Can a Financial Advisor Help With My Tech Stock Options?

When it comes to planning out a successful strategy for your stock options as a tech employee, a financial advisor on your team can be extremely helpful.

Published Feb. 18th, 2021

Reading Time: 4 minutes

As the United States continues to shift to a more tech-centric economy, many workers are beginning exciting new careers in the tech space, and it’s quickly becoming commonplace for tech startups to offer company stock options to their employees. Employee stock options are nothing new, as companies like The Home Depot, Whole Foods Market, and Nordstrom have been offering their employees stock options for decades. Yet, there is still a lot of misinformation and confusion surrounding employment stock options and how they work. For those with stock options, understanding them thoroughly can help maximize income and lay the foundation for a financially successful future. 

Understanding Tech Employee Stock Options 

Employee stock options are a way for employees to earn shares of the company as compensation. They are agreements between the employee and employer that allow the employee to purchase company shares at a set price within a given time frame. Most stock option agreements stipulate a strike price, a vesting period, and the amount of shares you can purchase. The strike price is the set price that you can purchase shares for and is usually lower than what the actual shares are valued at. 

Vesting is the process of earning your stock option. When you agree to a stock option, you are not immediately receiving company shares. Instead, you are agreeing to the option to exercise (buy) a specific number of shares for a set price in the future. You are not able to purchase the shares until the vesting period is over. The vesting period is used as an incentive for the employee to remain with the company and continue to perform well. 

NSO vs. ISO  

The majority of stock options fall into one of two categories: Nonqualified stock options (NSOs) and Incentive stock options (ISOs). NSOs are offered to employees at all levels, while ISOs are usually reserved for upper-level employees because of the better tax treatment. NSOs are considered normal income, therefore any gains between the strike price and market price will be taxed by the IRS as ordinary income. However, with ISOs, if there are any earnings between the strike price and market price, they will not be taxed as ordinary income, as long as the holding requirements are met (2 years from the grant date and 1 year from the exercise date). It’s easy to see why ISOs are preferred by employees. 

Regardless of how you acquired company shares, either through ISOs or NSOs exercise, if you sell your shares within one year of purchasing them (exercising)  them, the earnings will be taxed as ordinary income. However, if you hold the shares for longer than one year, any earnings from selling the shares will be considered capital gains and therefore be subject to the lower capital gains tax rate. 

When deciding whether to sell or hold your shares, it is important to examine the potential taxes that your earnings will be subject to. Working closely with an experienced financial planner can help you determine your best options so that you maximize your earnings from your company shares. 

What Happens to My Stock Options if My Company Goes Public?

When a company decides to go public in an initial public offering (IPO), there aren’t any major changes to employee stock options. The main difference is that you are now able to sell your shares publicly and earn cash. But, it is important to note that when a company goes public, there is a lock-up period ranging from 90 to 180 days that prevents employees from selling their shares. Oftentimes, when a lock-up period ends, many employees will begin selling their stocks, causing the company’s stock price to fall. From time to time companies may have open windows for employees to trade during the typical six month blackout to allow them to get some liquidity and prepare for a big tax liability. Taking advantage of the right opportunity during those windows could be critical in managing your wealth and tax obligation. A financial advisor can be a major asset to help develop a plan for your stocks to account for these situations. 

When a company goes public, it can actually make it easier for the employees to determine the value of the company’s shares. Stocks that are traded publicly have a set price that is determined by the market. If a company is private, they will usually have experts periodically evaluate their value so that they can set their share prices for employee stock options. This can be less transparent, making employees hesitant to exercise shares without knowing the true market value. Contrarily, an employee will always know the true value of a publicly traded stock. 

Unvested Stock Options 

If you have unvested stock options when your company chooses to go public, they will not be affected by the IPO. In the same way, your set vesting period should not be affected either. After your vesting period is over, you will be able to purchase shares at the agreed upon strike price in the same way that you would if the company were still private. The company being public now allows you the advantage of seeing the market price of the shares and comparing it to the strike price. This insight can be extremely useful when determining the right time to exercise shares at the agreed upon strike price. 

Vested Stock Options That are Not Purchased 

If you have vested stock options that you have not exercised yet, there are a few options to consider. If you know that your company is going public in the near future, it could save you money in taxes to purchase shares before the IPO. This will be depended on if you have ISOs or NSOs, and if you believe that the share price will rise above the strike price once publicly traded. 

If your company has already gone public and you have vested stock options that you have not exercised, you should compare the market price to your strike price. If the market price is lower than your stock price, it is probably not a good idea to exercise your stock options. 

Can a Financial Advisor Help With My Tech Stock Options?

Regardless of your situation, when it comes to planning out a successful strategy for your stock options as a tech employee, a financial advisor on your team can be extremely helpful. If your company will be going public soon, it is possible that the IPO will lead to volatility. An experienced financial advisor can help you plan for any market volatility and determine the best way to maximize your income and minimize potential taxes. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Ready to Get Started?

Real financial planning should pay off today, and in 10 years' time.