5.2.2025

In a recent episode of The Trusted Partner Podcast, hosts Jesse Cramer and Gabe Chodak sat down with Allison Shuler, a Certified Financial Planner, to break down the complexities of stock compensation and share strategies for optimizing its benefits.

Stock Options and Restricted Stock Units (RSUs)

• Stock Options: These give the employee the right to purchase company shares at a set exercise price. They are subject to a vesting schedule, which can vary. Once they vest, the employee can exercise the option and purchase the stock at the exercise price, at any point up until the expiration date. Stock Options only have an underlying value when the current stock price is higher than the grant price, so they can potentially expire worthless. There are two common types of Stock Options: Incentive Stock Options (ISOs) & Non-Qualified Stock Options (NSOs). They function similarly, but ISOs have more favorable tax treatment and several restrictions on how the grants can be structured.[1]

• Restricted Stock Units (RSUs): These represent a promise to receive company shares, subject to meeting certain requirements, which are typically time-based and detailed in a vesting schedule.

Tax Implications

• Non-Qualified Stock Options (NSOs): The bargain element (the difference between the exercise price and purchase price) is taxed as ordinary compensation income[2] in the year of exercise. Note that there also can be capital gains tax due on any subsequent appreciation beyond the purchase price upon the eventual sale of the stock.

• Incentive Stock Options (ISOs): Taxation on the exercise of ISOs is deferred until the stock is sold. Additionally, if holding period requirements are met, the bargain element is taxed at the more favorable capital gains rate upon the sale of the stock. To meet these requirements, the stock must be retained for at least one year after the exercise date and two years after the grant date.
  • There are Alternative Minimum Tax (AMT) implications associated with the exercise of ISOs, where the bargain element is included in AMT income in the year of exercise, which could trigger an additional tax.

• Restricted Stock Units (RSUs): The stock is taxed as ordinary compensation income at the market value upon vesting/receipt of shares.
  • Generally, some shares are withheld to cover taxes, and the employee receives the net value of shares.
  • The employee can also elect to sell all shares at vesting and receive the net cash proceeds.
  • If shares are retained after vesting, any future gain/loss is subject to income tax upon the eventual sale of the stock (i.e., same tax treatment as regular stock).

Diversification: Avoiding Overexposure to Employer Stock

Many employees amass large portions of their wealth in company stock, which can pose a significant financial risk. A key strategy is to set a target allocation for employer stock (e.g., 10-15% of net worth) and gradually sell shares to diversify. While this is a general guideline, individual circumstances and risk tolerance should guide the decision. Nonetheless, holding too much in one company’s stock ties financial well-being too closely to the employer’s performance.

Planning for the Long Term

Employees should proactively manage their equity compensation by:

• Understanding their vesting schedule and planning for tax liabilities.
• Creating a structured plan to sell vested RSUs instead of accumulating excessive exposure.
• Coordinating with a tax advisor to optimize when and how they exercise options to minimize tax burdens.
• Evaluate their total portfolio exposure to their employer’s stock, including holdings in 401(k) plans or stock funds.
• Be aware of any company specific rules and restrictions – executives and insiders may have restrictions on when and how they sell company stock.

What Happens When You Leave the Company?

While employer dependent, examples of how stock compensation can be handled include:

• Unvested RSUs typically are forfeited when an employee departs.
• Stock options may have a short post-employment exercise window (often 90 days) before they expire.

It is important to consult with your Human Resources representative to understand your options when leaving your employer.

Final Thoughts

Managing stock compensation effectively requires a combination of investment strategy, tax planning, and risk management. By understanding how RSUs and stock options work, employees can avoid costly mistakes and optimize their financial future.

For a deeper dive into stock compensation, listen to the full episode of The Trusted Partner Podcast.

[1] Restrictions include: 1) must be exercised within 10 years of their grant date, 2) the exercise price must be at least the fair market value of the stock at the time the ISO is granted, and 3) only up to $100,000 in stock underlying ISOs can become exercisable in any calendar year per employee (excess amounts are treated as non-qualified stock options).
[2] Income is taxed at Federal Ordinary Income Rates. Social Security/Medicare and State Taxes are also applied.

Disclosure:  Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.

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