As we settle into 2021, many of my clients are dealing with the changing landscape of the working world (and the world in general) and re-evaluating how they are spending their time, money and mental energy. I can relate! I don’t think it’s an exaggeration to say that last year dealt a lot of challenges to all of us. While each of our circumstances is unique, last year did bring about a lot of perspective. And it’s never a bad time to take a step back to determine if you are where you want to be. For A LOT of us, that place is in our own homes, 24/7.
Many of my formerly office-based clients haven’t been in an office since March 2020, and won’t be returning to one until well into 2021 … if ever. In fact, a recent survey shows a significant number of workers would actually quit their jobs if they had to return to the office, even after the pandemic wanes.
This circumstance has given rise to a whole new set of options and questions. Maybe you’re considering what it might mean to work remotely on a more permanent basis, even once the pandemic is over, so you can temporarily take up residence in a new location, travel at your own whims or permanently find a new home by taking a more non-traditional approach to your working life. You’re not alone — many Americans have fled big cities in search of more space or new scenery. Or perhaps you are thinking of finding other ways that you can work toward your career goals while also prioritizing goals in your personal life.
More and more, jobs with flexible arrangements like generous work-from-home policies built into their process (like startups, tech firms and biotech firms) also use various forms of equity compensation that aren’t as common as the typical 401(k) match, signing bonus or annual bonus — namely Restricted Stock Units (RSUs), Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQOs).
Many businesses use stock options to attract and reward employees and encourage company loyalty. RSUs, ISOs and NQOs each have nuances, intricacies and specific benefits that can be hard to understand, especially if you’ve never encountered them before. Over the next several weeks, I’ll be taking a deep dive into these three options in follow-up blog posts, but I wanted to start with an overview of the basics:
Restricted Stock Units
RSUs are often issued as part of a compensation or bonus in the form of company shares through a vesting plan. RSUs give employees interest in company stock but have no immediate tangible value and cannot be sold until they vest. In practice, RSUs are an incentive for employees to stay with their employer at least through vesting and help the company do well so the shares increase in value. Typical RSU vesting periods are monthly, quarterly or annually over several years.
Incentive Stock Options
With ISOs, employees get the right to purchase stock shares at a discount — a “strike price.” These options usually have a vesting period before they can be exercised. Once they vest, an employee can sell the stock at its current value and pocket the profit (if there is one — there’s no guarantee the stock price will be higher than the strike price upon vesting) or hold onto it. There are multiple options in timing the sale, each with different tax implications. Publicly traded companies and private companies who plan to go public in the future use ISOs to encourage high-value employees to stay with the company for the long term.
Non-Qualified Stock Options
NSOs give an employee the opportunity to purchase a set number of shares of the company’s stock at a discounted price — the “exercise price.” The employee may or may not be given a time frame to exercise the NSOs, and taxes and other costs are triggered when an employee exercises the option. Generally, an employee can immediately sell their shares and have all taxes taken out so there is no cash flow burden up-front or market risk in holding the stock.
Employees can lose the options if they leave the company prior to the stock options vesting.
Customize Your Approach
With any of these options, there’s no one approach that works best for every person, and your personal tax implications, short-term goals (like paying down debt and student loans, or saving for a down payment), investment goals and retirement plans could all come into play when deciding the best path forward with these options. A CERTIFIED FINANCIAL PLANNER™ professional can help you tailor a financial plan, create and implement a strategy and monitor the plan as your circumstances evolve.
Kelly Luethje, CFP®, is Founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain or by a lake working working virtually with clients across the country.