RSU Grant Issues
Do you need to review how RSUs work?
RSUs are a type of compensation granted by an employer to an employee in the form of company shares. However, the shares are “restricted” because they’re subject to a vesting schedule, which typically depends on meeting certain performance milestones or staying with the company for a certain period of time.
Do you need to confirm the conditions of vesting?
Vesting conditions for RSUs depend on the specific grant agreement. Generally, they vest over a period of time, often over 3-5 years. Some vest on a schedule (e.g., 20% each year for five years), and others cliff vest (e.g., 100% vesting after three years). Some plans may also have performance-based vesting conditions.
Does your plan allow you to defer the distribution of shares and continue to hold units until a later date, post-vesting (e.g., at retirement)?
This depends on the specific terms of your RSU grant and company policy. Some companies may allow you to defer distribution, while others will distribute shares as soon as they vest. It’s important to review your specific grant agreement or consult with your HR department for details.
Do you need to review what you will receive when your RSUs vest?
When RSUs vest, they are converted into shares of the company’s stock. You then own these shares outright and can hold them, sell them, or otherwise manage them as you see fit. However, taxes are typically due at the time of vesting based on the fair market value of the shares.
Does your company accrue/pay dividend equivalents while you hold RSUs?
Some companies pay dividend equivalents on RSUs, which are payments equal to the dividends you would have received if you had already owned the shares. These can either be paid out immediately or accrue and be paid out when the RSUs vest. Not all companies do this, so you would need to check your specific RSU agreement.
Do you need to review how the termination of your employment (voluntary or involuntary), disability, or death might affect your interests under your plan?
The treatment of RSUs upon termination of employment, disability, or death can vary significantly by company. In many cases, if you leave the company before your RSUs vest, you forfeit them. However, some companies may have provisions that allow for accelerated vesting or continued vesting under certain circumstances, such as retirement, disability, or death. Again, check your specific RSU agreement or consult with your HR department for details.
RSU Investment Issues
Do shares of your company’s stock, along with any unvested RSUs, make up a significant percentage of your investment portfolio (e.g., more than 10%)?
It is generally recommended to maintain a diversified portfolio to reduce risk. If a significant portion of your portfolio is made up of your company’s stock or unvested RSUs, you may be overly exposed to the performance of your company. If your company experiences downturns, it could significantly impact your portfolio value.
Does your company have a blackout period or trading window, or are there other limitations on your ability to sell shares?
Some companies have blackout periods during which employees cannot trade company stock. There might also be a designated trading window when employees are allowed to trade. The aim of these policies is to prevent insider trading and the misuse of confidential information. Review your company’s policy or consult your HR department for this information.
Do you need downside protection while holding your company’s shares?
Depending on your financial situation and risk tolerance, you might want to consider downside protection strategies for your shares. These strategies can help you mitigate potential losses if the company’s stock price declines. This could involve financial instruments like options or insurance products, or a hedging strategy. Consult a financial advisor to help determine the best strategy for you.
Are you considering selling company shares at a loss?
Selling shares at a loss, or “tax loss harvesting,” can sometimes be a strategic move for tax purposes, as it can offset capital gains taxes from other investments. However, this decision should be made carefully and in the context of your overall financial and tax situation. It’s generally recommended to consult with a tax professional or financial advisor to understand the potential implications.
RSU Tax Issues
Do you need to understand the tax consequences of the grant of your RSUs?
Generally, there are no immediate tax implications at the time RSUs are granted. Taxes come into play when the RSUs vest, as this is when you technically receive income.
Do you need to understand the tax consequences of the vesting of your RSUs?
When RSUs vest, they are considered taxable income. The amount of income recognized is the fair market value of the shares at the time of vesting. This income is typically subject to ordinary income tax rates.
Do you want to reduce your income tax liability in the year that your RSUs vest?
The ability to reduce your income tax liability in the year your RSUs vest is somewhat limited, as vesting RSUs are treated as compensation and subject to ordinary income taxes. However, you may be able to strategically manage when your RSUs vest to spread out the tax impact over several years, if your plan allows.
Do you need to plan for tax withholdings in the year of vesting?
Yes, tax planning is important when RSUs vest. Employers often withhold taxes at the time of vesting, similar to paycheck withholdings. Depending on your overall tax situation, you may owe additional taxes or may get a refund when you file your tax return.
Does your company offer the IRC §83(i) election to defer the recognition of income for up to five years after your RSUs vest?
Some companies may allow you to defer the recognition of income under IRC §83(i). This allows eligible employees to defer income taxes on the vested RSUs for up to 5 years. However, not all companies offer this, and there are specific requirements to qualify for this deferral.
Do you need help determining your cost basis in any shares acquired at vesting?
Your cost basis in the shares acquired from vesting RSUs is typically the fair market value of the shares on the vesting date. This is also the amount that is reported as income and subject to income taxes.
Do you need help determining your holding period for shares acquired through your RSU plan?
Your holding period for the shares starts on the vesting date. This is important for determining whether any gains from selling the shares are treated as long-term or short-term for capital gains tax purposes.
Do you need help understanding the tax consequences of the sale of shares acquired through your RSU plan?
When you sell shares acquired from vested RSUs, any increase in value over your cost basis is subject to capital gains taxes. If you held the shares for over a year before selling, it’s typically a long-term capital gain. If you sold the shares less than a year after vesting, it’s a short-term capital gain.
RSU Planning Issues
Do you need to assess your employer’s future equity value and long-term viability?
This is an important consideration for RSU holders, as the value of your RSUs depends on the future performance of the company. You may need to consider factors such as the company’s financial health, industry outlook, competitive position, and management team.
Is there a risk that your company will be acquired in the near future?
An acquisition can have a significant impact on your RSUs, possibly leading to vesting acceleration, conversion into the acquiring company’s stock, or cash-out. It’s important to understand your company’s prospects and the terms of your RSU agreement to assess potential outcomes.
Do you have future financial goals that your RSUs/shares could help to achieve?
RSUs can be a significant component of your financial plan. Whether it’s funding retirement, buying a home, or paying for education, your RSUs can contribute toward these goals. A financial advisor can help align your financial plans with your RSU vesting schedule and potential value.
Do you need to address your RSUs in your estate plan or in a pending divorce?
RSUs should be addressed in your estate plan, as they can be a significant asset. Similarly, in a divorce, RSUs may be considered part of marital property, and their division can be complex. Both scenarios require expert legal advice.
Does your plan allow you to designate a beneficiary?
RSU plans often allow you to designate a beneficiary to receive your RSUs in the event of your death. Check the terms of your RSU agreement or consult with your HR department to confirm this.
Do you need to consider any state-specific issues?
Yes, the state you reside in can have implications on how your RSUs are taxed and how they may be treated in situations like divorce. Different states have different rules and regulations, so it’s important to understand any state-specific considerations.
ISO Grant Issues
Do you need help understanding the options granted to you?
Incentive Stock Options (ISOs) are a form of equity compensation that provides you with the right to buy a certain number of shares of your company’s stock at a predetermined price, known as the strike price. The benefit comes when the market price exceeds the strike price, and you can buy the shares at a discount.
Do you need help determining the tax implications at grant?
Unlike Restricted Stock Units (RSUs), there are usually no tax implications when ISOs are granted. However, tax implications arise when you exercise the options and later sell the shares.
Are you subject to a vesting schedule?
Yes, ISOs are typically subject to a vesting schedule, which might be based on time, performance milestones, or a combination of both. This schedule determines when you’ll be able to exercise the options.
Will you be subject to clawback provisions?
Clawback provisions depend on the specific terms of your ISO agreement. Some companies include such provisions to protect themselves. A clawback provision allows the company to reclaim the options or the benefits you derived from them under certain conditions, like if you leave the company within a certain period or if there’s a restatement of financial results.
Do you need to review how the termination of your employment (voluntarily or involuntarily), disability, or death might affect your interests under your plan?
The impact of employment termination, disability, or death on your ISOs depends on your specific plan’s rules. Generally, if you leave the company (voluntarily or involuntarily), you might have a certain period (commonly 90 days) to exercise vested options. Disability or death can also trigger specific provisions allowing your heirs or estate to exercise the options.
ISO Exercise Issues
Do you need help determining the value of your interests?
The potential value of your ISOs can be estimated by comparing the exercise (strike) price of your options with the current market value of the shares. However, the actual value will depend on the market value of the shares when you decide to exercise and eventually sell the shares.
Do you need to assess your employer’s future equity value and long-term viability?
Assessing the future value of your employer’s stock and the company’s long-term viability is crucial in determining when to exercise your ISOs. Factors like financial performance, market position, industry trends, and economic outlook can impact the future value of the company’s shares.
Do you need to confirm the status of your ISOs?
It’s important to understand the current status of your ISOs, including their vesting schedule, the number of options that have vested, and the remaining duration until expiry. This information can usually be obtained from your company’s HR department or the brokerage platform where your ISOs are managed.
Do you need help determining the income tax implications of exercising vested options?
When you exercise ISOs, the difference between the fair market value at the time of exercise and the exercise price is known as the “bargain element.” This is not considered ordinary income, but it may subject you to the Alternative Minimum Tax (AMT). When you sell the shares, you will also be subject to capital gains taxes.
Are you permitted to exercise early and purchase stock before vesting?
Some companies offer what’s known as “early exercise” options. This allows you to exercise your options before they have vested. It can have tax advantages, but it also comes with risks because unvested shares may be subject to repurchase by the company if you leave.
Do you lack the funds necessary to do a cash exercise?
If you don’t have the funds to exercise your options, you could consider a cashless exercise, also known as a “same-day sale” or “sell-to-cover,” where you simultaneously exercise your options and sell enough of the shares to cover the exercise price and taxes.
Do you want the flexibility to avoid double taxation in the event you may choose to sell within one year of exercise?
To receive long-term capital gains treatment (and potentially lower tax rates), you need to hold the shares for more than one year after exercise and two years after the grant date. If you sell within one year of exercise, any gain is considered a short-term capital gain and is taxed at ordinary income rates.
ISO Share Ownership and Sale of Stock Issues
Does your company require pre-clearance or have blackout or window periods that might affect your ability to trade your shares?
Some companies have trading restrictions, often imposed on insiders or employees, to prevent unfair trading based on non-public information. This might involve a requirement for pre-clearance of trades or restricted trading periods known as blackout or window periods. You would need to check your company’s specific policy or consult with your HR department or legal team.
Do you own unvested shares due to an early exercise?
If you’ve taken advantage of an early exercise provision in your ISO agreement, you may own unvested shares. These shares can be risky because if you leave the company before they vest, the company may have the right to repurchase them, often at the price you paid, which could result in a financial loss if you paid taxes on a value that subsequently declined.
Do you need help understanding the tax consequences of the sale of shares acquired through your options?
When you sell shares acquired through ISOs, you’re generally subject to capital gains taxes. If you sell the shares more than two years from the grant date and more than one year from the exercise date, your gain is treated as long-term capital gains, which generally has lower tax rates compared to short-term capital gains or ordinary income. However, the bargain element at exercise may be subject to the Alternative Minimum Tax (AMT).
Do you need help tracking your regular tax basis, AMT basis, and your Minimum Tax Credit?
The cost basis for ISO shares is generally the price you paid to exercise the options. However, for AMT purposes, the basis includes the bargain element. You may be eligible for a Minimum Tax Credit for the AMT paid in a prior year, but calculating and tracking this can be complex. It’s recommended to seek advice from a tax professional.
ISO Planning Issues
Do you need to increase your withholdings (beyond any employer withholdings) or make estimated payments for taxes attributable to your options?
Depending on the number of ISOs exercised, you may trigger the Alternative Minimum Tax (AMT) and you may need to make estimated tax payments. This can be complex and might require consultation with a tax professional.
Do you need to evaluate your company stock position?
Regularly assessing your company stock position is important to understand your risk exposure and potential reward, especially if a significant portion of your net worth is tied up in company stock due to your ISOs.
Do you need a plan to mitigate concentration risk?
If a significant portion of your wealth is tied up in your company’s stock, you may face concentration risk. Diversification strategies or protective put options may help to mitigate this risk.
Is the benefit of waiting to make a qualifying disposition greater than the risk of a price decline while holding shares?
This depends on your individual situation, including the potential tax benefits of a qualifying disposition, the market outlook for your company’s shares, and your personal risk tolerance.
Is there a risk that your company will be acquired within the next two years?
An acquisition could affect your ISOs in various ways, including potential acceleration of vesting or conversion of your ISOs into options for the acquiring company’s stock. Understanding this risk is important for planning purposes.
Do you need help factoring in the risks of a stock price decline when considering whether to exercise and/or to make the IRC §83(b) election for AMT purposes?
The §83(b) election allows you to pay taxes at the time of exercise based on the bargain element, potentially lowering your tax burden if your company’s stock price rises significantly. However, this carries risk if the stock price declines after exercise. This decision should be made with the help of a tax professional.
Do you need to address your options in your estate plan or in a pending divorce?
Yes, ISOs can be a significant asset and should be addressed in estate planning and divorce settlements. However, transferring ISOs in a divorce can have tax implications, so it’s important to seek professional advice.
Do you need to consider any state-specific issues?
Different states have different rules for taxation of ISOs, so understanding any state-specific implications is important. Consult a tax advisor familiar with your state’s rules.
Do you have future financial goals that your options could help to achieve?
ISOs can contribute towards your financial goals, whether it’s retirement, buying a home, or funding education. A financial planner can help align your financial plans with your ISO strategy.
Non-Qualified Stock Option Grant Issues
Do you need help understanding the options granted to you?
Non-Qualified Stock Options (NSOs) are a type of employee stock option where the employee has the right to buy company shares at a predetermined price. When you exercise the options, the difference between the strike price and the fair market value is considered compensation income, and is subject to regular income tax.
Do you need help determining the tax implications at grant?
Unlike RSUs, NSOs do not trigger taxable income upon grant, unless the option has a readily determinable market value. However, such situations are relatively rare with employee stock options.
Is the exercise price less than the FMV at the grant date?
The exercise price is usually the FMV of the stock on the grant date. However, if it’s less than the FMV on the grant date, the discount is considered compensation income and must be included in your income in the year of grant.
Are you subject to a vesting schedule?
Most NSOs come with a vesting schedule, where the rights to exercise the options accrue over a set period of time. This could be based on continued employment or other performance metrics.
Will you be subject to clawback provisions?
Clawback provisions depend on the specifics of your NSO agreement. They allow the company to reclaim the options or any profit realized from them under certain circumstances, like misconduct or a restatement of financial results.
Do you need to review how termination of your employment (voluntarily or involuntarily), disability, or death might affect your interests under your plan?
The impact of these events on your NSOs varies by plan, but it’s common for there to be specific provisions that apply in these circumstances. For instance, you may have a limited time to exercise vested options after employment termination, or your heirs might be able to exercise your options if you die.
Non-Qualified Stock Option Exercise Issues
Do you need help determining the value of your interests?
The potential value of NSOs depends on the current and future price of your company’s stock, the exercise price, and the number of options you have. A financial advisor can help you understand the current value and potential future value of your options.
Do you need to assess your employer’s future equity value and long-term viability?
This is important as the value of your NSOs is directly tied to the company’s performance. Factors such as the company’s financial health, industry trends, and economic conditions can all affect the company’s future equity value and should be considered when planning your NSO strategy.
Do you need help determining the income tax implications of exercising vested options?
When you exercise NSOs, the difference between the exercise price and the fair market value at the time of exercise is considered ordinary income and is subject to income tax. A tax advisor can help you understand the potential tax implications of your decisions.
Are you permitted to exercise early and purchase stock before vesting?
The ability to exercise NSOs early depends on your specific grant agreement. If allowed, doing so could have significant tax implications, so it’s important to seek professional advice before making this decision.
Do you lack the funds necessary to do a cash exercise?
If you don’t have the funds to pay for the exercise price and the associated taxes, you may want to consider strategies such as a cashless exercise (also known as a same-day sale or sell-to-cover), where you sell enough shares at the time of exercise to cover these costs. However, this decision should be made in consultation with a financial advisor, considering your overall financial situation and goals.
Non-Qualified Stock Option Share Ownership and Sale of Stock Issue
Do you own unvested shares due to an early exercise?
If your NSO plan allows for early exercise, you might own shares that are not yet vested. Owning unvested shares can come with certain risks, such as the possibility of forfeiting those shares if you leave the company before they vest. It’s crucial to understand the terms of your plan and the potential implications.
Do you need help determining the basis of your shares?
The basis of your shares for tax purposes is generally the exercise price you paid plus any amount you had to report as income when you exercised. A tax or financial advisor can help you calculate this accurately, which is essential when you sell the shares and need to calculate your capital gains or losses.
Do you need help understanding the tax consequences of the sale of shares acquired through your options?
The difference between the sale price of your shares and your basis is generally treated as a capital gain or loss. If you’ve held the shares for more than a year, it’s typically a long-term capital gain or loss, otherwise, it’s considered short-term. These categories are taxed at different rates.
Does the company require preclearance or have blackout or window periods that might affect your ability to trade your shares?
Some companies do have policies that restrict when and how you can sell your shares. For instance, blackout periods are times when employees are not allowed to trade company shares (typically around financial reporting times), and preclearance requirements mean that you have to get approval before making trades. Check your company’s policy and consult with a financial advisor to understand how this might affect your NSO strategy.
Non-Qualified Stock Option Planning Issues
Do you need to increase your withholdings (beyond any employer withholdings) or make estimated payments for taxes attributable to your options?
Exercising NSOs can result in additional taxable income, potentially pushing you into a higher tax bracket or leading to an underpayment of taxes for the year. If your employer does not withhold enough taxes when you exercise the options, you might need to make estimated tax payments to avoid penalties.
Do you need to evaluate your company stock position?
Having a significant portion of your wealth tied up in one company’s stock can present a concentration risk. Diversifying your investments can help mitigate this risk. You should consider your overall financial situation and goals when deciding what to do with your NSOs and any shares you acquire from exercising them.
Do you need a plan to mitigate concentration risk?
A financial advisor can help you create a plan to manage concentration risk, which could involve regularly selling shares obtained through option exercise and investing the proceeds in a diversified portfolio.
Do you need help factoring in the risks of a stock price decline when considering whether to exercise and/or to make the IRC §83(b) election?
Exercising options and choosing to make an IRC §83(b) election involves risk, including the possibility that the stock price will decline in the future. It’s important to evaluate these risks in the context of your overall financial situation and risk tolerance.
Do you need to address your options in your estate plan or in a pending divorce?
NSOs and the shares obtained from them could be significant assets that need to be considered in estate planning and divorce settlements. Professional advice can help ensure these assets are handled appropriately.
Do you need to consider any state-specific issues?
State laws can impact the taxation of NSOs and the shares obtained from them. You might need professional advice to understand any state-specific issues that apply to you.
Do you have future financial goals that your options could help to achieve?
NSOs can provide significant wealth if managed properly, and this wealth can be used to achieve a variety of financial goals, such as retirement, education funding, or purchasing a home. A financial planner can help you develop a strategy for using your NSOs to achieve your goals.
