Published March 20, 2024, by CFP Letsmakeaplan
While stock options can be a great employee benefit and a good way to build wealth, they also come with complexities and risks that many employers don’t fully explain. A stock option is the right to buy equity in the company that employs you at a certain price, with profit potential, if the stock value rises and you decide to sell. Before exercising stock options, employees must follow a vesting schedule. That means they must work for the company for a specified period to buy these shares.
The three most common types of stock compensation offered by companies to attract and retain employees are as follows:
- Restricted stock units (RSUs)
- Non-qualified stock options (NQSOs)
- Incentive stock options (ISOs) for a new employee
Equity compensation plans involve many considerations, such as investment concentration risk, tax planning, and market volatility. Most important is your personal financial situation, which may be different from those of your colleagues.
Philip Herzberg, our lead financial advisor at Team Hewins, shares 4 key strategies to help you manage the risks that come with equity compensation.