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With an increasing number of companies are offering stock-based compensation, particularly Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs), as benefits, the overriding question on employees’ minds is how they should manage them for maximum benefit.

At work, your salary is not the only way your employer rewards you for your hard work. In Southern California, we see a big cluster of various Biotechnology companies. These companies in particular, are known for their equity rights—Employee Stock Options—being an integral component of your total compensation.

No matter what level of ESOs (Employee Stock Options) you receive, its important to make sure you are taking full advantage of the benefits as well as understanding how they fit in to your overall financial situation.

With that being said, there are “must-know” areas and common mistakes that should be avoided.

#1 Do you understand your stock options?

ESO’s are generally not “one size fits all”. There are various types of ESO’s; Employee stock purchase plans, restrictive stock units, non-qualified stock options, to name a few. The first step to take when reviewing your stock options is to know what is available at your company and what you currently have.

We specialize in financial planning for Biotech employees, and a part of that is to help you understand your company’s stock options so you can make better financial decisions. You can always reach out to us with any questions you may have.

#2 Have you marked your calendar?

There are a few key dates all employees with ESO’s should be aware of. Besides the commonly recognized “1 year mark” that separates preferential long-term capital gains taxes from short-term capital gains taxes, there are other dates to keep an eye on. These key dates include vesting schedules and expiration dates. Your vesting schedule gives you the time frames where you cannot touch your granted options, as well as the time frames where you can go ahead and take action. Depending on the kind of ESO you have, the vesting schedule can also determine tax treatment. Expiration dates should also be tracked—if you never exercised your options and you reach the expiration date, your ESOs will “expire” worthless, meaning you lost it without realizing any gains or losses. Note that understanding these dates as well as your overall position (mentioned in tip #1) can help provide a smoother process when you’re experiencing a layoff, a change in employer, or retirement.

#3 Did you consider possible company downturn?

This is when the quote “Don’t put all your eggs in one basket” becomes relevant. Despite the financially rewarding nature of company stocks and ESO’s, all sensible investors should take into account possible downturns. People make the mistake of having too much of their overall wealth depend on the performance of one company. Diversification is a crucial element to a sound financial plan because it mitigates some of the risks associated with equity investments. To avoid this mistake, it’s important to examine and confirm that your stock options are appropriately aligned with the rest of your financial picture.

#4 Do you know the tax implications?

Employees are often neglecting the impact of their stock options in regard to tax treatment. Cost basis (also known as the price you paid for the stocks) is a key factor in understanding the tax implications, as it determines the amount of taxes you’ll owe and type of taxes you will be subject to. Keep in mind that with incentive stock options in particular, figuring out your taxes for the year you exercise and hold them will be a little more complex due to the AMT (Alternative Minimum Tax). Additionally, the AMT credit can be used and prompt some tax planning strategies you may want to consider implementing.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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