Optimizing your equity awards

How to Make the Most of Your Restricted Stock Units (RSUs) and Incentive Stock Options (ISOs):

These days, rising professionals at growing companies are doing great — often making as much or more as doctors and lawyers. One caveat, they aren’t getting paid entirely in cash. Instead, they are often compensated with equity awards to supplement their salary. Exercising your options at the right time can be highly remunerative — but how can you avoid the consequences of exercising at the wrong time?

Heron Wealth is equity compensation central. Whether you work for a large, publicly traded company or a startup on the verge of going public, Heron Wealth can help you make informed equity compensation choices. Our fee-only financial planners will work closely with you to develop a plan which will maximize your income, minimize your taxes, and avoid all potential penalties.

Background

Many people who receive compensation in the form of Restricted Stock Units (RSUs) or Incentive Stock Options (ISOs) understand that the acronyms represent a lot of potential income. True, but people often don’t appreciate how hard it is to handle the acronyms the right way — or the consequences that can result from handling them the wrong way. 

For example: Did you know that, if you hold onto RSU shares for at least a year before selling them, the appreciation income will be taxed at the long-term capital gains tax rate, not the ordinary income tax rate? In concrete terms, that means incurring a tax bill as low as 15% versus 37% (depending on your tax bracket). In some cases, you can pay as much as 22% less in federal taxes. This can mean savings of tens of thousands — if not hundreds of thousands — of dollars. That said, it’s often wise to sell your RSUs right away — we can help you better understand why. If you do sell, should you hold onto the cash, fund a Mega Backdoor Roth, or something else?

Let’s pivot to ISOs for a second. RSUs, by comparison, are simple; ISOs often require a good deal more planning and analysis to utilize properly. ISOs differ from RSUs in that, while RSUs are effectively valued as units of company stock, ISOs are valued according to difference. That is: ISOs’ value depends on whether the company’s share price has risen by the vesting date — and, if it has, by how much. If you expect the company to rise in value substantially, a carefully designed plan to time the exercise of your stock options — and delay selling the shares more than a year later — is often worth doing. However, doing so is not without risk.

We won’t get too into the weeds of it now — it is a weedy topic — but, suffice to say, generating a good ISO plan involves a lot of analysis. It depends on your liquidity, your financial goals, your tax bracket, your family circumstances, and much more. Recognizing that savings depends on having the right plan in place.

It’s understandable that, whether you’re dealing with RSUs or ISOs, you wouldn’t be able to tackle this all on your own. Optimal planning takes training, for which career-focused individuals generally don’t have time. That’s where we come in. Not only do we have the time, we actually like it.

Chris Jennings, a Certified Financial Planner™ professional, is our main equity compensation strategist. Chris loves to educate his clients, and is one of those rare souls who enjoys getting into the weeds of equity compensation nuances. If you have equity compensation and would like to be kept up to date, you can schedule a call with Chris here. For a deep-dive into this topic, you can check out his article, “RSUs vs. ISOs: Equity Compensation 101”

By developing a thorough understanding of your assets, your debts, your tax bracket, your personal objectives, and the overriding regulations, Chris and the team will be able to illustrate the implications of various exercising schedules, helping you decide on one that works for you.

If you would like to discuss your equity awards and see a demo of our software, schedule a meeting. On the West Coast? No problem, evening hours are available.

If you have a time-sensitive issue or would prefer to start with a brief email, click here to send a message to Chris.