What is equity compensation?
Equity compensation, also called stock-based compensation, refers to various noncash remuneration received as part of a pay package. Examples include stock options (ISO/NQSO), restricted stock units (RSUs), employee stock purchase plans (ESPPs) and more. In addition, equity compensation can be given to employees and sometimes outside service providers (contractors, advisors, directors, consultants), providing an ownership stake in the company. The amount of compensation received is typically aligned with the value of the company’s stock.
Except in rare cases where it may be negotiable, the type of equity you get is up to the company you work for. In general, larger companies grant RSUs, and startups grant stock options, and occasionally executives and very early employees get restricted stock awards.
It’s great to receive equity compensation. It’s even better if you know how to maximize that benefit. But with so many different types of equity compensation plans, it’s important to understand their differences so you can start on the right foot.
Each plan’s details and restrictions vary, so it’s essential to take the time to read through all of the fine print. This way, you can prepare for any financial and tax consequences that may impact you now and in the future. In addition, seeking a second opinion from a financial or tax advisor well versed in equity compensation can help ensure you’ve considered all relevant nuances when devising your plan of action.
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Restricted Stock Units (RSUs) are a popular form of equity compensation that, after vesting, result in an employee’s receipt of shares of company stock or a cash payout. Similar to a bonus, RSUs can positively affect cash flow but incur taxes that require planning. It is important to develop an understanding of how they fit into your overall financial plan.
This checklist helps guide our conversations when advising clients regarding their RSUs:
- Key characteristics of RSUs
- Ordinary income tax considerations at vesting
- Capital gains tax considerations at sale
- Company stock and portfolio considerations
Financial planning for millennials and young professionals. Employee benefits (RSUs, ISOs, ESPPs)