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Welcome to the 35th edition of the Tech Financial Planning (TFP) newsletter.

Uncle Ben (of Spiderman) famously said “with great power comes great responsibility.”

And if Uncle Ben were a financial advisor talking about stock options, I think he’d expand on this quote and say with “with great stock options comes great responsibility, and if you’re not careful, great mistakes.”

(Insert groaning at this awful attempt at humor)

In this newsletter we’ll break down 7 common mistakes people make with their stock options.

TL;DR

Taxes are a key factor and common surprise with stock options
Stock options can be a negotiation tool if you are looking for a new job
Be careful where you get your advice

A couple quick notes

This post is not a beginners guide to stock options.

If you want more information, I’ll direct you to this guide from Carta.

It’s also worth noting that some of the specific strategies and guidance will differ based on if you work for a public or a private company.

Let’s jump in.

7 common mistakes people make with their stock options

Mistake #1 - Letting valuable stock options expire

If you have valuable options, they are called “in the money.

Basically, their current value is greater than it would cost you to purchase them.

But people let valuable options expire every year!

Options typically expire for one of two (related) reasons

They expire after 10 years - typically, most stock options expire if they are not exercised within 10 years from the grant date.
You leave your company - you have a set amount of time from when you leave your company (often 90 days, but increasingly longer) to exercise your stock options.

And even if you have more than 90 days to exercise after leaving, your incentive stock options (ISOs) will convert to Non Qualified Stock Options (NQSOs) after 90 days - in short, you’ll lose the favorable tax status.

If your company is public, it almost never makes sense to not exercise your valuable options - at the very least, you could sell them immediately, and the money you would make would more than cover the value of purchasing your options and any taxes (again, that’s the whole point, if they weren’t valuable, we wouldn’t exercise them).

If you work for a private company and don’t have the cash (or want to use the cash), it gets a bit more tricky, but there are options (pun intended)

#2 - Getting surprised by taxes

This could be from not understanding the alternative minimum tax with your incentive stock options

This could be from exercising non qualified stock options (NQSOs) and you owing more tax than what your company took out.

Or something else entirely.

Taxes are a huge part of stock options.

And it doesn’t matter if your company is private or public.

You would think that if you work for a private company and there’s no way for you to sell the stock, then it would (or should) be taxed differently.

Spoiler alert - it’s taxed the exact same as if you work for a public company.

#3 - not using your stock options as a negotiating tool

If you are leaving a company and giving up options that haven’t vested yet, use this as a negotiating tool.

I recently chatted with someone who’s leaving a fast growing private company.

By leaving now, they are giving up $300,000 worth of stock options (that could become even more valuable in the future) to join a much smaller company.

They should be compensated for this!

Plus - see if you can get a bonus to cover the cost of exercising any options you do have, plus the taxes associated.

#4 - exercising immediately at vest with NQSOs

This could go a lot deeper, and if you want to get super technical, Daniel Zajac wrote a wonderful (and deep) article on this topic.

With non qualified stock options (NQSOs) you might be tempted to think that it would make sense to exercise NQSOs as they vest and hold them for capital gains.

This is often not a good strategy for a couple reasons.

You pay taxes immediately on exercising on the difference between your price (the strike price) and the current price) or fair market value.

By waiting to exercise, you put off paying taxes

Exercising and holding eliminates the remaining option leverage.

This is where we could get super technical and where Daniel’s blog does a great job.

But in short, leverage can have a greater impact on option value than the tax savings.

In plain English - if the stock price increases, you could make a whole lot more money by waiting to exercise than any potential tax savings and exercising early.

#5 - not considering the value of unexercised and unvested options

This goes for RSUs too.

But when you think about how much money you have in your company stock, you must consider what’s coming to you in the future.

When making decisions about holding or selling and diversifying, you must consider your future equity too.

#6 - reporting info incorrectly and paying more in taxes

I talked about this a whole lot more in depth in this post on the double tax on your equity comp.

But in short, if you aren’t careful, you may pay more tax than you need to.

It’s the equivalent of leaving the IRS a big, fat tip.

It can get really tricky, and this tax season alone I’ve caught several instances of this on client’s tax returns - this could be thousands of dollars of unnecessary tax.

#7 - getting “Watercooler” or “Slack” guidance

This used to be conversations you’d have in the office at the “watercooler” or getting a cup of coffee (or in my case, your 3rd or 4th).

But now it’s more likely to take place on a slack channel.

You have to be careful what information you listen to, and more importantly, what information you act on.

Someone might have wrong information or only partially correct information.

They may be operating on different assumptions (ie. the company stock will 3x in the next year, so of course it makes sense to exercise now) or have completely different goals).

While it might and can be entertaining, I’d be very careful with any information you get in passing.

Putting It All Together

Stock options can be a wonderful wealth building tool.

I’ve seen so many friends, colleagues, and clients create (sometimes massive) wealth through stock options.

But it can be tricky too, and it’s easy to make lots of mistakes.

I’ve seen multiple people get surprised by $100,000+ tax bills.

And while there is a science to much of this, a lot depends on your personal situation.

How much cash you have and need, now and in the future
Your goals
The risk you can tolerate and afford
Your tax situation
Other investments and equity

And so many other factors.

It’s not easy.

The cost of a big mistake is usually much greater than anything you’d pay an advisor.

If stock options are a big part of your plan, find someone to work with - probably both a financial advisor and a tax preparer.

As my friend Nic says, “friends don’t let friends exercise alone.”

WHENEVER YOU’RE READY, THERE ARE 3 WAYS I CAN HELP YOU

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