Twitter’s IPO was today. If you’re a Twitter employee, what should you do about your stock options and equity grants? (More broadly, if you have stock options in any company, what should you do?)
1. Get the Facts
Stock options can be complicated, and most employees have only a vague notion of what their options are worth today and could be worth over time. So the first step is to get the facts:
- Do you have incentive stock options (ISOs), non-quals (NSOs), or restricted stock units (RSUs)?
- What is the quantity, exercise price and vesting schedule of each option grant?
Once you’ve gathered this information, put it into our online Stock Option Tracker, and we’ll chart the value of your equity now and over time as your options vest. For a public company like Twitter, we automatically update your value using the current stock price. And there’s a “what-if” feature, that calculates your value if the price goes up or down in the future.
This first step is easy. Just sign up for Personal Capital’s free Financial Dashboard. Then click on “Link Account”, click the “MORE” button in the lower right corner, and then select a “Custom Stock Option” to enter the information about your stock options. Click here to sign up for free.
If you’re a Twitter employee, you probably have RSUs rather than stock options. If so, set the exercise price at $0.01. And you probably won’t be able to sell any shares until February 15 of next year, at the earliest.
But now is the time to take the first step and start tracking the value of your stake in the company.
The second step is to look at your Twitter equity in the context of your complete financial picture. Your Personal Capital Financial Dashboard is the easy way to do that, as well. It electronically gathers information from all your financial accounts, so you can instantly see everything you’ve got – investments, bank accounts, credit cards and loans.
If your Twitter equity represents a significant portion of your net worth – let’s say 20% or more – then you should probably diversify. It’s generally unwise to hold a concentrated position in any single stock, because of the risk of a sharp decline in price. And newly-public stocks are particularly risky. Since 1970, excluding the opening-day price bump, new IPOs have underperformed the market by an average of 6.5% per year over their first two years. You don’t want too many eggs in that basket.
In fact, you don’t want too many eggs in any basket. Diversification is the single most important objective for most investors – not just across different stocks, but across different asset classes and geographies. The Asset Allocation screen on your Personal Capital dashboard shows how well diversified your household portfolio is, including all your holdings in all your accounts.
3. Beware the Taxman
Stock options and RSUs are taxed in different ways – each with their own pitfalls.
Restricted Stock Units: The current market value of your RSUs is taxable at ordinary income tax rates upon vesting. This means that you’ll owe taxes at a high tax rate with a timing that you can’t control. Unless the company withholds for estimated taxes, you may be compelled to sell a portion of your shares just to pay the taxes.
Incentive Stock Options: The tax treatment of ISOs is potentially more favorable. There is no tax upon vesting and, except for Alternative Minimum Tax (AMT) purposes, no tax upon exercise. And if you sell your shares more than two years after the grant date and more than one year after the exercise date, the gain is taxed at long-term capital gain rates, which are lower than ordinary income rates. But if you sell too early or get caught by the AMT, you could be taxed at higher rates or pay taxes on gains that you never made.
If you have significant Twitter equity, you should consult a tax professional. And if you have a large concentrated position, a financial advisor at Personal Capital can help build a diversification plan.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.