The Three Things to Consider with Every Company Stock Grant Your Receive

Morgan Ranstrom |

Many corporate and tech employees accumulate a great deal of employer stock via Restricted Stock Units (RSU), Incentive Stock Options (ISO), Non-Qualified Stock Options (NSO) and Employer Stock Purchase Plans (ESPP). In this episode of Coffee, Sweaters, and Finance, Morgan Ranstrom, CFA, CFP® and Bill Mulvahill, CFP®, CPA, fee-only financial planners at Trailhead Planners, list the three things to consider with every stock grant an employee receives. Including: 

  • How to think about the other side of the coin (the Risk!) of company stock...
  • Is my company stock going to impact my tax return?
  • What key investment principle do I need to consider with my company stock?


Morgan:                            00:13                   Hey, Bill.

Bill:                                     00:13                   Hey.

Morgan:                            00:15                   Morgan.

Bill:                                     00:16                   Bill.

Morgan:                            00:21                   Welcome to another episode of coffee-

Bill:                                     00:23                   Sweaters.

Morgan:                            00:24                   And finance.

Bill:                                     00:24                   Finance.

Morgan:                            00:26                   Bill, I was kind of thinking of some other topics that we could talk about on this-

Bill:                                     00:28                   Can't wait to hear it.

Morgan:                            00:29                   Yeah, within the realm of employer-based stock or concentrated stock positions. But what are the three things you should think about with every employer-based stock grant that you receive? Whether that's an ISO, an RSU, or a ESPP.

Bill:                                     00:48                   So, these are going to be general concepts, but the first one is risk. You have to think about your risk. What are the risks associated with this stock position, and how does that risk impact the rest of your financial situation? First and foremost. And there is unique risk to concentrated stock because it's a larger position. You know, we've talked about this before. It can go to zero, it could get cut in half. How does that impact things? Different types of employer stock, whether it's stock options, restricted stock, they're going to have different risk-return characteristics. Stock options, you can make more money with stock options, but they can also go to zero faster. You have to understand that. I've had clients in the past where their net worth grows spectacularly over a one year period because they have a bunch of stock options, and the value of the stock options just shot up. But don't get ahead of yourself because if the stock price goes down your net worth could fall right back down as well.

Morgan:                            01:47                   The leverage can work for and against you in that scenario. I always think of: Remember your fable. Don't count your chickens before they hatch. A bird in the hand is worth two in the bush. I don't know any more fables [inaudible 00:01:59]. Are those even fables?

Bill:                                     02:00                   I think they are.

Morgan:                            02:01                   There's a word for but I don't know what it is. We just talk about finance, guys.

Bill:                                     02:04                   Yes. Yes. All right, so: two.

Morgan:                            02:07                   Two. Number two. You got it?

Bill:                                     02:07                   Taxes.

Morgan:                            02:08                   Ooh. That's a good one.

Bill:                                     02:09                   Yup. Taxes, they're-

Morgan:                            02:10                   A recurring theme within this realm.

Bill:                                     02:12                   Returning theme, yes. Yep. So understand the risks. Understand the tax component. So when are you going to be taxed? What rate are you going to be taxed at? How much are you going to be taxed? So understand that so that you can prepare to pay the taxes. And just from a cashflow standpoint, however it's going to work. And then understand, too, if there's planning opportunities. There's ways to reduce it. Better to think ahead a year in advance, two years in advance, months in advance, as opposed to just waiting until you make the decisions and then deal with your tax.

Morgan:                            02:50                   And you can't just look at the stock within a vacuum. This is going to impact every aspect of your financial life. Your partner's, your spouse's finances will also impact or be impacted by your choices if you are employer-based comp. So, yeah, absolutely. Think about taxes. Recurring theme within this realm.

Morgan:                            03:08                   I've got number three, if that's all right.

Bill:                                     03:09                   Let's hear it.

Morgan:                            03:10                   Have a diversification plan.

Bill:                                     03:10                   Yep.

Morgan:                            03:13                   Another recurring theme within this realm. You have to plan in the future for how are you going to solidify your net worth, in that sense. Do you risk your net worth as you go forward? If you don't have that diversification plan, you don't want to wish that you had.

Bill:                                     03:34                   Yup. Yes.

Morgan:                            03:35                   Right?

Bill:                                     03:37                   And it's going to be unique to every person. It's going to be unique to the type of stock that you have and the company itself. But it's going to depend on what form of equity you have. Stock options, restricted stock, employer stock purchase plan, shares, so forth. So it's going to depend on that. It's going to depend on your personal cash flow [inaudible 00:03:53] situation. It's going to depend on how concentrated you are in this. Where you are in terms of your life cycle. Are you in your early thirties? Are you nearing retirement? The more you're nearing retirement and the larger the position is, the more you really need to absolutely diversify. There's nothing more that could blow up a retirement plan then if a huge chunk of your retirement savings-

Morgan:                            04:16                   Yeah. Imagine you get to 55, 60, 65 and you've been counting on this one asset, because we do a lot of mental accounting. We as humans, I should say, we do a lot of mental accounting, and you don't want... You're at retirement or a year in and all of a sudden that stock plummets. That gets back to that general electric example that we kept talking about a lot.

Morgan:                            04:35                   The other situations I think of a lot is, you know, this is within mental accounting as well, is that you might say, "Hey, this block of stock is for my son's or my daughter's college education. And we're just going to hold onto it for the next 10, 15, 20 years. When they're in school, we'll use this." Well, it's probably just better to sell a little-

Bill:                                     04:55                   Sell and diversify.

Morgan:                            04:55                   -and put it into a 529 or something like that. Yeah, yeah.

Bill:                                     04:58                   There's more tax efficient ways and there's less risky ways. And if the goal is to pay for your children's education, why take the downside risk? It's just not necessary.

Morgan:                            05:09                   You know that cost is coming, so let's do appropriate planning for it.

Bill:                                     05:12                   Yep. Absolutely.

Morgan:                            05:13                   Yeah. So know your risks, understand the taxes, and then have a diversification plan.

Bill:                                     05:17                   Love it.

Morgan:                            05:18                   Awesome.

Bill:                                     05:18                   All right.

Morgan:                            05:19                   Thanks y'all. Have a great day.

Bill:                                     05:19                   See you.