For those who are compensated partially or mostly in equity – as opposed to simply earning a salary – it’s important to plan for vesting, exercise, and sale. The tax code regarding equity compensation is fairly complex. Which means stock options provide opportunities for investors if the planning is managed correctly.

Equity compensation is an important component of your financial plan.


Similar to selling a business, you want to plan for these eventualities instead of allowing circumstances to determine your actions. That way you’ll take advantage of the opportunities that are open to you, in the time frame when they’re most tax-advantaged.

Equity compensation is just as important an asset as a house or other investments. It should be analyzed and folded into a comprehensive plan just as other assets are.

Because your equity compensation is in one stock, it creates a diversification problem if you don’t have a financial plan. If your investments are spread out among different accounts, it may be difficult to judge how much of your wealth exactly is concentrated in one stock. Developing a financial plan will help you gauge where you need to diversify.

In addition, many of the advantages of these types of strategies are embedded in the tax code. Developing the right strategy includes taking the opportunities provided by the tax code while marrying the shares with the investment plan. A financial plan with a qualified CFP® professional can help you achieve tax-advantaged wealth.

Equity comp isn’t just for startups, though it certainly applies to them as well! There are large firms all across the US that pay senior executives in equity. Whether the company is large or small, or the compensation itself is large or small, a financial plan that includes these assets is more of an asset to you, especially in regard to your retirement planning.


Type of Equity Compensation: Stock Options/Restricted Stock Units/Employee Stock Option Plans


Tax treatment varies across all these forms of equity compensation. Stock options may be Incentive (ISOs) or Non-Qualified (NQSOs). The timing of vesting, exercising, and selling the shares all must be done within certain limits to ensure their benefits are maximized.

Depending on the amount of these types of stock options, they may result in a concentrated position for the investor. Including these in the financial plan allows the financial planner to coordinate the asset allocation for the portfolio.

The plan will also take taxes into consideration. If you sell your $1 million in revenue accounting firm for its expected 1.2 times, your bank account isn’t going to balloon by $1.2 million once you take taxes into account. You’ll end up with substantially less with a cash payment upfront.

Equity Compensation Strategies: Net Unrealized Appreciation (NUA) and 83(b)


NUA strategies involve a tax-advantaged strategy for taking appreciated employer stock from the company’s retirement plan. The difference between the cost basis of the shares and the stock price at distribution is the net unrealized appreciation. Ordinarily the immediate sale of the stock results in an ordinary income tax on the difference. This can be significant for highly appreciated stock.

When the employee takes a lump-sum distribution with an NUA strategy, net unrealized appreciation is excluded from income. Tax is deferred until the company securities are sold. At which time they’re taxed at the long-term capital gains rate, instead of ordinary income.

This strategy has to be balanced against the risk of holding these securities long-term for a concentrated position.

Including the analysis in a financial plan will show the difference between taking the ordinary income hit while diversifying, and having a concentrated position for some period of time. But selling later at capital gains rates instead.

The 83(b) election is an opportunity to pay taxes on the value of shares when granted.


This may be especially valuable for startups, when the fair market value is likely to be lower. Otherwise the shares are taxed when vested.

If the company’s shares are growing, it’s best to pay taxes at grant. However, if the company’s shares decline, then it would have been better to pay at vesting instead.

A financial plan can take the place of a crystal ball.


Too bad it’s not possible to know how any company will perform in the future, especially a start-up! All founders and employees of newly launched companies assume that the stock will be more valuable in the future, otherwise they wouldn’t be working there. Your financial planner can talk you through this election, so you can make an informed decision.

Minimize the Risk of Concentrated Equity Holdings


Depending on how much of your compensation is in the equity of your company, you may be able to diversify away from this position in other accounts. Such as your regular taxable account or even your retirement account. Your financial plan will show how much needs to be peeled off from company stock over time in order to achieve the portfolio’s target allocation.

However, some firms require that their senior people maintain a certain amount or percentage of the portfolio in company stock. Or, you may be new to financial planning and simply have allowed the shares in your company to accumulate to this point.

Whatever the reason, your portfolio may be concentrated in one stock. A good financial planner can help you minimize the effects of holdings and take into account the cost of hedging. If possible, the planner may be able to set up a 10(b)5-1 plan that allows the regular selling of company stock, for certain officers of a company.


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Equity Compensation: 10(b)5-1 Plans


At the top of the organization chart, there’s a tension to be managed. Ensure that the leaders of the company have sufficient “skin in the game” so that they’re incentivized to grow the stock as much as possible. Also make sure each officer can maintain a  sufficiently diversified portfolio.

Because the stock sales of certain eligible executives can be made public, it’s key for a healthy business to ensure that these sales don’t tank the stock price. It also protects the execs from accusations of insider trading. They can show that the stock sale was made in accordance to a plan filed with the appropriate regulators, for the purposes of diversifying their own portfolios.

The instrument for this is the 10(b)5-1 plan, named after its section of the tax code. Including it in the financial plan means that the stock sales will not adversely affect any other financial moves.

It also allows the planner to ensure that the portfolio’s targeted allocation will be reached in a certain period of time, by the scheduled sale of a concentrated stock position.


Executive Deferred Equity Compensation Plans


As with so many of the equity compensation strategies discussed here, timing and concentration of stock are key factors in deferred comp strategies. Technically 401(k) and pensions are deferred compensation plans too, but they are qualified plans administered by ERISA. Here we are referring to nonqualified plans for executives only.

The company sets aside a guaranteed amount of income for the executive, usually with provisions to pay out early if they’re disabled or die prematurely. It’s a good retention strategy to keep key employees at the company. Certain conditions must be fulfilled in order for the executive to claim the compensation at retirement.

Planning how to contribute and how to structure the payout is a crucial part of the employee’s financial plan. Because they’re nonqualified, a much larger amount can be deferred into an executive plan since they’re not subject to ERISA limits. The money is tax-deferred until payout starts.


However, as they’re not subject to ERISA, these plans do carry the risk that all the assets in the plan may be lost. Employees who are counting on this money at retirement could end up with an unpleasant surprise. That’s why it’s key to consider this as part of a financial plan, so that you understand the risks and know how much you can contribute without jeopardizing your retirement. These are usually utilized only by execs who have already maximized the tax-advantaged 401(k), FSA and HSA possibilities.

Equity Liquidity Events

When the company is merged, acquired, or sold, the senior executives often find themselves awash in liquidity. This is where a financial plan can be extremely important in order to avoid spending down the largesse, or even being taken advantage of by savvy salespeople.

Use a financial plan to manage or optimize a liquidity event.


A comprehensive financial plan is tailored to your specific financial goals. Managing a liquidity event properly can help you achieve those goals. It may even allow for new or bigger goals to be set, depending on the size of the event.

If you have kids to put through college, a liquidity event could be your answer. You might be able to prevent your children from taking on too much student debt. Most financial planning software systems contain recent data for costs for most colleges and universities in the US. There are tax-advantaged accounts that can be utilized as well (529 and 529ABLE accounts.)

Or you may be thinking about legacy planning, and a financial planner can help you do that in a tax-efficient way. There are a number of ways to set aside money for charitable purposes. Planning this in advance allows you to take advantage of the opportunities still left to investors in the tax code.


If you’ve identified a potential need for medical cost planning in the future, money from the event may be set aside in a specific vehicle for this purpose.

And so on; the money can protect against some “holes” identified in the household’s needs.

Your financial planner may also recommend the services of a trusted estate planning professional, who can set up the appropriate trusts and legal concerns. Especially in California, it’s important to keep as much out of a probate estate as possible.

Is equity compensation an important part of your financial life? Email us to discuss creating a financial plan today.

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.


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