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Plan for Your Equity – Part II: Employees

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This two-part series seeks to bring attention to the overlooked subject of equity and the associated tax and financial facets. This happens because either one does not fully understand all of the moving parts or because there is a lack of clarity in the true value of the equity. In the first part of the series – which can be found here – we focused on business owners and founders. For part two, we are going to cover equity planning for employees.

There are several tools in the financial industry – such as or Personal Capital – that aid with financial planning and tracking, but there is no integration with equity assets. We are currently working to solve this problem through our new platform Below are some questions employees must consider when evaluating their equity.

What is my equity worth?
If you are an employee at a publicly traded company, that is a fairly easy question to answer. If your company is still privately-held then it is a little more difficult. For many later stage companies (such as Uber or Airbnb) there is an established private market for stock which can provide the value. If there isn’t a private market, your company’s most recent 409(a) valuation will provide a basis.  Ask your company – they are required to provide it.

What’s my vesting schedule and what happens when my equity vests?
Your equity is usually subject to a vesting schedule to protect the company. It is important to understand these dates and the type of equity you hold as it changes what happens when you vest. For example, if you have options, when they vest that merely gives you the ability to buy stock at your option price. On the other hand, if you have restricted stock units (RSU’s), they become taxable when they vest and your employer usually sells off a certain amount to cover a portion of the taxes. The bottom line: understand how your vesting works and what it means. Also, beware of the vesting cliff!

How do taxes work on my equity?
There are several factors involved and each person’s equity is unique, however there are some general things to consider:

– Evaluate holding stock for at least 12-months to achieve long-term capital gains. This holding period starts when an RSU vests or when you exercise an option.

– Beware of AMT if you have incentive stock options (ISO’s). We cover that in detail here.

– Often times, withholding on RSUs is not enough to cover the taxes you actually owe. Read more here.

How should I plan with my equity?
You should have a crystal-clear path on how your equity affects your personal financial goals and your current and future taxes. This plan should be created in unison with all things financial so that your goals are achieved more efficiently. Here are some key questions that will help you establish your path.

– How do I save taxes today? This plan should include a strategy for tax minimization by evaluating your income, assets, deductions, tax bracket and available tax opportunities, and additionally, how your equity ties into this.

– How do I maximize the value of my equity over time? Develop a comprehensive strategy that determines when to exercise, when to sell and how to stagger these events in order to keep taxes as low as possible. A proper strategy could result in tax savings in excess of 20% of your equity value.

– How do I use equity to achieve financial goals? This is the key to making it all work. As part of your personal financial plan, equity should be considered a part of the overall investing, savings and retirement strategy. Maximize the value and invest it properly as you diversify; the power of time with prudent and thoughtful financial decisions are now on your side.