Talisman Talk


November 22, 2021

(I’m Going Down to) Alphabet Street: Making Sense of the Tasty Soup of Equity Compensation

By Jennifer Kirby, Managing Partner, Senior Wealth Advisor |
Zarateman, Vitoria - Graffiti & Murals 1238, CC BY-SA 4.0

Part 2 of the Talisman Talk Series

Congratulations. You receive the offer letter from Company X. It says some blah blah about stock, or options, or units, or whatever. You barely read it. You are super excited. You immediately call your mom. You dance around the living room. You post about “being blessed” on social. You open the envelope containing the compensation paperwork and see letters that resemble English but look something like this: RSU, ESPP, PSA, ISO, NQSO, SAR, IPO.

In short of a minute everything gets shoved back in the envelope, and you bury it under the pile of supermarket circulars you just received. Welcome to most people.

Here’s the scoop: each configuration of these letters is its own type of award, with different tax, timing, and risk attributes. Sometimes you only get one type, sometimes you get multiple types.

Aside from your job-job, you have one job here: get as much information as soon as possible about these special letter combinations — any explanations provided by the firm, any calendars or schedules associated with them, and any statements of where these things are going to live until you figure out when you are getting them and what to do with them. Start there. Note it is very easy to get lost on Alphabet Street. If you’d like to get really lost, do yourself a favor and call the phone number of the plan administrator.

Conversely, if you’d like to get un-lost, contact us.

I won’t lie — when we get that call from a client, we are simultaneously excited for them and a little freaked. You wouldn’t know this if I hadn’t told you and, for what it’s worth, our first piece of advice is to ourselves… never freak in front of a client. That is bad.

Why would we freak at all, might you ask? Isn’t this a wonderful thing? Yes, but it is also serious business. These awards introduce specific risks to your financial picture, like a 2-ton elephant-with-feet-up-on-your-glass-coffee-table-risk. But that equity compensation elephant can also be a game-changer and a massive engine for the creation of generational wealth. Maybe. Sort of. Or, as we say pretty much all the time in the land of financial advice, it depends.

Equity compensation can be worth more than your salary year over year depending on the amount of your awards and if you are working at a company with decent prospects. It can be worth cray cray money if you work for the next Amazon. Don’t get too excited yet… these awards can take many years to ripen, meaning, are available to you.

Bottom line is that, to make the most of this situation, you need to consider the risks and rewards, and tie those to your short-, intermediate- and long-term financial goals.

These are the considerations we bake into our analysis of how to handle equity compensation:

· Taxity-tax-tax. As in, potentially paying more. Maybe a lot more. How do you manage that?

· Concentration. Some people end up with most of their net worth tied up in a single stock. If you are Jeff Bezos, good for you. If you are like the rest of us, you need to think about the too-many-eggs-in-one-basket thing carefully.

· Timing. If you can sell the stock, should you? Do you need the proceeds to fund some goals? Do you have conviction in the company and feel that holding on to the stock longer is a good bet? Is the market in a good place or not?

· Your financial goals. Seems obvious but so do a lot of things, like the merits of eating kale. That doesn’t mean we think about it as much as we should.

There are no single right answers. Again, the dreaded phrase: IT DEPENDS.

The analysis for your equity compensation can be very nuanced and involve intimidating terms such as INTRINSIC VALUE, IN THE MONEY, OUT OF THE MONEY, LEVERAGE, BLACK SCHOLES (sounds like a pair of shoes), and FORFEIT VALUE. If you want to get all up in that, have at it but — at the end of it all — optimizing your compensation is subjective and really about what your money means to you, and this is where a financial advisor like us can be very helpful.

Now, go back to dancing in your living room.

Talisman Talk: An intersection of financial advice, culture, music, and things we find amusing.

For more information on how we can help you with your financial planning needs, contact us at www.talismanwealthadvisors.com

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