If your company is headed toward public offering, whether through IPO, SPAC, or direct listing, it’s likely you’re wondering how you can make the most of your equity compensation. While this can take several different forms, this article will specifically examine the most common type of equity compensation: restricted stock units (RSUs). RSUs are often offered to employees and executives after a company has reached a stable valuation as well as after it goes public. To make the most of your RSUs, follow these five tips.
1. Start with why.
Simon Sinek aimed this simple sentence at business leaders, but its message is applicable to many areas of life. It’s always handy to have more money, but when you know why you want to grow your wealth, you can begin to aim your financial strategies toward your specific goals. Start by making a list of both short- and long-term goals. For example, you might want to travel more, start a new company, or sit on boards. Your long-term goals may include retirement to your favorite beach community, philanthropic endeavors, or leaving a legacy to your children/grandchildren.
When you begin with your unique goals, your financial advisor can work with you to develop an individualized, detailed plan to get you there. Understanding when you want to make major purchases allows your advisor to develop a sales strategy for your company stock that fits your vision for the future.
Your financial advisor should be experienced and trustworthy, but the ultimate consideration should be what guides your advisor's decisions. We discuss why in How Do You Know If Your Financial Advisor Is Working for You?
2. Understand your equity compensation documents.
What type(s) of compensation are you receiving?
Because equity compensation comes in various forms and companies often provide more than one type, understanding exactly what you own can be challenging. Take the time to carefully review your equity compensation documents with your investment advisor. Determine whether you have RSUs, restricted stock, incentive stock options, nonqualified stock options, and/or an employee stock purchase plan. Each type of compensation is subject to its own set of rules, so it’s important to get the advice of an expert who can help you understand critical details like holding periods and taxability.
How do your RSUs vest?
When you have RSUs, another crucial detail to understand is your vesting terms. RSUs are somewhat more complicated than other forms of compensation because they may be subject to either single-trigger or double-trigger vesting. Single-trigger RSUs vest over time; for example, a certain number of shares may vest after one year with more vesting quarterly for a specified period. Double-trigger RSUs require two events before they are fully vested, typically time in service (as with single-trigger RSUs) and a liquidity event such as IPO or SPAC acquisition. When your RSUs vest, the fair market value of your shares is taxable to you as ordinary income.
3. Plan to pay your tax bill.
Withholding
Understanding how your RSUs vest is essential to tax planning. At vesting, employers are required to withhold 22% of the shares’ current market value (or 37% for those with annual income above $1 million). However, many taxpayers receiving RSUs are subject to higher tax rates than these flat withholding amounts. This can leave you responsible for quarterly estimated payments or an additional lump-sum payment at tax time.
Reduced Shares
Some companies help employees plan for this burden by allowing them to reduce the number of shares they receive by the amount of their additional tax burden. For example, if your shares are worth $50 each and vesting results in a $1,000,000 tax bill, you might be able to elect to receive 200 fewer shares, using these to cover taxes on the rest.
Sale of Shares
If your company doesn’t provide this perk and your company has already gone public, you may be able to sell some of your shares to cover your tax liability. Be aware, however, that any increase in market value between the time your shares vest and the time you sell them will be taxable as a capital gain. If you hold your shares less than one year before selling them, this tax accrues at the higher short-term rate. Additionally, even after IPO, your ability to sell can be restricted by lockup and blackout periods. Your investment planner can help you develop a 10b5-1 plan to provide more flexibility in your sales strategy.
Reduce Taxable Income
If you’re facing a large tax bill due to RSU vesting, you may be able to mitigate it by deferring income or increasing your deductions for the current tax year. For example, you may be able to participate in a nonqualified deferred compensation plan, which allows you to defer receiving compensation (and incurring its associated taxability) until a specified later time. You could increase deductions by making larger contributions to your qualified retirement plan, health savings account, or favorite charitable vehicles such as a donor-advised fund (DAF) or family foundation. You can also spread the burden over the year by increasing the salary withholding from your paycheck.
4. Align your portfolio with your larger plan.
Receiving equity compensation often results in a portfolio that is heavily invested in a single company. While this is often unavoidable in the beginning, it’s important to develop a plan to reallocate your investments over time. Work with your advisor to develop a sales and reinvestment plan to build a balanced portfolio that will support your long-term goals.
One question that executives and employees frequently pose during the portfolio planning process is related to RSUs: Should I leave my restricted stock units as they are, or is now the right time to sell? The answer depends on many factors, and we explore this in our blog: Are RSUs Stagnating Your Portfolio Potential?
5. Work with a full-service fiduciary wealth manager.
Making the most of equity compensation such as RSUs is a complex undertaking. You need an advisor who will listen to your individual goals and create a comprehensive financial, investment, and tax strategy to help you meet them. This is why comprehensive wealth management is important. Experienced wealth managers understand more than just investment, taxes, or financial planning; they know how these tasks must work together to make the most of your opportunities.
WRP works with our partner, WRP Tax, to provide comprehensive investment, financial, and tax planning with a focus on executives and employees of companies who are in the IPO process. For more insights and tips, subscribe to our blog.