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Guide to Employee Equity Compensation

Here’s the main benefit of receiving employee equity compensation: It has the potential to bolster your long-term financial goals.

Yes, potential.

You’ll be reading that word a lot throughout this article. We’ll discuss why.

Given the rise in popularity of equity as a form of employee compensation – and thus, as a potential portion of your wealth – it’s important to know the basics of popular forms of equity compensation.

The Personal Capital Guide to Employee Equity Compensation gives you an in-depth look into this form of compensation, plus how it fits into your tax strategy, overall net worth, and long-term financial plans.

Equity compensation can be complex. But with the right knowledge and a clear strategy in place, you may be able to leverage your equity compensation within a comprehensive financial plan to meet your goals even sooner.

Let’s dig in.

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What Is Employee Equity Compensation?

Employee equity compensation is a form of non-cash compensation that gives you partial ownership in your company.

Both startups and established companies offer equity compensation for myriad reasons. One of the more common purposes is allowing a company to free up cash flow by offering this alternative form of compensation. Another driver is attracting high-quality talent — and then keeping those people motivated and employed with the company.

Katie Z., a Personal Capital client, received equity compensation from a startup she helped build from the ground up. She now says her biggest financial accomplishment was when her company was acquired: “At startups, work becomes personal. It was almost like the cousins’ table at Thanksgiving; we were all in this together. The acquisition gave me a new type of asset that I needed to figure out.”

Read More: How Katie Managed the Windfall From her Company’s Acquisition

Katie is a client of Personal Capital Advisors Corporation, and she was not paid for this testimonial.

Main Types Of Equity Compensation

There are generally three types of equity compensation awarded to employees:

  1. Stock options
  2. Employee Stock Purchase Plans (ESPPs)
  3. Restricted shares

These can be further broken down.

Stock options generally can be categorized as either Incentive Stock Options (ISOs) or Nonstatutory Stock Options (NSOs), which are commonly also known as Non-Qualified Stock Options (NQOs).

Restricted shares (in the context of equity compensation) are usually structured as either Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs).

Each type of compensation has unique characteristics, so it’s important to identify your type of equity compensation so you can understand its benefits and potential challenges.

Read More: Get Your Guide & Understanding Your Options

Katie felt overwhelmed when she was finally able to access her equity. She already used the free and secure Personal Capital Dashboard to manage her finances. But when her company was acquired, she realized she needed a plan to best take advantage of her equity.

She took up the offer for an advisor’s complimentary analysis of her financial life. In that first series of consultations, Katie said she felt more at ease. “Someone sat down and really took the time to get to know where I was,” she said. “He was able to give me different ways to think about my financial life.”

What’s the Value of Employee Equity?

When considering the true value of employee equity, you are often in a speculative position.

Sure, you have the possibility of coming into a windfall like Katie. But keep in mind that you’re also placing a bet on the same company that also signs your paycheck.

The biggest risk comes if most of your net worth is tied up in your equity.

Rather than let your employer stock dominate your portfolio, part of managing your wealth is figuring out how (and when) to:

  1. Sell down some of your shares in a tax-efficient manner
  2. Build a diversified portfolio appropriate for your risk tolerance and your financial goals

It’s important to understand your awards, vesting schedule, potential tax consequences, and concentration risk within your overall allocation. The more information you’re armed with, the better you know what your equity compensation could ultimately be worth — potentially.

Next Steps for You

To get a handle on your equity, download Personal Capital’s Guide to Employee Equity Compensation. This free resource provides you with:

  • Key questions to ask when offered equity
  • Strategy on tax optimization
  • Tips on exercising

When you get the guide, you also gain access to Personal Capital’s free, award-winning financial Dashboard — the same tools that Katie used to manage her investments and plan for her big financial goals, like buying her first home.

“The only reason I felt comfortable and confident knowing that I could buy a house was because I could see my assets in one place,” she said. “I was able to see how a down payment would impact my overall financial situation.”

Get Started by Understanding Your Equity

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.

JJ Lester, CFP® is a financial advisor at Personal Capital. Prior to his work at Personal Capital, JJ served both as an estate specialist at Oppenheimer Funds and financial advisor through LPL Financial. JJ holds an M.S. in Management from The American College of Financial Services and a B.A. in Psychology from the University of Colorado, Boulder.
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