A simple strategy to manage your compensation in shares, from a CFP

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Do you have stock compensation and feel overwhelmed by the decisions you need to make about it? Let that not prevent you from managing it well.

Whether you want to keep it simple, eliminate as much risk as possible, or reduce the number of difficult choices you face in your financial life, this basic approach to managing your equity compensation can help you avoid financial crippling. analysis and allow you to leverage the equity you own.

First of all, you need to understand what kind of equity you have

Before I get into the broad outline of what I often recommend as a financial planner, there are a few caveats to keep in mind. Most importantly, stock compensation becomes complicated and fast.

There isn’t just one type of equity you might have, and you need to be very clear on what you clean before making any choices or decisions. Incentive stock options and unqualified stock options may both be “stock options”, but they are treated and taxed differently.

Confusing one with the other could have serious financial consequences. If you have equity compensation, it is worth bringing in a number of professionals to help you out, including a financial planner and tax advisor or CPA.

It’s nice to have a idea what you would like to do with your equity, and this plan can help if you want to keep it simple. But at the end of the day, your stock compensation presents a big opportunity. and an equally important potential downside risk. A team of professionals can help you manage this in a way that works for you, within the context of a larger financial plan.

Then you need to know the concentration risk

One of the factors that makes stock mix potentially dangerous is that it inherently creates a concentrated position in a single company within your overall portfolio of assets.

Any investment in the stock market involves market risk. As an investor, there is not much you can do about this. And it’s not necessarily a Wrong thing; Without risk, there is no potential for reward (which in this case is the return on investment you can earn).

However, owning a specific stock also carries additional and acute risks. These include, among others, business, industry, business and legal risks. You can reduce or potentially eliminate these risks through appropriate diversification.

Having a concentrated position in the company that employs you exposes you to these additional investment risks. If you don’t do anything to mitigate this, you are probably lowering your likelihood of long-term success.

Not to mention that you are already “exposed” to your business, whether or not you have equity: they provide your paychecks and possibly other valuable financial benefits, like a retirement plan that could go with it.

If something happens to your business (or your position with it), your income is already in jeopardy. Add a large chunk of your investment portfolio of company stocks and then you are putting your overall assets and financial future at risk as well.

Again, proper diversification can help here, and this is where my basic strategy for managing your equity can come into play.

Use this simple strategy to manage your equity composition

The key is to be proactive with your equity compensation. It is very easy to let a super concentrated position in your business inventory build up over time if you are not careful.

This is why a useful approach is to simply sell the stocks you receive on the acquisition and reinvest the proceeds (minus the money you have to set aside to pay taxes) into a diversified portfolio at scale. global.

In practice, this could be like selling stocks as soon as you are able to do so, setting aside the appropriate amount (based on your tax rate) that you will owe the IRS when you file your taxes. for the year, and contributing the remainder of the sale to a taxable investment account for long-term growth.

Or, if you have known short-term goals, you can take the proceeds from the sale of stocks and use it to fund them. You can then repeat this process each time you receive new equity grants throughout your time with your business.

Again, this is a simplified approach to managing your equity compensation, and it prioritizes minimizing concentration risk and avoiding market timing over things like optimizing the lowest possible tax rate or hoping to get the biggest profit possible from the sale of your shares.

Depending on your situation, you may want to use a different strategy that is more complex, requires more management, or presents you with more risk. This is where a team of professionals can help chart the right course for you and what you want to achieve.


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