Whether you are c-suite executive or high performing employee working in tech, finance, media or healthcare chances are a portion of your total compensation is not only cash but in some form of equity.
More and more companies are incorporating equity into compensation packages as a powerful way to reward top talent, promote collaboration across teams, and align employee incentives with long term company performance. This makes sense, but where we need more support is educating on what this means to taxes, creating a savings plan, understanding concentrated positions, etc.
Equity compensation is often referred to as deferred compensation, that terminology can be misleading and even viewed negatively. There was a time when I was caught off guard when part of my compensation was going to be issued in the form of stock, looking back I should have immediately viewed this as a privilege.
While the payout is delayed, equity can be an incredibly valuable component of your wealth strategy. Some of the key benefits include:
- The potential for significant growth, as the value of your shares increases alongside the company’s success.
- Providing skin in the game, connecting your wealth to the performance of the organization.
- A future cash flow, especially if vesting is structed consistently over your employment. Consider this an additional salary or bonus.
Some common forms of equity compensation you may encounter:
- RSUs – Restricted Stock Units
- ISOs- Incentive Stock Options
- NSOs – Non-Qualified Stock Options
- EPPs- Employee Stock Purchase Plans
- Founder Shares & Restricted Holdings
- Performance Shares & Carried Interest
Each of these comes with different tax rules, risk profiles, and planning opportunities.
Equity ownership changes the game. Not only how you view your role within the company but the strategy in managing your finances. With equity you are no longer just an employee, you are a partial owner of the business.
- A portion of your net worth becomes tied to the future of the company.
- Your tax situation quickly becomes more complex, often involving multiple tax events (vesting, exercising, and selling).
- Liquidity may not be immediate, especially for private companies. This can affect your cash flow planning.
Below are some planning considerations as you are evaluating your total compensation
- How much of my net worth is tied to one company or industry?
- What will my tax liability look like if I sell this year or subsequent years?
- Should I exercise now or consider waiting?
- Do I have a diversification strategy in place once I exit?
- How is my equity protected should something happen to me? (Estate Planning)
- What is my current cash flow strategy while holding these illiquid assets?
- What are my lifestyle goals? Can I meet them if liquidity takes longer than expected?
As you grow within your career, senior leadership often come with complex equity packages. We are here to unpack what this means for you, your family and how to best position yourself to feel confident when preparing a wealth strategy.
Disclosure:
Investment Advisory Services offered through Expressive Wealth, LLC. All investing involves risk, including the potential loss of principal. Market volatility may significantly impact the value of your investments. This communication is provided for informational purposes only and should not be construed as personalized investment advice or a recommendation of any particular security, strategy, or investment product. Information has been obtained from sources believed to be reliable, though not independently verified. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Expressive Wealth research and professional experience and are expressed as of the date of this report. We recommend consulting with a qualified financial adviser to develop a strategy that aligns with your financial goals and risk tolerance.