you owe taxes and how much flexibility you have in managing the position.
| Restricted stock | Shares of company stock that are taxed as compensation income upon vesting. Some types of restricted stock grants allow for additional planning opportunities, such as an 83(b) election. |
| Nonqualified stock options | Provides the option, but not the obligation, to purchase company shares at a pre-determined “strike price” after your vest date. |
| Incentive stock options | Similar to nonqualified stock options, but taxation can be converted to long-term capital gains treatment upon sale under certain conditions. Exercising incentive stock options can trigger Alternative Minimum Tax (AMT). |
How to exercise your stock options
Unlike restricted stock, stock options generally require employees to take affirmative action in order to realize their value. Understanding the different exercise strategies can be an important part of managing equity compensation.
- Exercise and hold: buy the shares in cash and hold them for future appreciation
- Exercise and sell: buy and sell the shares in a single transaction, receiving net benefits in cash
- Exercise and sell to cover: sell just enough shares to pay the exercise cost and tax; keep the remaining shares
- Stock swap: use stock you already own to exercise options with no cash outlay
Planning opportunities and risks
Liquidity needs, tax exposure, concentration risk, and changing market conditions are just a few of the many considerations one must navigate when deciding what to do with an equity award.
As always, the best time to plan is ahead of an event rather than after. Below are a few examples of ways your Westmount Planning Team can help:
Liquidity planning
The timing and structure of equity awards can create uneven cash flow and unexpected tax obligations. Planning ahead for events such as RSU vesting, option exercises, or large tax payments can help ensure sufficient liquidity while supporting broader financial goals.
Managing concentrated stock exposure
Equity compensation can result in a significant portion of net worth being tied to a single company. While concentrated positions may reflect confidence in your employer, they can also increase portfolio risk.
Those with concentrated stock have several avenues to explore that may help reduce risk exposure while still mitigating unnecessary tax liability.
Privately held company stock
Depending on the company and stage of growth, privately held stock can create unique planning considerations, risks, tax implications, and opportunities. Proactive planning can help navigate limited liquidity opportunities and major company events like tender offers or IPOs.
Tax timing strategies
Those who anticipate significant stock appreciation between grant and vesting may benefit from an 83(b) election, if eligible. This strategy allows recipients to recognize taxable income at grant rather than vesting, but it carries meaningful risks and strict timing requirements.
Corporate insider considerations
Corporate insiders, such as executives and directors, may face trading and liquidity restrictions when selling company stock. In certain situations, a 10b5-1 Trading Plan can help facilitate future share sales while supporting compliance with insider trading regulations.
Take the next step
If you receive a compensation package that includes restricted stock or stock options, your advisor can help you navigate the different options. Email us at advice@westmount.com, call 310-556-2502, or contact your Westmount advisor directly.
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Disclosures
This report was prepared by Westmount Partners, LLC (“Westmount”). Westmount is registered as an investment advisor with the U.S. Securities and Exchange Commission, and such registration does not imply any special skill or training. The information contained in this report was prepared using sources that Westmount believes are reliable, but Westmount does not guarantee its accuracy. The information reflects subjective judgments, assumptions and Westmount’s opinion on the date made and may change without notice. Westmount undertakes no obligation to update this information. It is for information purposes only and should not be used or construed as investment, legal or tax advice, nor as an offer to sell or a solicitation of an offer to buy any security. No part of this report may be copied in any form, by any means, or redistributed, published, circulated or commercially exploited in any manner without Westmount’s prior written consent.
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