What is Equity Compensation?

Kolleen Schocke |

There are a lot of advantages to working for a tech company in the Bay Area; pioneering the frontier of technology, a plethora of in-office perks, a location unparalleled in views and weather, and very importantly, the opportunity to earn equity compensation in the company you work for.

You may be asking, “Equity Compensation – what’s that?”

Simply put, it’s a form of non-cash pay offered to employees, often tech professionals, in addition to a regular salary. This benefit offers the opportunity to potentially build wealth while participating in your company’s success.

Equity compensation may be more commonly referred to as “company stock” but that’s a broad term that covers many types of shares, each with its own qualities and tax implications. It’s possible to build wealth by capitalizing on your equity compensation but to do so, you should understand the value of equity compensation as part of your benefits, the investment issues for each type of equity compensation offered to you, and the tax rules that apply.

Equity Compensation largely falls under the following three categories:

  1. Employee Stock Purchase Plan
  2. Restricted Stock Units and
  3. Incentive Stock Options

The C-J Advisory blog will cover each of these types of equity compensation at length later this month. Whatever type of equity compensation is offered to you, it’s important to understand the details of the program. Make sure you have a clear understanding of what you have. Do you know how many stocks you own? Are they vested? If not, when do they vest? When can you sell them? Are there critical action dates you need to be aware of? What is the tax implication of selling your shares?

There are a lot of moving parts to equity compensation and not only does each plan work differently, the frequency of grants and their vesting schedules are set by your employer which means that each company has its own variables to take into account.

If your employer offers multiple equity compensation plans (as many do), don’t wait until you file your taxes to understand the consequences of selling your shares. You should be familiar with the tax implications of each plan type and evaluate which particular shares in the plan can be most advantageous. Selling the wrong shares can be an expensive error, and many costly mistakes are often made as the result of overlooking the details.

While employers may explain the mechanics of a plan, most companies cannot provide guidance on selling strategies. Working with an advisor like us, that’s familiar with equity compensation is helpful to build overall wealth. Without a selling strategy that considers your tax circumstances, tolerance for risk, and especially what to do with the proceeds of the sale, you may be inadvertently extending the timeline to reach your goals. Our team helps technology professionals evaluate their equity compensation and takes a proactive approach to tax planning by working with your tax professional to make coordinated strategic choices. Contact us to learn more.

 



C-J Advisory, Inc. is an investment adviser in San Jose, CA.  C-J Advisory, Inc. is registered with the Securities and Exchange Commission (SEC).  Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.  C-J Advisory only transacts business in states in which it is properly registered or is excluded or exempted from registration.  A copy of C-J Advisory’s current written disclosure brochure filed with the SEC which discusses among other things, C-J Advisory’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.  C-J Advisory does not provide tax or legal advice. Nothing provided herein constitutes tax or legal advice. Individuals should seek the advice of their own tax or legal advisor for their specific situation. Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.