If you exercise your stock options, you will receive purchase shares of company stock, or equity, which represent an ownership stake in your company. Once you’ve acquired stock, you own it permanently, whether or not you work at the company. As long as your company is publicly traded, you can sell your stock whenever you choose (subject to restrictions such as a blackout period or lock-up period) —again, whether or not you still work there.
A qualified employee stock purchase plan allows employees to purchase shares of stock through convenient payroll deductions, often at a discount to the fair market value. Some ESPPs include a lookback provision, making a good ESPP potentially more attractive.
A provision in an employee stock option agreement that allows you to exercise an employee stock option prior to the option vesting. An early exercise is often combined with an 83(b) election in an attempt to mitigate tax.
When you own company stock, there’s always the risk that its value could decline by a little or a lot. There are investment strategies to minimize this risk, although you can never entirely eliminate it. Most importantly, ensuring your total investment portfolio is diversified helps offset the potentially significant downside risk inherent in holding any individual stock.
Restricted stock units are often taxed and shares delivered when they vest. For Pre-IPO stock, this presents a problem where the value of vested units will be taxable, and tax will be due, on pre-IPO shares that you cannot sell. A double trigger RSU adds a second component that must be met prior to RSUs being tax and delivered, often an IPO or other liquidity event. Only after both events occur will tax be due.
DAFs are a special account type offering a simple, tax-advantaged way to engage in charitable giving. After establishing a DAF account, you can fund it with cash, in-kind stocks, and other assets, often taking a tax deduction on the fair market value of your contribution. You can then use DAF funds to distribute gifts to your chosen charities over time, while keeping the rest invested. As such, DAFs can offer a convenient and tax-effective way to donate low-basis company stock to charity. But be aware, once you contribute an asset to a DAF, the gift is irrevocable. It can only be distributed to qualified charities.
Well-built investment portfolios are spread across a wide range of diverse holdings. This typically means being invested across stocks and bonds, domestic and international holdings, various company sizes and book values, and other characteristics known to contribute to your portfolio’s overall risks and expected returns. Holding a significant position in a company stock or stock option reduces diversification, which means you may need to take extra steps to offset excessive concentration risk.
A qualifying disposition of employee stock purchase plan shares occurs if you sell your stock at least 2 years from the offering date and 1 year from the purchase date. Qualifying dispositions lead to preferential tax treatment and may allow for some portion of the gain to be taxed at long-term capital gains rates. A disqualifying sale of ESPP stock is anything that does not meet the qualifying standard. Gains from a disqualifying sale are often subject to various, higher tax rates.
A qualifying disposition of incentive stock options occurs if you sell shares at least two years past the ISO grant date, and at least one year past your exercise date. A disqualifying disposition is any sale that does not meet both of these requirements. Proceeds from a qualified sale are taxed at usually more favorable capital gains rates. Proceeds from a disqualified sale are subject to various, usually higher tax rates. However, by taking a qualified disposition, you may assume extra concentration risk. If the stock price drops in the year or so after you exercise your options but before you sell the stock, you may lose more in share value than the tax savings are worth.
A qualified ESPP may allow for employee participants to buy shares of stock at a discount of up to 15% from the purchase price.
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