Many people don’t know quite how employee stock options fit in with their larger financial goals. On one hand, you might prefer to have a bigger paycheck today than be given an offer that may or may not end up being worth anything years down the line. On the other hand, employee stock options can end up being an extremely lucrative part of your financial plan. And because you don’t have to do anything with stock options you’ve been granted, there’s no financial risk to you unless you choose to exercise those options.
Your unique situation will determine the role that your stock options play in your overall financial planning. These are some of the things you might want to consider as you think about stock options as part of your financial future.
• You can’t count on any guaranteed outcome. You may want to keep in mind the old saying about not counting your chickens before they hatch. Employee stock options may ultimately net you a big payout, but it’s imprudent to put too much stock (pun intended) in your options until they vest and you’re able to sell them. Any number of market forces can affect a company’s stock price. Stock options, like the stock in any single company, can be a lot more volatile than mutual funds and other diversified investments. As a result, they generally shouldn’t make up the core of your financial plan.
• Be thoughtful about diversification. Owning too much of one company’s stock puts you in a vulnerable position, especially if that company is your employer. If the stock price drops because the company is struggling, employees could lose their jobs and the value of their stock options around the same time. If you want to exercise and hold shares, make sure you’re working with a financial planner to ensure that your portfolio is balanced and you’re not exposed to too much risk. Alternatively, you could sell quickly after exercising your shares, but you will want to be mindful of the tax implications.
• You have to prepare for the tax bill before making any moves. There’s a lot to know about stock options and taxes. How and when you’ll be taxed depends on whether you’ve been granted ISOs or NSOs, and on how long you keep any shares before selling them. But if your options are lucrative, you could end up with a much bigger tax bill than you anticipated. Make sure you know what your tax obligations are going to be so you can more accurately estimate your net proceeds from any sale.
• Do the math before making a cash exercise. Will purchasing shares require you to take out a loan or pull money from another investment? Consider whether this is ultimately the best move for your overall financial plan.
• Employee stock options won’t always be worth taking a job for, or make it worth sticking around long term. Granting stock options may allow a cash-strapped company to attract top employees while paying lower salaries than their competitors. Companies also use employee stock options to encourage retention, by requiring employees to forfeit their stock options if they leave the company before the options vest. Sometimes, taking a more lucrative job somewhere else is the better financial move in the long run, even if it means sacrificing stock options. Make sure to consider all your opportunities when making any career decisions that affect your stock options.
Ultimately, remember that employee stock options are just that: options. They may prove to be a highly profitable part of your portfolio, but they’re just one small part of your financial picture. To make the decisions that best support your goals, work closely with a financial planner before exercising stock options. It’s easy to miscalculate when you’re making stock options decisions alone.
Sachetta Callahan advises clients of all ages and stages of life about their stock options and their overall financial plans. We help clients understand and evaluate all their choices to make informed decisions that best support their financial goals. If you have any questions about stock options or financial planning, contact me today!
Eric Sachetta, ChFC®, CFP® is a Certified Financial Planner™ practitioner and focuses on financial planning and client relationship management. Eric believes that estate planning provides an opportunity to “look at all things that you value, see how they fit together, and make choices to balance everything and to maximize the things you want to do.”
For important disclosures please click here.