Advisors Reveal Top Tips For Stock Options, RSUs, ESPPs

Equity awards are complex, and so is the financial planning. No single strategy fits all. You must link the necessary financial and tax decisions to your own personal situation and goals. However, there are some general financial-planning considerations to understand before you start. A recent myStockOptions webinar featured four leading advisors who routinely work with clients that have equity comp and company stock acquired from their grants. In the real-world case studies they presented, they discussed their core strategies for stock options, RSUs, ESPPs, and company shares.

Start With Your Personal Goals

All of the advisors who spoke in the webinar cited the complexity and highly personal nature of planning for equity compensation and company stock holdings. “I always start with clients by asserting that these are complex benefits,” said panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and the author of a highly anticipated forthcoming book, All The Presidents’ Money. Megan emphasizes the importance of “playing the long game” with her clients. “We have to keep them on strategy, and strategies are personal—ignore the watercooler talk.”

“I also start with the client’s personal and financial goals,” stated panelist Chloé Moore, the founder of her firm Financial Staples in Atlanta. “What are they wanting to accomplish in the short term and in the long term? What are their cash needs? What do they want their life to look like and how can we use these RSUs or other equity awards as a tool to help make those dreams reality?”

Equity Comp As Goal Accelerator

Chloé said she often frames this as “accelerating that timeline.” For retirement goals, the stock-sale proceeds can perhaps go toward saving more, investing more, and making retirement possible sooner. For short-term goals such as buying a house or paying off student loans, the proceeds from equity awards can bring those goals even closer to the present.

An important point that Chloé stressed is that you should “live off your base salary and not rely on occasional income from equity awards or bonuses to fund basic living expenses.” Stock compensation “is really something that clients need to achieve or accelerate financial goals,” she reiterated.

Be Realistic With Yourself

Danika Waddell, the founder of Xena Financial Planning in Seattle, raised the importance of personal comfort level and pragmatism in financial planning for equity comp and company shares. “I think it’s really important to keep in mind that even though there may be an optimal financial or tax strategy, it may not make sense for the client—whether they’re not comfortable with it or it’s too complicated or for whatever reason they are just not willing to do that strategy. You have to find something that’s going to work for that client.”

She pointed out that, oddly enough, the strategies which actually work for her clients are often not the ones that are optimal from a tax perspective or a financial perspective. They are successful, she emphasized, because the client will stick to them.

“Tune out the noise,” added Danika. It’s vital, she asserted, to craft and stick with a financial plan that is tailored for you, regardless of casual advice from those around you. “Almost all of my clients hear a lot of opinions from co-workers and on Slack channels. They may also be getting input from an uncle, a dad, a cousin. What I say to clients is that they may be smart people and know a lot about tax situations, they don’t know everything about your situation. They may be at a different life stage. They may be in a different tax bracket.”

Know How Much Tax Will Be Withheld

For most employees, 22% is the statutory federal withholding rate for supplemental wage income, such as income recognized from stock option exercises or RSU vesting, and it’s the rate that most companies use. (The required withholding rate rises to 37% for amounts in excess of $1 million during the calendar year.) Depending on your overall yearly income and tax bracket, the 22% withholding rate may not be enough to cover the taxes you actually owe according to your bracket rate.

“A lot of my clients’ companies now give employees the chance to add extra withholding on top of the 22%, so they can choose exactly the amount of withholding they want,” observed Chloé Moore. “If that’s a choice and it makes sense for the client, we’ll get that as well. If not, we’ll want to be sure they set aside cash to cover the tax bill.”

Quarterly estimated tax payments are one way to cover any shortfall in the tax withholding. Alternatively, you can put cash aside from stock-sale proceeds to pay the taxes with your tax return for the year.

Sell The Company Shares Or Hold Them?

This is the $100,000 question (or maybe even more). When you receive shares of your company’s stock via equity compensation, whether you sell or hold the shares depends on various factors. Some of those factors, especially personal ones, are under your control, while others stem from the tax rules, your company’s stock plan, or its blackout periods for insider-trading prevention. Nevertheless, many advisors often suggest immediately selling all or most of the shares received at RSU vesting, chiefly to diversify and thus avoid the risky overconcentration of your wealth in just the stock of your company.

Webinar panelist Daniel Zajac, the managing partner of Zajac Group in the Philadelphia area, often takes this approach. “Generally speaking, selling RSU shares right when they vest is where we lean with most of our clients, and then we figure out what to do with the proceeds,” he explained. “Are we going to cover taxes by putting money on the side, making estimated tax payments, running tax projections? Or are we going to take the rest of it and invest it, fund a goal, buy a house, doing whatever the client wants to do with that excess money.”

Diversification

Danika Waddell concurred—and pointed out the importance of diversifying. “This isn’t a blanket rule, but for many of my clients I recommend selling RSU shares soon as they vest and setting aside money for the taxes and just diversifying,” she said. “Many of the clients I work with come to me with already 60%, 70%, 80% of their net worth tied up in their company stock, so we’re absolutely working on diversification. If that’s not the case, it’s a little less critical. But for many people it’s just sell as soon as the shares vest.”

Danika recommends this course of action even more strongly for shares acquired via an employee stock purchase plan (ESPP). “If someone is going to participate in an ESPP, I always recommend selling the ESPP shares as soon as they become available. I don’t really want anybody to hold on to them. I’ve seen too many situations where it doesn’t pan out, and then the ESPP taxes are just so complex on top of that.”

Automate Selling Under Your Plan Where Possible

Automated selling is another recommendation that Danika favors. “I’m a big fan of automation. If your company allows you to set things to auto-sell, that leaves one less thing on your plate. Especially if your RSUs are vesting monthly, you otherwise have to go in and remember to sell shares.”

Daniel Zajac agreed. “As much as we can automate selling for clients, we’re all for it. It’s not uncommon for our clients to come in regularly with $50,000 or $100,000 of after-tax RSU money that’s been sold, and we then dump it into an investment account, where it builds and builds. And clients start to love that action, seeing that account get bigger and bigger over time.”

Danika noted that dispassionate automated selling can work well as part of a financial plan determined in advance, sometimes in the form of a Rule 10b5-1 trading plan if you frequently know material nonpublic information about your company. “Make it really simple so that you’re not constantly having to think about when should I sell, how should I sell, what should I wait for—removing as much as possible emotional decisions.”

Capital Gains Tax

What about the tax on capital gains when you sell shares? Avoid letting aversion to capital gains tax get in the way of your bigger-picture financial planning. “Don’t let the tax tail wag the planning dog,” quipped Megan Gorman. “I think it’s great that sometimes people focus on the tax, but sometimes you just have to sell. You pay the tax and you move on.”

Further Resources

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. It is part of our Equity Comp Masterclass series of three webinars. For additional guidance and ideas, see the extensive resources in the section Financial Planning at myStockOptions.com, along with the website’s modeling tools and calculators for stock options, restricted stock, and restricted stock units.

SPECIAL WEBINAR

Equity Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

Wednesday, Sept. 11 (2pm–3:40pm ET, 11am–12:40pm PT). See the webinar registration page for a detailed agenda. 2.0 CE hours for CFP, CPWA/CIMA, CEP, CPE, and EA

Join us for this lively webinar on financial and tax planning for equity comp and shares in private companies. In 100 minutes, a panel of leading financial and tax advisors will present practical insights and real-world case studies:

• Alfred Au (MS, CFP®), DiversiFi Capital
• Meredith Johnson (CPA, CFP®), BPM
• Kristin McKenna (CFP®), Darrow Wealth Management

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Instacart IPO: Long-Awaited Liquidity For Employee RSUs And Stock Options

After hinting at an initial public offering (IPO) last year, delivery service Instacart has finally gone public with a listing on Nasdaq. It is the highest-profile venture-backed company to go public since the end of 2021. The IPO has been heralded as a sign of a potential resurgence in initial public offerings after a dearth in 2022 and the first half of 2023.

As with many later-stage startup companies, Instacart’s initial public offering (IPO) is as much about its human capital as its financial capital. Grants of restricted stock units (RSUs) and stock options are important forms of compensation for Instacart employees—but to cash in, they needed a liquidity event for the company’s stock.

That is why, in an interview with CNBC on IPO day, Instacart CEO Fidji Simo proclaimed: “This IPO is not about raising money for us. It’s really about making sure that our employees can have liquidity on stock that they worked very hard for.”

Filed under its formal corporate name Maplebear Inc., the company’s S-1 registration statement with the Securities and Exchange Commission (SEC) discloses details about Instacart’s equity programs for employees.

RSUs With Double-Trigger Vesting

Larger, later-stage pre-IPO companies often grant RSUs instead of stock options for many reasons, including concerns about shareholder dilution and high valuations leading to exercise prices that go underwater. Instacart is no exception. In its later stages before going public, the company moved in a big way from grants of stock options to grants of RSUs. No stock options were granted at Instacart in 2020, 2022, or the first six months of 2023.

The equity capitalization table from its S-1 shows the following total outstanding grants as of June 30, 2023, for its non-voting common stock:

Stock Options	29,910,133
RSUs	63,467,028

In a now common practice for later-stage pre-IPO companies, Instacart structured its RSU grants (and some of its stock options) with both the usual service-based vesting plus a second vesting condition that requires a liquidity event for the grant to fully vest:

1. With service-based vesting, you must work at the company for a specified period after grant. The service-based vesting period for these awards at Instacart typically runs four years, with a cliff vesting for part of the grant at one year of service followed by continued vesting monthly or quarterly.
2. With vesting based on a liquidity event, vesting conditions are met upon the earlier of (1) a change of control (e.g. a merger or acquisition) or (2) the effective date of a registration statement for an initial public offering of the company’s common stock.

Instacart also has some grants that vest only upon the satisfaction of both service-based vesting conditions and market-based vesting conditions (e.g. the achievement of specified future valuation or capitalization amounts). To make it even more of a puzzle to grasp all their different equity grants, the company made others that vest only upon the satisfaction of service-based, liquidity-event-based, and market-based vesting conditions.

Tax Hits For Employees

Many of Instacart’s employees have grants that met their vesting conditions immediately after the IPO. This will result in a big tax bill for employees when the shares are delivered. In fact, the value of the shares they receive will probably push most employees into the top tax bracket for all of their income in 2023—the one potential downside to the liquidity and wealth the IPO creates for them.

The S-1 registration statement explains that the company assumes a 47% tax-withholding rate for holders of its RSUs and shares of non-voting restricted stock that will vest and settle in connection with this offering. The company will automatically withhold shares from the RSU grants to pay the taxes owed, a practice referred to as “net settlement.” Instacart assumes a 43% tax-withholding rate for holders of its stock options, mostly via net option exercises.

$2.6 Billion Financial Impact

The use of stock compensation and the immediate non-cash accounting expense for the way the grants are designed to vest is so large that Instacart states the following in its registration statement (our bolding for emphasis):

“In the quarter in which this offering is completed, we will recognize approximately $2.6 billion of stock-based compensation expense associated with the satisfaction of the liquidity event-based vesting condition for outstanding RSUs and shares of outstanding restricted stock, for which the service-based and/or market-based vesting conditions have been fully or partially satisfied on or before August 15, 2023. As such, we expect to incur a net loss for the quarter and year in which this offering is completed, primarily as a result of recognition of this stock-based compensation amount.”

Amid dilution concerns, the company’s growing cash position enabled it to offer cash alternatives to employees. For example, the registration statement disclosed that in April 2023 it offered employees the choice to elect cash in lieu of a portion of certain equity awards.

Lockup Of Employee Shares With Potential For Earlier Sales

The liquidity for employees that Instacart’s CEO mentioned is not immediate. Instacart did separately register on SEC Form S-8, for employees’ public resale, all of the shares of common stock issuable under its previously granted equity incentive awards, along with those the company will grant in the future under its new equity incentive plan and separate employee stock purchase plan (ESPP).

Employees still will need to wait 180 days to sell their shares under the standard post-IPO lockup provisions. The S-1 registration statement reveals an exception that allows earlier sales during an open trading window should the stock trade at more than 120% of its IPO price for at least five of ten consecutive trading days. One of those days must occur after the company’s first quarterly earnings announcement.

Further Resources

Equity compensation is a key benefit for many employees at private companies, from startup to IPO or M&A stages. myStockOptions has articles, FAQs, videos, and quizzes that explain all aspects of private company stock compensation, from the basics to tax and financial planning.

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WEBINAR: 10b5-1 Trading Plans And Other SEC Rules Advisors Must Know

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Discover how to use these plans to maximize your clients' wealth in company shares, stock options, and restricted stock/RSUs while protecting them from insider-trading charges. The webinar's panel of experts will provide real-world case studies:

• Michael Andresino (JD), Partner, ArentFox Schiff LLP
• Rich Baker (MBA), Exec. Dir., Morgan Stanley Executive Financial Services
• Megan Gorman (JD), Founder, Chequers Financial Management
• moderator: Bruce Brumberg (JD), Editor-in-Chief and Co-Founder, myStockOptions

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Stock Options & RSUs: 6 Pro Tips For Navigating Volatility

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even the most experienced holders of stock comp (and their financial advisors).

Sooner or later, volatility may force you to make decisions that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two recent myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different angles.

1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

2. Welcome New Option Grants, But Have A Layoff Plan

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

• Stock Option Exercise Strategies: Advanced Bootcamp
• Restricted Stock & RSU Financial Planning: Advanced Bootcamp

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.

RSU Grants At Amazon, Apple, Google Adapt To Help Retain Top Talent

Hiring competition, the Great Resignation, and stock-price volatility are prompting changes in longstanding stock compensation practices for key performers at big, established tech companies such as Amazon, Apple, and Google. Although grants at these tech giants are still more likely to be restricted stock units (RSUs) than the stock options that can be wealth-builders at tech startups, features of their new grants are evolving in an effort to retain top employee talent.

The changes that these industry leaders are making in their stock grant designs will be widely observed and may be emulated by other companies.

Amazon

One example is Amazon, discussed in an article from Bloomberg (Burnt Out Amazon Employees Are Embracing The Great Resignation) and other sources, including financial advisors who work with Amazon employees. The company is facing challenges with employee retention, for numerous reasons including a decline in its stock price since its high last July.

Amazon caps salaries for white-collar workers at a specified amount and then adds in stock grants that gradually vest in “steadily increasing chunks” over four years. In response to the tight labor market, the company just announced that it plans to more than double its cap on base salary, from $160,000 to $350,000 per year. According to an article from GeekWire, Amazon also stated that it will start making stock grants to employees when they are promoted, instead of waiting until the next annual grant cycle. Amazon’s announcement says the purpose is “to better align newly promoted employees with the compensation range of their new level.”

Further changes may also be coming in Amazon’s stock grant practices. Amazon’s RSUs currently vest 5% after the first year, 15% after the second, and then 20% every six months for the remaining two years. This is a backend-loaded vesting schedule. An article from Business Insider reveals that Amazon Web Services is considering a shift to a monthly vesting schedule for employees at Level 7 (principal) or higher and for approximately 15% of employees with a “top tier” annual performance review rating (see Amazon Considers Changing How It Distributes Employee Stock Options To Stem Exodus Of Top Talent).

Another article from Business Insider discloses an internal company memo stating that Amazon will allow employees to take longer leaves of absence before pausing their RSU vesting (Amazon Changes Employee Stock Distribution Policies After Exodus Of Top Talent And Complaints Of Slow Vesting Period). Previously, Amazon paused vesting for leaves of longer than two weeks for any reason, which is not a common practice. The Bloomberg article cited above adds that the company will now let vesting continue during parental leave and for up to 26 weeks of medical leave. Amazon will now also give employees the choice to trade fractional shares, and when an employee dies it will accelerate the vesting schedules for beneficiaries.

Apple

Apple has informed certain high-performing engineers (10%–20% in some divisions) that they will receive out-of-cycle RSU grants that vest over four years, according to a short news article from Fortune (Apple Is Doling Out Bonuses Up To $180,000 To Retain Top Employees). These grants are seen as a retention incentive to prevent defections to tech rivals. The grant values range from $50,000 to $180,000, with both the size and timing being atypical and surprising, the article claims.

The article also touches on the downside of these out-of-cycle types of grants, which are different than regular annual grants. They “irked” some engineers who didn’t get them and saw the selection process as arbitrary. Some grants equaled the annual stock grant normally given only to engineering managers.

Separately, Apple’s CEO received a new performance-based vesting RSU grant (performance stock units, or PSUs) on the 10th anniversary of his promotion to that position. See pages 44 and 50–52 of Apple’s definitive proxy statement filed with the SEC for his grant and others to executives, and also an article from MarketWatch (Apple CEO Tim Cook’s Compensation Rises To Nearly $100 Million Thanks To New Stock Award). These pay out stock based on the relative performance of Apple’s total shareholder return compared to companies in the S&P 500. For example, if Apple ranks in the 85th percentile of companies in the S&P 500 for the performance period, 200% of the target number of RSUs vest. For an explanation of the difference between time-based vesting RSUs, which were also granted at the same time to these Apple executives, and PSUs, see an FAQ at myStockOptions.com.

Alphabet/Google

Alphabet, the parent company of Google, is similarly finding the need to make larger grants to retain its top talent—see, for example, an article from CNBC, Alphabet Grants Tens Of Millions Of Dollars In Stock Awards To Top Execs. As detailed in Alphabet’s 8-K filing with the SEC on new compensation packages for four senior executives, including the CFO and the chief legal officer, each executive received stock awards valued between $23 million and $35 million, split between performance-based and time-based vesting RSUs.

The performance-based RSUs will vest from 2022 to 2024 according to total shareholder return (TSR) relative to companies in the S&P 100. The number of PSUs that vest will range from 0% to 200% of the target grant size. The time-based RSUs will vest quarterly in 12 installments, assuming continued employment at the company.

Business Insider reports that for all of its employees globally, Google has shifted to more front-loaded vesting for its RSU grants. Its RSUs used to vest evenly over four years (25% yearly). Now they vest 33% per year for the first two years, 22% in the third year, and 12% in the fourth. In comparison, most startup and pre-IPO companies tend to use a four-year vesting design in which 25% of the grant vests at the one-year mark, then monthly for the remaining term of continued employment (36 monthly vests after one-year cliff vest). I predict that more public companies will be tweaking their vesting schedules in various ways, including moving away from annual vesting to quarterly or monthly.

At Forbes.com, senior contributor Jack Kelly has a few insights on the RSU grants at Google for principal engineers. The author, a respected recruiter at one of the largest global search firms, emphasizes the importance of stock grants “that could potentially change your life” (Google Engineer Shares How They Made Over $1 Million In Total Annual Compensation: The Advice Applies To Everyone).

Underwater Stock Options

With stock markets in decline at the start of 2022 and IPOs underperforming, concerns about underwater stock options have resurfaced. Martin Peers, New York bureau chief and columnist at The Information, bluntly expresses both good news and bad news about the volatility in a recent article (Tech Stock Slump Hits 2021 Stock Comp). The good news? Grants made early this year will have “lots of upside.” The bad news? Last year’s grants. Even with RSU grants that do not technically go underwater (unless the stock price falls to $0), the value of grants at some companies has been substantially sliced.

In the author’s view, the big decline in tech stocks will have a widespread impact on employee compensation, and companies will need to address that in the upcoming months. He also wonders whether companies will take steps to make up for what employees lost by “beefing up” new grants to increase employee retention.

More Resources

See the extensive articles and FAQs at myStockOptions for more about restricted stock/RSUs and performance shares/PSUs, including their tax treatment.

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AdvisorFind Directory

Stock compensation raises many questions.

• How much should you contribute to your ESPP?
• When should you exercise stock options?
• Should you sell or hold restricted stock at vesting?
• How can you diversify your company stock holdings?
• How can you minimize your tax bill?
• How do you negotiate for stock compensation in your employment agreement?

While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.

• Identify and contact an expert who can provide specialized professional guidance on equity compensation.
• Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
• Look up resources for performing background checks on advisors.

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Stock Options & RSUs From Startup To IPO Or M&A: Top Financial Advisors Cover 5 Key Topics

Fast-growing private companies rely heavily on equity compensation to recruit, motivate, and retain the best employees. Grants are typically stock options, restricted stock, or restricted stock units (RSUs). However, stock comp in private companies is surprisingly more complex and varied than what’s commonly used in mature public companies. The many challenges range from the inability to sell stock at exercise to fund the exercise costs to lockup restrictions on shares after the IPO.

A recent webinar held by myStockOptions.com presented practical guidance and case studies from three financial advisors with expertise in the financial and tax planning for private company equity awards and shares. Discussed in this article are five of the many topics covered.

1. When To Exercise Stock Options In A Private Company

At private companies in the early stages of growth, stock options predominate. By contrast, in public companies RSUs are more likely to be awarded for new-hire and annual grants. These startup company grants may include what are called “early-exercise stock options,” which allow you to buy the stock immediately. At exercise, you receive restricted shares that still must vest before you own the stock. Assuming a timely 83(b) election is made with the IRS, this comes with advantages and risks.

One potential benefit is “the ability to invest in the company early, possibly at a reduced tax cost,” as explained by webinar panelist Meredith Johnson, Director of Tax at BPM in San Francisco. “Exercising early converts future appreciation from ordinary income to capital gains and starts the clock toward a long-term holding period,” added panelist Devin Blackburn, a Senior Vice President at Northern Trust Wealth Management in Chicago. Exercising early also starts the holding period for the special 0% tax rate for qualified small business stock (QSBS).

But it’s important to note that early exercise is not for everyone. “I usually advise clients to wait to exercise private company stock options until they have to (e.g. changing jobs, options expiring) or possibly for an upcoming liquidity event,” said panelist Kristin McKenna, the Managing Director of Darrow Wealth Management in Boston. “Consider the time value of the money that would be used for option exercise—other ways to use that cash and other cash needs until the stock has liquidity.” That strategy was echoed by Meredith Johnson: “If there is embedded gain in the private company options, I typically recommend timing the option with a liquidity event (tender offer, etc.).”

2. Expect RSUs In A Later-Stage Private Company

As the private company matures and moves toward an IPO or acquisition, equity grants tend to shift toward restricted stock units (RSUs). You don’t exercise RSUs, unlike stock options. Once the RSU vesting conditions have been met, the shares are delivered to you.

While RSUs in public companies typically have just one vesting requirement (e.g. length of employment from time of grant), RSUs in private companies have “double-trigger” vesting. In other words, two conditions rather than just one must be met before the RSUs vest and the underlying shares are delivered to you. “Usually time is the first trigger, and an event such as an IPO or a company acquisition is the second and final trigger,” explained Meredith Johnson.

Crucially, you cannot control the timing of taxation with RSUs, as you can with stock option exercises. This raises a myriad of tax-planning issues, leading to the next topic.

3. Need A Plan For The Taxes On Equity Comp

When you receive stock in a private company, whether by option exercise or RSU vesting, the IRS and the SEC don’t care that you can’t sell the shares to pay the taxes owed. The same tax rules apply to illiquid private company stock as to freely tradeable public company stock. Therefore, before a stock option exercise or RSU vesting date, you need a way to pay the taxes that you may owe.

With incentive stock options (ISOs), when you exercise and then hold the shares you need to consider the alternative minimum tax (AMT). Plus, while no withholding applies with ISOs, even when you can sell some of the shares, that doesn’t mean you may not owe taxes! With nonqualified stock options (NQSOs), you have withholding and taxable compensation income for the spread at exercise, plus Social Security and Medicare taxes (FICA). With double-trigger RSUs, you will face compensation income when all the vested shares are delivered in one batch at the specified time after the second trigger, and then also the FICA taxes when the IPO occurs.

Depending on your tax bracket, the flat federal withholding rate on stock compensation may not be enough to cover the total tax you really owe on the value of the shares you receive. (The rate is 22% for yearly supplemental wage income up to $1 million and 37% for amounts over that.) In this case, you need to think about paying quarterly estimated taxes, making adjustments in your salary withholding, or at least plan to pay extra taxes (and potential penalties and interest) with your tax return for the year.

All of the webinar panelists emphasized that not considering the tax impacts is an especially big mistake with private company stock comp. As Devin Blackburn put it: “lack of planning for the dreaded ‘liquidity crush’—you’re wealthy on paper but have a persisting cash deficit.” You need to think about “how to pay tax without liquidity,” Kristin McKenna reiterated.

4. Actions Before And After The IPO Lockup

Some companies, such as Airbnb, Robinhood, and Snowflake, have allowed employees to sell a small percentage of shares at the time of the IPO and/or shares later before the expiration of the lockup. However, in general, you may not be able to sell any shares for up to six months after the IPO date (and often longer with SPACs).

Plus, if you’re a company executive or key employee who often knows material nonpublic information, you may also be subject to frequent blackout periods. That is when the company prohibits you from selling stock and thus potentially committing insider trading. That creates the need to consider the use of Rule 10b5-1 trading plans.

This is another planning area where mistakes can easily occur. “Understand the attributes of all your grants, share holdings, the lockup period, and any blackout periods,” explained Devin Blackburn. She also emphasized the need to “model various scenarios that reflect multiple price targets to manage expectations and emotions.” For example, with unexercised ISOs, when about six months from the IPO, evaluate exercising and holding pre-IPO. Although this may trigger the AMT, after the lockup ends you can then sell the stock, with all the sales proceeds over the exercise price getting taxed as long-term capital gain.

This is the time to tie everything together about your grants and stock holdings. “Calendar the IPO, lockup, sales windows, and tax payments so that you can better coordinate sufficient liquidity to meet your tax obligations,” added Meredith Johnson. “Understand the immediate tax impact of an IPO (double-trigger RSUs) and whether there is an opportunity to opt in to alternative tax withholding. Review vesting schedules, early-exercise provisions, and consequences of separation from service.” She suggests a goals-based planning model that considers appropriate cash needs to determine a client’s sales strategy.

Kristin McKenna recommended that you “use the calendar year to your advantage.” This can help you decide whether it’s time to take profits and risk off the table, such as selling before year-end, which also avoids any AMT on ISOs exercised early in the year. She also urges her clients to get organized with separate bank account for taxes and cash to exercise, while tracking the lockups’ end and any special milestones, such as those related to an acquisition vesting or payout.

5. Lessons Learned From The Recent Big Wave Of IPOs, M&A, And Startup Financing

There has been a “sheer explosion of IPOs” over the past year, noted Devin Blackburn. “They are up more than 650% compared to a year ago.” Like many of their colleagues, the advisors on the webinar panel have been thoroughly battle-tested by guiding clients from the startup stage through the hectic climax of an IPO or acquisition, and then in the newly acquired wealth beyond. “Never assume that someone with a tidal wave of wealth has an adequate team, wealth plan, or estate-planning documents,” added Devin. “Founders, employees, and early investors need guidance.”

“Client education and communication are particularly important for clients who are unaccustomed to working with professional advisors,” observed Meredith Johnson. “Have the uncomfortable discussion about market risk—founders in particular see their stock in a rosy light.”

“Recognize that things can change quickly,” warned Kristin McKenna. “The market for IPOs and M&A can change rapidly, and stocks don’t just go up.” She advises her clients to “focus on what you can control.” Controllable factors she emphasizes include portfolio diversification to manage the risks of concentration in your company’s stock. They also include carefully watching “lifestyle inflation,” i.e. the growth of spending with sudden new wealth.

Further Resources

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. In addition to what’s covered in this article, the advisors addressed numerous advanced topics, such as estate planning, SPAC acquisitions as way to go public, and company-sponsored liquidity sale programs (e.g. tender offers) for later-stage private companies. The sections Pre-IPO and M&A at myStockOptions also cover a range of topics on the financial and tax planning for equity comp in private companies.

myStockOptions Webinar Channel

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know: Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Stock Options & RSUs: 5 Costly Mistakes To Avoid

Stock compensation is complex: make no mistake about it. However, that's easier said than done. It's actually all too easy to make costly mistakes with grants of stock options or restricted stock/RSUs, and the related taxation.

In two myStockOptions “advanced bootcamp” webinars this summer, leading experts in stock options and RSUs discussed equity comp blunders to avoid, among many other topics (Stock Option Exercise Strategies and Restricted Stock & RSU Financial Planning). This article covers five common mistakes as explained by these webinar panelists.

Mistake No. 1: Not Understanding Your Grant Or How It Works

This point may seem obvious, but you’d be surprised. Employees sometimes tell their financial advisors they have “stock options” but upon inspection of the plan documents it turns out they have another type of equity comp. So, first of all, confirm which type of equity grant you have.

A related mistake is simply failing to read all the stock plan documents and not fully understanding the terms of the grant. Study up on them. “Grant info needs to be organized, saved, and updated to provide ongoing guidance,” suggests Bill Dillhoefer, the CEO of Net Worth Strategies, the company behind the StockOpter equity compensation analysis applications for financial advisors.

Crucially, understand that stock options have a set period during which they can be exercised after vesting. When the option term ends, unexercised stock options expire and are irrecoverable. Understand the timeframe of your stock options and steps you must follow so that you’re not caught in a scramble to exercise on the final day before expiration. You do not want to let valuable in-the-money stock options expire.

RSUs bring some different planning factors. “Roughly how much will each vested amount be worth, pre- and after-tax?” asks Meg Bartelt of Flow Financial Planning. As an advisor who works with clients at pre-IPO and newly public companies, she also considers the special traits of RSU grants made by private companies. With her clients, she evaluates whether simply working at the company for a specified length of time after the grant is enough for the shares to vest or whether the stock plan requires a second vesting trigger involving a liquidity event (i.e. IPO or acquisition by a public company).

Mistake No. 2: Not Understanding The Taxes Or Letting Taxes Drive Decisions

You need to understand the taxation of your grants before you do anything with them. The tax treatment is crucial for both avoiding IRS problems and making the most of your gains. At the same time, the financial advisors all caution, understanding the taxation doesn’t mean taxes should be the principal driver of decisions.

“While taxes are key factors, it’s dangerous to base decisions principally on tax aspects and neglect coordination with goals and investment risk,” warns David Marsh, a Financial Planning Case Manager at Ameriprise.

In other words, “the tax tail should not wag the option dog,” says Megan Gorman of Chequers Financial Management. However, she acknowledges, “to build wealth, you have to deal with tax consequences.” So how do you get the balance right?

Model tax scenarios for your stock options and be prepared, Megan advises. For example, she points out that you should “be prepared for your company’s tax withholding to not be sufficient to cover your tax bill.” The IRS default flat withholding rate of 22% for supplemental wage income, such as the spread at option exercise or restricted stock unit (RSU) vesting, is often lower than your actual income-tax rate, she observes.

While the withholding rate jumps to 37% for supplemental wage income in excess of $1 million during the calendar year, employees between those extremes still need to pay the taxes not covered by the 22% default rate. The shortfall can be paid in quarterly estimated taxes based on the amount owed, among other methods.

Stock options aren’t the only equity awards with tricky taxes. Mistakes with the taxation of RSUs can also be very costly. “The worst-case scenario with RSUs, in my opinion, is that you lose money on them,” says Meg Bartelt. “And that’s a possibility if you do not sell enough RSUs immediately to cover your full tax bill.” The concern? The stock price could suddenly fall after vesting. “The bottom line is that if the stock price drops enough after the initial withholding of 22% before you sell more shares to pay your taxes, then the shares you still have can be worth less than the taxes you still owe.”

“Get ahead of the game by preparing a projected tax return to see the impact of vesting RSUs on your tax return,” advises Daniel Zajac, co-founder of Zajac Group. “Consider ways to defer other income and/or increase deductions to reduce the spike in your taxable income,” he adds. “For example, increase 401(k) contributions, participate in a nonqualified deferred compensation plan, make bigger charitable donations, or separately increase salary withholding.”

Lastly, watch your tax bracket. Stock compensation can push your income for the year into a higher bracket, leading to more taxes—something that careful timing of option exercises and RSU vestings can avoid. “The total picture of your grants is really important,” says Daniel Zajac. “I’ve seen clients create cash by exercising and selling nonqualified stock options when they’ve just had RSUs vest. That could needlessly push them into a higher tax bracket.”

Mistake No. 3: Forfeiting Your Grant In Job Termination

If you leave your company, the vesting of your stock options stops and the term usually ends early, requiring you to exercise the options soon after your departure to prevent forfeiture. These rules and timeframes can vary according to the reason you left work (e.g. job change, disability, death, retirement).

Chief among the option terms to know are the vesting provisions and what would happen upon job termination, which usually triggers a very short window for option exercise before the grant term expires. “It’s crucial to clarify equity awards’ terms for vesting and at separation of service,” says David Marsh of Ameriprise. “Realize they may not all be the same.”

As for restricted stock units, job termination stops the vesting of RSUs. So if you have a big vesting date coming up, you may want to stick around for it before any planned job change or retirement.

Other types of job terminations and life events may affect vesting differently. “How do leave of absence, disability, death, acquisition of your company, etc. affect the vesting schedule?” is something Chloé Moore, founder of Financial Staples, wants her clients to understand and communicate.

David Marsh lamented that many optionholders neglect to designate a beneficiary for vested stock options in case of death. “This is usually allowed in the plan, but often employees are unaware of that.” Also be sure that beneficiaries and executors of your estate know the option exercise deadlines.

Mistake No. 4: Not Having A Strategic Plan For The Shares

When you exercise stock options or when your RSUs vest, a big mistake is not having a plan ready to go for your newly acquired shares.

Overconcentration in company stock is a major danger employees face with shares they get from equity awards. Loyalty to your company’s stock can work against you if too much of your wealth is tied up in the stock and the price then drops. “It’s amazing to me how many times clients who understand they have a lot of company stock lose track of how concentrated they are and how movements in the stock price and new grants affect that concentration,” says David Marsh. “That’s a particular blind spot,” he warns.

Indeed, it would be hard to find a financial advisor who doesn’t extoll the virtues of diversification. “Investments that are diversified—your money is invested a little bit in a lot of different stocks or bonds—perform better, on average, than investments that are concentrated in one stock,” points out Meg Bartelt.

She often advises clients with just-vested RSU shares to sell all the stock. “Let’s say your RSUs are worth $100,000 when they vest. If I gave you $100,000 in cash income instead, would you go out and use that money to buy your company stock? If your answer is no, then that is literally the same, financially, as selling all your RSU shares.”

In her view, “you’re better off selling them all and using the money immediately for some current need (such as a down payment on a house) or other financial opportunity (such as paying off debt), or investing the money in a broadly diversified, low-cost portfolio.”

Chloé Moore has helped many clients strategize for RSU vesting. In one example that she presented during her webinar segment, her approach included:

• Allocated monthly savings, cash bonuses, and sign-on bonus to short-term savings goals.
• Kept 25% of shares that vested after the one-year anniversary (about 30% of the portfolio and a smaller percentage as the portfolio grew).
• Set aside reserves to pay the tax bill (worked with a CPA to estimate each year’s tax liability).
• Sold remaining shares as they vested and split the proceeds between student loans and savings goals, then eventually a diversified taxable account.

Daniel Zajac often suggests that his clients establish a sell schedule. “One strategy that may balance the decision to immediately retain 100% of the shares or sell 100% is to implement a plan that sells a certain number or percentage of shares over a set period. Setting a sell schedule allows you to intentionally reduce your company stock according to a formula. That removes some of the emotional decision-making from the process. You don’t need to guess what the stock price will do next, or decide you will sell when the price reaches X per share, but change your plans once the price does hit that point. You then risk the price going back down before you do sell.”

Mistake No. 5: Getting Bad Advice On Financial And Tax Planning

Stock compensation is a complex employee benefit. “Complex benefits require us to move slowly and think through issues,” says Megan Gorman. She implores employees with equity comp to obtain guidance from a qualified financial advisor and/or tax expert, and to avoid relying on tips from co-workers. Bill Dillhoefer echoed this sentiment, observing that applying advice from “water-cooler” chats with co-workers can lead to mistakes.

Everyone’s individual circumstances differ. Identifying strategies that work for you is yet another good reason to consult a financial planner. “Strategies are incredibly personal,” agrees Megan. “For your own unique situation, you may need to do very different things than your colleagues.”

Further Resources

On myStockOptions.com, the online educational resource with content and tools devoted to all things equity comp, employees and their financial advisors can prepare for stock option exercises and RSU vesting. For more on mistake prevention, see the following articles:

• How To Avoid The Most Common Stock Option Mistakes by wealth advisor Beth Walker
• How To Avoid Mistakes And Create Wealth With Your Stock Options by CFP Paul Palazzo

In addition, all of the financial advisors quoted in this article have discussed planning strategies in detail during webinars that are available on demand at the myStockOptions Webinar Channel.

 

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WEBINAR: Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

• Sept. 22, 2pm–3:40pm ET, 11am–12:40pm PT
• 2.0 CE credits for CFP, CPWA/CIMA, CEP, and EA

Initial public offerings (IPOs) are booming as fast-growing private companies go public. Important wealth-building and tax-minimizing decisions are faced by employees and executives at private companies who have stock options, restricted stock, restricted stock units (RSUs), or founder's stock.

In 100 minutes, this webinar covers the fundamentals of private company stock grants and related strategies for financial and tax planning that can help advisors serve these clients effectively, build wealth, and prevent expensive mistakes. The webinar features three leading financial advisors presenting practical guidance and real-world case studies. Their insights and expertise apply to clients at both startups and later-stage private companies, from the time of grant until the company goes public or is acquired.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

So Your Company Granted You RSUs. Now What? 3 Planning Tips From Top Financial Advisors

Getting an RSU grant is a reason to celebrate. But now comes the tricky part: financial and tax planning.

Restricted stock and RSUs are awards of company shares subject to a vesting schedule, which can be based on length of time employed after the grant date and/or on meeting specified performance goals. Once the grant vests you own the shares outright, at least in a public company. You can hold, sell, donate, or gift the shares as you wish (though you always need to avoid insider trading by not selling when you know important nonpublic information about the company).

However, financial planning with restricted stock and RSUs can be deceptively complex for a type of equity award that is supposed to be foolproof. Plus, you have the taxes to understand. Key questions to include on your planning checklist:

• What documents have the important grant details?
• How will withholding be handled at vesting?
• Should you hold or sell the shares?
• If you sell, how many shares should you sell, and what should you do with the proceeds?

Below we present three key planning topics recommended by financial advisors (all CFP® professionals) who have extensive experience in working for clients with restricted stock, RSUs, stock options, and ESPPs. For more on these planning topics with RSUs in particular, see articles at myStockOptions.com written by two of these advisors (Sell Or Hold RSU Shares At Vesting? 3 Approaches To Consider and Financial Planning With Restricted Stock Units: 3 Key Questions). In addition, all three of the advisors were featured presenters in a popular recent myStockOptions webinar on these topics: Restricted Stock & RSU Financial Planning: Advanced Bootcamp, now available on demand.

1. Understand Your Grant And Its Documents

This point may seem obvious, but you’d be surprised. We hear from financial advisors whose clients tell them they have “stock options” but upon inspection of the plan documents it turns out they have another type of equity comp. So, first of all, confirm which type of equity grant you have: restricted stock or RSUs, separate from any stock options or an employee stock purchase plan.

While restricted stock and RSUs are conceptually similar and close siblings, they have important differences that can matter for your financial planning (see an FAQ on the website myStockOptions.com that outlines the differences).

You want to review your actual stock plan, the grant agreement itself, communications materials your company provided, and any third-party website where you can view your grant and some of the details (e.g. website of broker or transfer agent). Two core facts to know about your grant from this review:

• Vesting schedule: how many shares vest and on what dates?
• What are tax-withholding choices?

You have many other potential factors to understand. “Roughly how much will each vested amount be worth, pre- and after-tax?” asks Meg Bartelt of Flow Financial Planning (Bellingham, WA). As someone who works with clients at pre-IPO and newly public companies, she also considers the traits of RSU grants made by private companies. Is simply working at the company for a specified length of time after the grant enough for the shares to vest, or is there a second trigger involving a liquidity event (i.e. IPO or acquisition by a public company)?

Then you need to know the impacts of job events, life events, and M&A on each grant, points out Chloé Moore of Financial Staples (Atlanta, GA). “How do leave of absence, disability, death, etc. affect the vesting schedule?” is something she considers for each of her clients. Daniel Zajac of Zajac Group (Exton, PA) concurs, adding: “What if the client leaves near retirement or is seeking another job?”

2. Know The Tax Impact

Watch out for taxes, emphasize all of the financial planners. Taxation can be tricky with restricted stock and RSUs.

Section 83(b) Election For Restricted Stock

With restricted stock, the usual time of taxation is vesting. However, within 30 days of the grant date you can make what’s called a Section 83(b) election to be taxed on the value of the shares at grant instead of at vesting (election not available for RSUs). If you’re confident the stock price will significantly rise between grant and vesting, this election to pay taxes on the lower value at grant can be a good bet, and it starts your capital gains holding period early. However, figuring out whether that is a good bet is complex and risky.

Tax-Withholding Issues

Then you face the issue of under-withheld taxes. According to the IRS rules for supplemental wage income, such as income from the vesting of restricted stock or RSUs, your company must withhold tax at a flat rate of 22%. (The rate jumps to 37% for income amounts in excess of $1 million during the calendar year.)

Here’s where it gets complicated. The rate you pay in your income-tax bracket is likely to be higher than the tax-withholding amount for your grant—especially after your income spikes with the vesting of your shares. Most people with just-vested restricted stock or RSUs need to pay extra taxes to make up the shortfall, whether via quarterly estimated tax payments or their tax return for the year. Therefore, unless you have extra cash lying around for your tax bill, you need to plan how many shares you need to sell to cover the taxes.

Mistakes here can be very costly. “The worst-case scenario with RSUs, in my opinion, is that you lose money on them,” says Meg Bartelt. “And that’s a possibility if you do not sell enough RSUs immediately to pay your full tax bill.”

The concern? The stock price could suddenly fall. “The bottom line is that if the stock price drops enough after the initial withholding of 22% before you sell more shares to pay your taxes, then the shares you still have can be worth less than the taxes you still owe.”

“Get ahead of the game by preparing a projected tax return to see the impact of vesting RSUs on your tax return,” advises Daniel Zajac. “Consider ways to defer other income and/or increase deductions to reduce the spike in your taxable income,” he adds. “For example, increase 401(k) contributions, participate in a nonqualified deferred compensation plan, make bigger charitable donations, or separately increase salary withholding.”

3. Have A Strategic Plan For The Shares After Vesting

Chloé Moore of Financial Staples in Atlanta has helped many clients meet their financial goals with tailor-made strategies for RSU shares. In one example that she explained to us, her approach included:

• Allocated monthly savings, cash bonuses, and sign-on bonus to short-term savings goals.
• Kept 25% of shares that vested after the one-year anniversary (about 30% of the portfolio and a smaller percentage as the portfolio grew).
• Set aside reserves to pay the tax bill (worked with a CPA to estimate each year’s tax liability).
• Sold remaining shares as they vested and split the proceeds between student loans and savings goals, then eventually a diversified taxable account.

This is just one example of an approach when shares vest. Everyone’s individual circumstances differ. Identifying strategies that work for you is one good reason to consult a financial planner.

Concentration Risk: Don’t Keep All Your Eggs In One Basket

An important part of financial planning for just-vested shares is understanding the risks of holding them and the need for diversification. After the vesting, you could have substantial amounts of your personal wealth tied up in just one stock. We’ve all seen how quickly a stock price can tank. If you are, for example, subject to trading restrictions by your company during a blackout period, you may not be able to immediately sell shares to avert losses. With a falling stock price, all you could do in that case is watch the value plummet.

“Investments that are diversified—your money is invested a little bit in a lot of different stocks or bonds—perform better, on average, than investments that are concentrated in one stock,” points out Meg Bartelt. “Diversification is said to be ‘the only free lunch in investing.’ Keeping your company stock is anti-diversification.”

Meg often generally advises clients with just-vested RSU shares to sell all the stock. “Let’s say your RSUs are worth $100,000 when they vest. If I gave you $100,000 in cash income instead, would you go out and use that money to buy your company stock? If your answer is no, then that is literally the same, financially, as selling all your RSU shares.”

In her view, “you’re better off selling them all and using the money immediately for some current need (such as a down payment on a house) or other financial opportunity (such as paying off debt), or investing the money in a broadly diversified, low-cost portfolio.”

This is just one type of strategy. “There’s an almost infinite spectrum of decisions you could make here,” observes Meg. Holding some shares can often be more acceptable to clients, she explains.

The most important point, in her view, is diversifying and thus reducing the risks that arise from concentration of wealth in just one vulnerable stock. “Selling at least some shares is progress toward a portfolio whose risk-adjusted return is optimized.”

More Strategies To Reduce Concentration Risk

“One strategy that may balance the decision to immediately retain 100% of the shares or sell 100% is to implement a plan that sells a certain number or percentage of shares over a set period,” says Daniel Zajac.

“Setting a sell schedule allows you to intentionally reduce your company stock according to a formula,” he explains. “That removes some of the emotional decision-making from the process. You don’t need to guess what the stock price will do next, or decide you will sell when the price reaches X per share, but change your plans once the price does hit that point. You then risk the price going back down before you do sell.”

For clients who are loyal to their company stock and feel reluctant to “dump” it, a compromise approach can be highly beneficial, Meg suggests. “I find this cognitive flexibility comes in handy when I’m working with clients whose net worth is tied up heavily in their company stock. In my profession, there’s a rule of thumb that no more than 5% of your investment portfolio should be in a single stock. Often I work with clients who have 20%, 50%, 90% of their liquid net worth (i.e. cash and investment accounts) in their company stock.”

For many people in this position, selling all the way down to 5% is often “just too big a shock to the system,” Meg has learned. “But I find most people are fine going from 90% to 70%. Or 50% to 40%. And you know what? That’s progress.”

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WEBINAR: Stock Option Exercise Strategies: Advanced Bootcamp

• June 24, 2pm–3:40pm ET, 11am–12:40pm PT
• 2.0 CE credits for CFP, CIMA, CPWA, and CEP

Employees with stock option grants, whether NQSOs or ISOs, face important wealth-building and tax-minimizing decisions about when to exercise their stock options. Our upcoming webinar Stock Option Exercise Strategies: Advanced Bootcamp will clearly explain the variety of stock option exercise strategies to both build wealth and prevent expensive mistakes. This webinar is part of our advanced series building on our flagship webinar Stock Compensation Bootcamp For Financial Advisors.

Registration is now open for this lively educational event. In 100 minutes, it will feature insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for stock options in both public and private companies.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

Restricted Stock & RSUs: Top 10 Questions To Ask To Make The Most Of Your Grant

From Apple, Amazon, Microsoft, or Tesla to new IPO companies, grants of restricted stock or restricted stock units (RSUs) are now more common than grants of stock options at public companies. Whether you consult a financial advisor or do your own tax and financial planning, you need to understand some core issues with these grants to build wealth and prevent costly mistakes.

From my experience with the stock plan participants and financial planners who use myStockOptions.com, answering the questions in the checklist below is a good way to start making the most of restricted stock/RSU grants.

1. Do I have a grant of restricted stock or a grant of restricted stock units? What are the key differences?

2. Is formal acceptance of the grant required? What happens if I don't accept the grant before vesting?

3. What is the vesting schedule?

4. Is vesting based on duration of employment or on performance goals?

5. What would happen to the vesting of my grant if I were to leave or lose my job, die, become disabled, or retire?

6. When the shares vest, what account will they appear in?

7. Does the company offer a choice for the tax withholding, or does it hold back shares to pay the taxes?

8. With RSUs, can I defer the delivery of the shares at vesting?

9. If my company pays dividends to shareholders, will I get dividends on my restricted stock? If so, when? What if I have a grant of RSUs instead?

10. What would happen to my restricted stock in a corporate acquisition or merger?

If you don't know the answers to some of these questions, look at the stock grant agreement, the stock plan, and any employment agreement. You may want to double-check those documents in any case just to confirm the facts and detect any inconsistencies. When the answers in the documents are unclear or raise new questions, ask your company’s stock plan administrator or the appropriate contact in the HR department.

Tax Treatment In A Public Company

In addition, you should understand the key aspects of the standard tax treatment:

• Your taxable income is the market value of the stock when the restrictions lapse (or at grant with an 83(b) election for restricted stock), minus any amount paid for the shares.
• You have compensation income that is subject to ordinary income tax, Social Security, Medicare, and any state and local tax.
• The income is subject to mandatory supplemental wage withholding, which for US income taxes is a flat rate.
• The amounts of taxable income and the taxes withheld are included in the corresponding boxes of the your Form W-2.
• The capital gains holding period starts the day after vesting/share delivery (or at grant with an 83(b) election for restricted stock). You have tax return reporting on Form 8949 and Schedule D for the stock sale even if you flip the shares immediately at vesting.

Private And Pre-IPO Companies

With early-exercise stock options in a private company, you receive restricted stock at exercise (not RSUs) that follows the same vesting as the original stock option grant. These same rules above apply. However, the Section 83(b) election needs to be within 30 days of exercise, with the taxable income being the spread at exercise.

Some larger pre-IPO companies also grant RSUs that have double-trigger vesting. The first vesting condition is met when you work at the company for the required period. The second condition, which then vests the shares, is when a liquidity event occurs for your company, such as an IPO or acquisition.

You want to carefully check your stock plan documents to see how soon after the liquidity event the second vesting trigger occurs, as this is when you’ll have a big income hit, and whether the company has the flexibility to change it (e.g. from the end of the lockup to the IPO date). You want to add this to your RSU question list when you work at a private company. Also ask whether the company’s RSU grant qualifies for the five-year tax deferral election in the new tax code Section 83(i).

Quizzes To Test Your Knowledge Of These Stock Grants

You can your knowledge of restricted stock units and restricted stock with two fun, free interactive quizzes on myStockOptions.com:

• Restricted Stock Units (RSUs)
• Restricted Stock, RSUs, Performance Shares

Restricted Stock, Restricted Stock Units, And Restricted Securities: How To Tell Them Apart And Avoid Confusion

Restricted stock and restricted stock units (RSUs) are now the most popular type of equity compensation. RSUs in particular are the most frequently granted equity awards in public companies. Restricted stock/RSUs may be granted instead of or in combination with stock options, which continue to be a major type of equity award but have declined somewhat over the past decade.

However, we continue to see companies, employees, and financial advisors inaccurately call RSUs "restricted stock" or even "restricted securities." That lax terminology can be problematic and confusing. Those three things are not the same—and the differences matter. As a lawsuit by current and former Uber employees shows, it is important to know what type of stock grant you have and its tax treatment. In this article we explain the important differences between restricted stock, RSUs, and restricted securities.

Unidentical Twins

Restricted stock, along with its nearly identical twin restricted stock units (RSUs), is a direct grant of company stock, as opposed to an option to purchase stock (as in stock options). The stock is "restricted" because it is subject to a vesting schedule, which can be based on time worked at the company after grant and/or on specified performance goals.

Restricted stock and RSUs used to be granted only to key employees and executives or as a replacement stock grant when you were leaving behind valuable stock options at another company. For a long time, stock options were the grant of choice for rank-and-file employees and managers.

However, stock options have become somewhat tarnished by changes in their accounting, concerns about shareholder dilution, option-backdating scandals, and the vast number of underwater options employees were stuck with from past economic downturns. As a result, many companies now grant restricted stock and RSUs more broadly to employees and managers, either in place of stock options or in combination with them.

Both restricted stock and RSUs are considered “full value” grants. This means that you receive the entire value and ownership of each share when it vests.

Example: You received a grant of restricted stock for 1,000 shares. At vesting the stock price is $15. You now have company stock valued at $15,000.

The table below shows key differences between restricted stock and restricted stock units, including their taxation.

	Restricted stock	RSUs
Time of share issue	Grant (held in escrow)	Vesting or delivery
Voting rights?	Yes	Not until after shares are delivered to you
83(b) election available?	Yes	No
Social Security and Medicare taxes	At vesting	At vesting
Income tax (in the United States*)	At vesting	At share delivery
Deferral available?	No	Yes, with a proper 409A election
Dividend rights?	Yes	No, but company plan may provide dividend equivalents

* For the tax treatment of restricted stock and RSUs in other countries, see the Global Tax Guide at myStockOptions.

Explaining The Differences

The principal traits of restricted stock include the following:

• At grant, restrictions on sale and the substantial risk of forfeiture exist until you meet vesting goals of employment length or performance targets.
• Normally, the grant vests in increments over several years (graded vesting); but it can instead vest all at once (cliff vesting).
• During the restricted period (i.e. the vesting period), dividends are usually paid, and grant-holders have voting rights, like shareholders.
• Under Section 83(b) of the tax code, you can elect to be taxed on the value at grant rather than on the value at vesting—a tax flexibility that is not available with RSUs. This election allows you to pay tax on the lower value at grant, and not at vesting when you’re confident the stock price will be higher, and also start the capital gains holding period earlier. To make the election, you need to file it with the IRS within 30 days of the grant.
• Some private companies grant early-exercise stock options that are immediately exercisable into restricted stock with its own vesting schedule.

Restricted stock units have many similarities, including that both represent compensation equal to the value of a share of stock. But important differences exist:

• With RSUs, the stock itself is not issued or outstanding until the actual release of the shares at vesting. Before then, RSUs are essentially a bookkeeping entry—technically an unfunded promise to issue a specific number of shares (or a cash payment) at a future time once vesting conditions have been satisfied. For various reasons, RSUs are now more commonly used than restricted stock, including that they are easier for your company to administer. Stock-settled RSUs are much more common than cash-settled RSUs.
• Under most RSU plans, such as RSU grants made by Amazon, Microsoft, Apple, and Intel, the delivery of shares occurs at vesting. These plans are similar in concept to standard time-vested restricted stock.
• A small number of companies have RSU plans with a tax-deferral feature that lets you select a later date for share delivery, which also delays the income tax. Alternatively, the company can specify a date for deferred delivery (e.g. retirement).
• Larger private companies tend to grant RSUs that require an additional vesting condition of a liquidity event, such as its acquisition or IPO.
• Holders of unvested RSUs have no shareholder voting rights and, depending on the plan details, may or may not receive dividend equivalents. Ask your company if you’re not certain about whether and when it pays dividend equivalents on its RSUs.

Restricted Securities

Restricted securities are shares that are not registered with the SEC, such as shares in a private company. They have a formal definition under the US securities laws. When you work for a startup or fast-growing private company that hopes to get acquired or go public, the shares you receive from your restricted stock or RSU grants are also restricted securities. The stock investors buy in a private company are also restricted securities.

The "restrictions" in restricted securities, such as the special resale holding periods under the SEC rules, come from the securities laws, whereas the vesting restrictions in restricted stock come from your company. Restricted securities are resold under SEC Rule 144 or another SEC registration exemption, until registered with the SEC in an IPO.

When the shares are owned by a senior executive or director (i.e. an affiliate), they are also called control stock, even when acquired from an open-market purchase or from stock compensation. Technically, the phrase "restricted shares" also refers to restricted securities, though some companies confusingly use “restricted shares” to mean restricted stock grants.

When you acquire restricted securities, the stock certificate will have a legend stamp indicating that the shares are restricted and therefore cannot be resold unless they are registered with the SEC or unless an exemption applies. This legend will need to be removed before you can resell the stock.

Ready For A Quiz?

Test your knowledge of restricted stock units and restricted stock with two free interactive quizzes on myStockOptions:

• Restricted Stock Units (RSUs)
• Restricted Stock, RSUs, Performance Shares

Performance Share Grants: Equity Approaches At Apple And Uber Help Illustrate 5 Key Features

At most public companies in the United States, when you reach the executive ranks you are more likely to receive grants of performance shares than stock options. While stock options may still appear in the mix of grants you get, with the potential to create substantial wealth, major surveys show that other types of stock awards have overtaken options in popularity.

Popular With Both Established Public Companies And IPO Companies

At Apple, executives receive restricted stock unit (RSU) grants that increase or decrease in target size according to how the company’s total shareholder return (TSR) ranks relative to the TSR of other companies in the S&P 500. An illustration of this is in the terms of a grant to Apple’s COO that eventually paid out handsomely (detailed in the footnotes in the Form 4 SEC filing). If Apple ranked at the 85th percentile, 200% of the target number of RSUs would vest. For performance at the 55th percentile, 100% of the target number of RSUs would vest, while performance at the 25th percentile would cause 25% of the target number of RSUs to vest. No RSUs would vest if Apple's performance ranked below the 25th percentile.

These types of grants are not limited to long-established public companies. The Form S-1 registration statement that Uber filed with the SEC for its IPO states the following (page 236):

"As we transition to become a publicly traded company, we expect that the mix of service- and performance-based components of our equity compensation will shift. To help us achieve our objectives of rewarding our executive officers for their experience and performance and motivating them to achieve our long-term strategic goals following this offering, we anticipate that performance-based vesting conditions applicable to RSUs granted to our executive officers will become more prevalent."

Five Key Features Of Performance Share Grants

These types of performance-based equity awards can be highly customized to match a company’s compensation approach and goals. While the terminology and features vary by company, these grants most often pay out in shares rather than cash and tend to have at least five common features, detailed below.

1. Performance-based awards are often made as grants of restricted stock or restricted stock units (RSUs) that vest or pay out only if specified company performance goals have been reached by the end of the measurement period cycle. For regular stock options and RSUs, time-based vesting is the most common type of vesting (e.g. 25% of the grant vests yearly). In performance-based awards, vesting is both time-based (“service-based” in Uber’s SEC filing) and also dependent on the attainment of company or individual goals.

In stock awards to senior executive that deliver huge compensation, such as those listed in New York Times and Wall Street Journal reports about the highest-paid CEOs, the vesting of the grants is based almost entirely on performance criteria. That is the main way in which these stock grants for senior executives can be made acceptable to big institutional investors and the proxy advisory firms. By contrast, these types of vesting criteria are not common for stock options, which have their own built-in performance goal of requiring a stock price increase from grant to have any real value. The performance criteria in the huge and complex stock option grants to Elon Musk at Tesla are a rare exception.

2. A wide range of goals or metrics is possible, tied in some way to your company’s stock price and/or internal financial measures. The most popular are TSR (typically relative to the TSR of an index or competitors, as in the Apple example above); return on capital; earnings per share; and revenue. Companies often use multiple targets for the stock award. For example, 50% of the grant’s payout may be based on one goal, the remaining 50% on another.

3. The performance period for measuring whether the goal is reached is often three years. While a stock option grant may have a ten-year term and an RSU grant a four- or five-year vesting period, performance share grants with a three-year term are still considered a form of long-term incentive (LTI) compensation. Often you have multiple outstanding performance share grants with three-year cycles. This makes it complicated to track them all and follow how you’re doing against the performance criteria.

For tax purposes, you are likely to receive the shares only after the board certifies whether the performance goals were reached when the period ended (usually a cumulative calculation and not based on yearly measurements). The award is then paid out in the year after the cycle ends. It’s in that year when you’ll have taxable income from the grant. Some companies have started adding a post-payout, time-based holding period, at least for the shares net of taxes owed.

4. Grants tend to have sliding scales or multipliers that can give you a bigger payout. For meeting a goal, you may get the target award size (e.g. 10,000 shares). Falling below the goal could result in no payout or a minimum amount. Should your company exceed the goal by 100%, you may get a maximum payout of 200% of the target (e.g. 20,000 shares). The grants at Apple described above illustrate this potential upside.

5. Leaving your company for another job during the vesting period will end your rights to any payment, regardless of how well your company is doing during the performance cycle and your role in contributing to it. Retirement, death, or disability under your plan may allow for pro rata distribution at the end of the performance period, depending on how long you worked for your company during the cycle (or a full payout, if your grant’s terms permit that). Should your company get acquired, technically triggering a “change in control” as defined by your grant agreement, you may still get the full payout under the terms for an M&A transaction.

Further Resources On Performance Shares

To learn more about these types of equity awards, see the section Restricted Stock: Performance Shares at myStockOptions.com, including an FAQ on the top 10 questions to ask about your performance share grant.

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Register For Our National Financial-Planning Conference

Our special one-day conference is coming up soon: Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In a fresh lineup of talks and panel sessions, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

Continuing education credits, including 8.0 CFP® credits and 7.0 CEP credits, are available. You can register and make hotel reservations now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

Amazon Ends RSU Grants To Hourly Employees, But The Benefits Of Broad-Based Employee Stock Grants Live On Elsewhere

When Amazon announced a pay increase for warehouse workers and other hourly employees to at least $15 per hour, we were surprised to hear that Amazon also eliminated bonuses and restricted stock units (RSUs) for those same workers. Amazon's move was widely reported by news outlets, such as Bloomberg. (We note, however, that some of the articles, along with Senator Bernie Sanders, mistakenly referred to these RSU grants as stock options.)

Amazon apparently cut bonuses and RSUs to redirect expenses for the increase in hourly wages and calculates that these workers will still see an overall pay rise. It also stated that as the pay these workers receive is "no longer incentive-based, the compensation will be more immediate and predictable."

Benefits Of Broad-Based Stock Grants

So what should we make of Amazon's decision? In past blog commentaries, we have reported favorably on stock grants made by various prominent companies, including Apple and Starbucks, to their broad employee populations. An article on similar topics in The Wall Street Journal rightly observes that broad-based equity can be a "powerful recipe for an engaged workforce," mentioning that modest restricted stock grants at this employee level "is good for the bottom line because it generates loyalty."

We are, therefore, very curious about the internal calculation, evaluation, and (hopefully) debate that Amazon went through before its decision to eliminate the RSU grants and cash incentive bonuses. When your company's stock price has skyrocketed and is expected to remain strong, as at Amazon, that is often when employees want equity the most. That is when stock compensation can play its most powerful role in recruitment, retention, and motivation, whether in the executive suite or in the warehouses. Plus, it is often the lower-level employees who most appreciate how equity pay increases their wealth and helps them with financial planning and funding for important life events.

Not surprisingly, some hourly employees at Amazon were disappointed by the company's elimination of bonuses and RSU grants, as discussed by articles in The New York Times and the magazine Money. The NYT gives details on both the variable compensation plan, which provided for the monthly attendance and productivity cash bonuses, and on the RSU grants. The NYT article reports that some employees "were saddened to lose the sense of ownership that the stock compensation provided." That is a message which we at myStockOptions.com have always emphasized as a major reason for having stock compensation.

Sharing Financial Success With Front-Line Workers

After Gardner Denver Holdings granted $100 million in shares to 6,000 employees, including hourly workers and staff in customer service and sales, a Bloomberg news report quoted chairperson Pete Stavros about the reasons. He explained that employee ownership at manufacturers can be effective at improving operations in which the company needs to do a "a million things a little better." He observes that "it's the workers on the front lines that often know where the inefficiencies are to fix and they share in the success through their equity stake." His statement succinctly expresses why broad-based grants, particularly to those in front line and hourly positions, are often a smart compensation approach. 

For data from studies exploring the benefits of equity comp to companies (and employees) and the various reasons why they make them, see an FAQ at myStockOptions.com.

Top Ten Facts To Know About Your Restricted Stock And RSU Grants

Our recent blog article on the top 10 questions to ask about performance share grants received a great response. Performance share awards use restricted stock or RSUs (restricted stock units) as the underlying form of grant, with vesting based on the achievement of specified performance goals instead of time.

To complement that piece, and to help myStockOptions users and licensing clients make the most of restricted stock/RSU awards, we have compiled the top 10 questions that you need to ask about restricted stock and RSUs to fully understand your grants. The links in the questions below go to the related content at myStockOptions.com.

1. Do I have a grant of restricted stock or a grant of restricted stock units? What are the key differences?

2. Is formal acceptance of the grant required? What happens if I don't accept the grant before vesting?

3. What is the vesting schedule?

4. Is vesting based on duration of employment or on performance goals?

5. What would happen to the vesting of my grant if I were to leave or lose my job, die, become disabled, or retire?

6. When the shares vest, what account will they appear in?

7. How does the tax withholding work?

8. With RSUs, can I defer the delivery of the shares at vesting?

9. If my company pays dividends to shareholders, will I get dividends on my restricted stock? If so, when? What if I have a grant of RSUs instead?

10. What would happen to my restricted stock in a corporate acquisition or merger?

In addition, you should understand the tax treatment, the reporting on your Form W-2 (whether for restricted stock or RSUs), and the related tax return reporting. Our Tax Center covers all tax topics involving stock compensation.

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Visit myStockOptions This Week At NASPP 2018: Exhibit Hall And Financial-Planning Session

We are excited about the NASPP's annual conference, being held this week in San Diego (Sept. 25–28). As always, myStockOptions.com has its cheerful booth in the exhibit hall, where our editor-in-chief Bruce Brumberg is available as an NASPP-designated expert to answer questions on stock plan education/communications and equity comp taxation. If you are attending the conference, please stop by our exhibit booth for a chat and pick up a myStockOptions.com souvenir!

In addition, Bruce is presenting at an NASPP Power Session on Sept. 28 (Friday morning) called Financial Planning Strategies for Employees. Joining Bruce in this interactive session will be James Fucigna, a leading Wealth Management Director at Morgan Stanley.

Restricted Stock/RSUs And Tax Returns: Eight Costly Mistakes To Avoid

"April is the cruellest month," wrote the poet T.S. Eliot. It certainly can feel that way if you have not yet filed your federal tax return as the IRS deadline in April approaches—and especially so if you are daunted by the complexity of the tax rules that apply to stock compensation.

Special issues on tax returns arise with restricted stock and restricted stock units (RSUs). Mistakes can be painful not only because they can cause you to overpay your taxes but also because they may draw unwanted attention from IRS auditors. (Ouch, right?) Below is a brief review of the necessary tax documents and forms, followed by eight big tax-return mistakes to avoid with restricted stock and RSUs.

Restricted Stock And RSUs: Crucial Tax-Return Documents And Forms

When restricted stock vests or RSU shares are delivered, the full value of the shares at vesting is reported on your Form W-2. If you are not an employee, this income appears on Form 1099-MISC. Employees include this value on tax returns as part of salary/compensation income on Line 7 of Form 1040. It's the same for restricted stock units, as long as all the shares are delivered at vesting (see an FAQ on RSUs with deferred delivery of shares).

For restricted stock that vests over a number of years (e.g. 25% per year), you realize and report W-2 income with each vesting slice, not when the full grant is vested. One exception: if you made a Section 83(b) election (unavailable with RSUs) to pay taxes on the full value of the restricted stock at grant, you do not then report income again for the value of the shares at vesting.

If you sold stock during the tax year, you must file with your tax return IRS Form 8949 along with Schedule D, using what your brokerage firm reports to you on IRS Form 1099-B. In most situations, the cost-basis information on Form 1099-B for stock sales from equity compensation cannot be used "as is" for accurate tax-return reporting. If you do not understand the rules, you will overpay taxes (see a related FAQ).

Eight Big Mistakes To Avoid With Restricted Stock And RSUs

Most of the potential mishaps, presented below, concern the reporting of stock sales on Form 8949 and Schedule D.

1. After selling any or all of the shares at vesting, you still need to report this sale on Form 8949 and Schedule D even though you are also including it as part of your compensation income. You may even have some small gains or losses, depending on how your company calculates the stock value at vesting and any commissions and fees for the stock sale. (For an annotated example of how to report the restricted stock sale on these forms, see the related FAQ.)

Alert: If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, the IRS would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice for the taxes due.

2. Even though you never purchased the stock, your tax basis for reporting the stock sale in column (e) on Form 8949 is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return). If you made a Section 83(b) election (not available for RSUs), the basis amount is the value at grant on your W-2. Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. For the cost basis, Box 1e of your 1099-B may be blank (or show $0) only because brokers are not required to report the cost basis for noncovered securities, such as restricted stock and RSUs (some brokers may report the basis on the 1099-B that you receive but not on what they report to the IRS). Otherwise, you will pay double tax on the value of the shares at vesting. See a related FAQ with annotated diagrams of Form 8949 and Schedule D that show how you report stock sales after you have held the stock at vesting.

3. You will also mistakenly double-report income if you do not realize that your W-2 income in Box 1 already includes stock compensation income. Wrongly thinking it was left out may prompt you to erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2017 form). Doing that would cause the income to be taxed twice as ordinary income. You use Line 21 only when your company mistakenly omits the income received at vesting from your W-2 or 1099-MISC.

4. If you surrendered or sold shares at vesting to pay the withholding tax (see our FAQ on withholding for restricted stock), you want to report any actual market sale of shares on your Form 8949. For a share surrender in which you receive only the net after-tax shares in your account, speak with your own tax advisor about the need to report this (see our related FAQ on the issue). Alternatively, if you sold only some of the shares (e.g. for taxes), you don't want to report on your Form 8949 the cost basis for all the shares vested. This would result in a much larger tax basis and a capital loss for these shares sold.

Alert: When you later sell the remaining shares in your grant, remember to exclude from your Form 8949 at that time the shares used earlier to withhold taxes (i.e. do not use the full number of granted shares). Otherwise you'll report more shares than you sold, as explained in a related FAQ.

To read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ about this topic on myStockOptions.com. Also, see other FAQs for the biggest tax-return blunders to avoid with stock options, employee stock purchase plans, or stock appreciation rights.

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Register For Our Financial-Planning Conference

We are preparing to hold our first-ever conference, a one-day event: Financial Planning for Public Company Executives & Directors (Monday, June 18, 2018). Taking place in the Boston area, this is a must-attend national conference for financial, tax, and legal advisors working with or wanting to counsel executives, directors, and high-net-worth employees. We have a wonderful group of expert speakers and a comprehensive agenda of sessions on various stock-related and financial-planning topics:

• trends of importance to advisors
• tax, estate, and SEC-related planning challenges
• methods for attracting and advising high-net-worth clients
• case studies and other examples of successful planning strategies

CE credits will be available! Register at the conference website or contact us for more information (617-734-1979, [email protected]). Special discount price for early-bird registration through April 1.

News And Views On RSUs: Broad-Based Grants, Bankruptcy Court Case, And Survey

Grants of restricted stock units (RSUs) continue to become commonplace, whether alongside or instead of stock options, as a way to reward valuable employees and foster a company culture of employee ownership. In this blog commentary, we present three interesting stories involving RSUs that have recently come to our attention.

Unusual Broad-Based RSU Grant In Heavy Industry

An attention-grabbing example of a broad-based RSU plan is presented by an article in Bloomberg Businessweek. When Gardner Denver Holdings went public, backed by private equity firm KKR, it granted $100 million in shares to 6,000 employees who were not already part of its equity program. These grant recipients included hourly workers and staff in customer service and sales, with meaningful grants of equity equal to about 40% of their annual salaries, according to the article. Employees, including managers, now own about 10% of the company.

This move toward broad employee ownership is unusual in the company's manufacturing sector (industrial equipment and related services). As the Businessweek article points out, broad-based equity is far more associated with the white-collar high-tech industry than with blue-collar manufacturing, an observation also made by a blog commentary from the National Association of Stock Plan Professionals. Pete Stavros, head of KKR's industrial team and the chairman of Gardner Denver, believes employee ownership at manufacturers can be very effective at improving operations when the company needs to do a "a million things a little better." As employees everywhere know all too well, it's often the workers on the front lines who best know where inefficiencies need to be fixed. Through their equity stake in Gardner Denver, the company's employees now derive a direct financial benefit from striving for operational efficiency.

RSUs In Lehman Bankruptcy Case

While restricted stock or RSUs still have value even when a company's stock price is lower than the grant price (stock options would be underwater), any type of equity grant can be worthless if a company goes bankrupt. That is one of the many lessons of litigation stemming from the bankruptcy of Lehman Brothers back in 2008.

In the case In Re: Lehman Brothers Holdings Inc. (2017), the 2nd Circuit Court of Appeals confirmed that in a corporate bankruptcy RSU-holders do not have any preference over general creditors in the distribution of remaining corporate cash. Previously, the original decision in the lawsuit, made by the United States Bankruptcy Court, was upheld by the US District Court for Southern New York in 2016. It reasoned that RSUs fit the legal definition of "equity securities" and that employees with RSUs should therefore be treated like other holders of equity in Lehman Brothers. The contention that employees with noncompete agreements resulting from a merger should have priority over general creditors was similarly rejected. This outcome follows the reasoning set forth in a 2006 decision involving employee stock options in the bankruptcy of Enron. Some additional information on the Lehman case and the court's reasoning are provided by Courthouse News Service and Bloomberg BNA.

Long-Running Survey Charts Rise Of RSUs, Decline Of Restricted Stock

An article in Ayco Company's Compensation & Benefits Digest presents results of an informal survey that Ayco made of its 325 client companies in the United States which grant restricted stock or RSUs (Restricted Stock And Restricted Stock Utilization Today, pages 1–5). Ayco's long-running series of surveys in this area has found a significant rise in the use of RSUs between 2007 and 2017, along with a drop in the use of restricted stock during the same period. In 2007, 41% of the surveyed companies granted restricted stock, while only 13% did so in 2017. By contrast, in 2017 nearly three quarters (72%) of the surveyed companies are granting RSUs, while only 37% did so in 2007. An FAQ on myStockOptions.com discusses why companies may prefer RSUs over restricted stock. Another FAQ at myStockOptions.com has a range of survey data on trends in restricted stock, RSUs, and other equity awards.

Survey Reveals An Intricate Mix Of Restricted Stock, Performance Shares, And Stock Options In LTI Vehicles

If you're as into stock plans and equity comp as we are, you're probably also really into survey data and statistics. That makes this blog entry a good one for both of us.

While the rise of restricted stock/RSUs and performance shares, along with the relative decline of stock options, has been well documented for many years, it is always interesting to get a nuanced picture of how all three grant types are used in tandem now. As we predicted a while ago, stock options have not disappeared but are often being granted to supplement full-value awards such as restricted stock and performance shares, especially in long-term incentives (LTIs) designed for executives.

That's where the following new survey comes in. For its study 2017 Trends And Developments In Executive Compensation, the research and consulting firm Meridian Compensation Partners surveyed 118 companies to uncover the current usage of equity comp in LTI vehicles for executives. Meridian found that for their senior executives, 90% of the surveyed companies use two or three types of long-term grants (though for grants to employees at lower levels, the use of just one type is more common).

Meridian discovered the following about the prevalence and weight of restricted stock, performance shares, and stock options in LTI vehicles for executives.

Type of award	% of companies	Performance awards (dollar weight in total LTI value)	Stock options (dollar weight in total LTI value)	Restricted stock (dollar weight in total LTI value)
Performance awards, stock options, and restricted stock	22%	44%	27%	29%
Performance awards and restricted stock	55%	58%	—	42%
Performance awards and stock options	11%	51%	49%	—
Stock options and restricted stock	2%	—	28%	72%
Performance awards only	8%	100%	—	—
Restricted stock only	0%	—	—	100%
Stock options only	2%	—	100%	—
Overall (averages) in 2017	100%	56%	13%	31%
Overall (averages) in 2016	100%	55%	16%	29%

An FAQ on myStockOptions.com presents numerous other surveys which show that many companies use a variety of grants in tandem, including restricted stock/RSUs and performance shares.