How Equity Compensation Fits into Your Financial Plan
For many professionals, equity compensation — meaning shares of company stock given as part of your pay — has become a major way to build wealth over a career. Common forms include restricted stock units (RSUs, which are shares given to you after a waiting period), stock options (the right to buy shares at a set price), and restricted stock awards (RSAs).
However, this type of pay can be complicated to manage. Understanding how equity fits into your overall financial plan, and how to handle the risks that come with it, is key to making the most of it — whether you work for a small startup or a large public company. Reach out to TrueVine Family Wealth in Naples, FL to discuss your personal finances and develop a strategic plan to help you work towards your financial goals.
Equity compensation has grown more common over time. Companies like it because it saves cash while encouraging employees to stay and perform well. For employees, it offers a chance to share in the company’s success. In the 1990s, stock options became popular at startups, but many became worthless when the dot-com bubble burst. After that, companies — especially in tech — shifted toward RSUs, which hold some value even if the stock price drops. A recent survey by the National Association of Stock Plan Professionals (NASPP) and Deloitte showed that technology and life science companies grant RSUs to nearly 60% of their workforce.1
How To Value Your Equity Compensation
One challenge is figuring out what your equity is actually worth. Some people treat unvested shares as worthless, while others at fast-growing private companies may overvalue theirs based on the latest funding round. A balanced approach recognizes that equity has real value, but with some uncertainty. For shares in a public company, use the current market price. For shares in a private company, the most recent valuation is a useful guide, but may need to be adjusted downward because those shares are harder to sell and their value is less certain.
Managing Concentration Risk
A key concern with equity compensation is “concentration risk” — having too much of your wealth tied to one company’s stock. This is especially risky because your paycheck and your investments are both dependent on the same employer’s success. Here are some strategies that can help:
• Staged selling means committing to sell a set portion of your vested shares on a regular schedule. This removes emotion from the decision and slowly reduces your concentration over time. Rule 10b5-1 trading plans can help employees who face trading restrictions by automating sales in a way that complies with insider trading rules.
• Tax planning is important when selling a large amount of stock, since it can trigger a significant tax bill. Strategies like donating appreciated shares to a donor-advised fund (a charitable giving account) can provide a tax deduction and help reduce your exposure to a single stock.
• Keeping a cash reserve — a “liquidity sleeve” of cash and short-term bonds — ensures you have funds available for taxes or expenses without being forced to sell shares at the wrong time.
• Diversifying other accounts, such as your 401(k) or IRA, away from your employer’s industry can help balance out your overall exposure. For example, a tech employee with significant RSUs might want to hold fewer tech stocks in their retirement account. TrueVine Family Wealth in Naples, Florida is here to help you understand and navigate your family’s investments.
For very large concentrated positions, more advanced strategies may be available, though these typically require professional guidance given their complexity.
The goal is to build a comprehensive financial plan that makes the most of your equity compensation while keeping your overall portfolio aligned with your long-term goals.
References
1. https://www.naspp.com/blog/5-trends-in-full-value-awards
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