Financial Planning

Financial Advisors for Equity-Compensated Employees

By  Brian Thorp

Disclaimer: To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers. Learn how we operate with integrity to earn your trust.

Does your employer count the potential equity you could receive in the company as a considerable percentage of your overall compensation package? If so, you fit the definition of an equity-compensated employee.

While equity compensation offers the potential for significant rewards if your company grows substantially or is acquired at an attractive valuation, you’re also subject to substantial risks that your equity could be worthless if your company is outmaneuvered by a competitor, runs out of cash to operate the business or sells to another business on unfavorable terms.

What is Equity-Based Compensation?

According to the Internal Revenue Service (IRS), the term “equity-based compensation” includes any compensation paid to an employee, director, or independent contractor that is based on the value of specified stock (generally, the stock of the employer, which may be a corporation or a partnership).

Examples of equity-based compensation include Stock Transfers, Stock Options, Stock Warrants, Restricted Stock, Restricted Stock Units, Phantom Stock Plans, Stock Appreciation Rights, and other awards whose value is based on the value of specified stock.

Are You an Equity-Compensated Employee?

As an equity-compensated employee, you have unique financial planning needs, whether you’re just starting out in your career or you’re counting down to retirement in a few years. Given the complexities of your compensation package, it makes sense to work with financial professionals who understand the ins and outs of equity compensation, especially the IRS rules governing stock options, restricted stock, and other forms of equity-based compensation.

If you’re thinking about working with a financial advisor, how can you be sure you’re hiring an advisor who truly understands your unique needs as an equity-compensated employee?

Fortunately, you have more options today than ever before to find a specialist financial advisor with the knowledge and experience to help you navigate the complexities of your compensation plan. Beyond researching financial advisors in your neighborhood, you may find the best financial advisor for you lives several states away and is easy to work with virtually, often via Zoom online meetings, for example.

So is a financial advisor who specializes in serving equity-compensated employees right for you?

Let’s learn more by getting answers from financial advisors featured on Wealthtender who offer their perspectives on the potential benefits of working with a specialist.

👩‍💼 Get to Know Financial Advisors Who Specialize in Serving Equity-Compensated Employees

This page is organized into sections to help you quickly find the information you need and get answers to your questions:

  1. Q&A with Financial Advisors Who Specialize in Serving Equity-Compensated Employees
  2. Get Answers to Your Questions About Financial Planning for Equity-Compensated Employees
  3. Browse Related Articles

Financial Advisors Specializing in Serving Equity-Compensated Employees

Get to Know:

Rebecca Conner (Austin, Texas) | ✅ TJ van Gerven (Boston, Massachusetts)

Three Questions with Rebecca Conner, CPA, CFP®

Based in Austin, Texas, Rebecca Conner regularly guides tech professionals on a path to early retirement or a work-optional lifestyle. As the founder of SeedSafe Financial, Rebecca specializes in serving equity-compensated technology workers and executives who want to grow their wealth and free up their time to feel in control of their lives.

Q: What is a common financial planning challenge unique to equity-compensated employees that you frequently encounter when working with your clients? How do you work with them to overcome this challenge?

Rebecca: We find tech professionals reach out to us based on the pain point of ‘what should I expect from my stock compensation? What should I be prepared for tax-wise?’  Taxes are such a convoluted system in the United States, so it isn’t always easy to understand what applies in a specific situation.  It is even more difficult that different types of stock and options can produce different tax implications.

For example, RSUs are taxable income at vesting, and so when clients see taxes withheld at that point, they can often believe that’s all they owe.  Unfortunately, the withholding tax rate applied at vesting is lower than their effective tax rate may be and we’ve seen this turn into $30,000 or more due on the tax return still.  We wrote an entire blog post on it – Offer letter basics: RSU taxes and how it works.

For clients with stock options, there are far more tax considerations depending on whether the options are non-qualified stock options (“NQSOs”) or incentive stock options (“ISOs”).  To find out more about the tax implications of ISOs and the alternative tax, check out our post Stock Option Plans and the Alternative Minimum Tax

We do appreciate the flexibility in stock options from a tax planning perspective :). Everything is a trade off and we walk through what that might look like in exercising over a few years (laddering stock option strategy) or if there is a plan to leave the tech company soon we will look at the trade offs in exercising, exercising/selling, and negotiating a different time horizon for stock options.  You may find out more at What to do with stock options at termination.

In the end, our goal is to clarify and streamline finances to make this big intangible thing more actionable and defined.  

Q: For equity-compensated employees who are unsure whether or not they should hire a financial advisor at the current point in their lives, what guidance can you provide to help them make a more informed and educated decision?

Rebecca: One of the first questions we ask tech professionals is ‘what is your most fulfilled life?’.  Often, the answer to this is why they come to us.  It may be that they want to be able to get out of the ‘rate race’ of tech by age 55, they want to make the most out of the opportunity of a future IPO so they can gain financial independence, or because they have a growing family and are weighing the trade-offs in giving them the best chance at life.

I believe it’s important to start with what you want out of life and what that means you want out of your finances.  Without clarity, it is difficult to take action and know what reaching out to an advisor may really do for you.  Then, once you identify that you do want that help, it is important to review the expertise you are looking for and match that with the best advisor relationship for you.

Get to Know Rebecca Conner:

View Rebecca’s profile page on Wealthtender or visit her website to learn more.

Q: How do the services you offer equity-compensated employees distinguish your firm from other advisory firms?

Rebecca: Great question!  We’ve been working with tech professionals since 2016, and we’ve seen some very unique situations many advisors do not understand.  Tender offers, M&A, upstream/downstream mergers, and IPO work are our specialties. 

Our services actually developed from what our clients asked from us over the years.  So we now do tax returns and estate planning for our ongoing clients as a special value add.  We dive deep into stock cost basis calculations to make sure our projections are on point, and the client knows exactly what they are getting in cash and investments for making the most of their financial life. 

Then, we add life planning to ensure we are really living into values and a most fulfilled life.  This marries the emotional and logical for our clients to know their finances are taking them to the next level.

Three Questions with TJ van Gerven, CFP

We asked Boston-based financial advisor TJ van Gerven to answer three questions he often hears from equity-compensated employees.

Q: I’m interested in leaving my current job for another opportunity, but I’m worried about what will happen to the equity I’ve received where I work today. What should I do?

TJ: The first thing you should do is review your vesting schedule so that you fully understand how much you may be leaving on the table. Typically, when you leave your employer, you’ll lose any unvested equity. It’s important to understand what type of equity you have available, whether it’s shares or options.

With vested options, you’ll want to review exercising before you leave your employer; otherwise, you could lose any in-the-money value. Ultimately, you’ll have to review the tradeoffs of leaving unvested equity on the table versus the benefits of the new opportunity. It’s not always about the money, but it is important to make a conscious and informed decision!

Q: My company is talking about going public in the next year and I have stock options that could be quite valuable. Should I be doing anything now to prepare?

TJ: The first thing you’ll want to do is look into your open trading windows for when you’re allowed to exercise your options. If you’re anticipating a post IPO windfall, it could be hugely beneficial to exercise your options ahead of time to get the clock ticking towards long-term capital gains (LTCG) taxation.

You’ll want to understand the out-of-pocket expense to exercise your options plus any potential for an alternative minimum tax (AMT) liability so that you can avoid a cash flow crunch.

Even more so than the tax planning for your potential windfall, it’s crucial to have a financial plan in place so that you have a vision of what you’re looking to do with the money.

Get to Know TJ van Gerven:

View TJ’s profile page on Wealthtender or visit his website to learn more.

Q: I love my company and the considerable equity I now own, but I’m worried I have all my eggs in one basket and don’t know when we’ll be able to cash out. What should I do?

TJ: This can be a tricky situation to navigate. By leaning on financial planning and understanding how on track to financial independence you are given your investing time horizon, you can start to determine if it makes sense to diversify. Remind yourself that “concentration builds wealth, and diversification preserves it.”

In particular, when it comes to stock options, you’ll want to consider the time value of the options relative to the current value. Always be mindful of your concentration risk, and work towards a percentage of your net worth that you’re comfortable with. Remind yourself, “if I’ve already won, why am I still playing”?

Slide Show: Financial Advisors for Equity Compensated Employees

🙋‍♀️ Have Questions About Financial Planning for Equity-Compensated Employees?

Reader Questions Answered

Q: My company is going to be acquired in an all stock deal. I have substantial equity (have purchased my options) but don’t know the implications. What do I need to consider? Thank you, Leslie

TJ van Gerven (September 19, 2022): Hi, Leslie. Assuming you’re going to have all of your equity cashed out via the acquisition, the first thing you will want to consider are the tax implications.

In the case of your stock options, that’ll mean reviewing the difference between your exercise price and the market value of your shares (based on the acquisition price) to determine how much taxable income you’ve generated.

Consider working with a tax professional if you feel uncomfortable approximating how much to earmark for tax time. Once you’ve determined how much to set aside for taxes, then you’ll want to consider the planning opportunities and best use of the proceeds.

Here are ideas and things to consider:

  • Are you comfortable with your overall investment strategy?
  • Do you have any high-interest debt to pay down?
  • Are you maxing your tax-deferred accounts such as 401(k), HSA, and Backdoor Roth IRA?

Assuming you have no short-term needs for cash, you’ll want to consider getting back invested in a diversified stock allocation via a taxable (brokerage) investment account.

Consider how you could use the proceeds. Do you want to take time off from work? Do you want to keep building towards financial independence?

These questions are highly personal, so as usual, it depends! 🙂

About the Author
Brian Thorp, Founder and CEO of Wealthtender profile picture

Brian Thorp

Founder and CEO, Wealthtender

Brian and his wife live in Texas, enjoying the diversity of Houston and the vibrancy of Austin.

With over 25 years in the financial services industry, Brian is applying his experience and passion at Wealthtender to help more people enjoy life with less money stress.

Connect with Brian on LinkedIn

Disclaimer: To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers. Learn how we operate with integrity to earn your trust.