Equity Stock Options: Year End Housekeeping Tips

As end of year approaches, it is a good habit to set up at minimum an annual review of your equity compensation.  We encourage stock option and RSU holders to conduct a thorough inventory check, refresh awards and vesting schedules, make note of key price changes, estimate any potential tax liabilities, and assess current value versus future goals.  

Below is a quick overview of some items that should be considered in your review.

  1. Keep track of your equity compensation with a spreadsheet or professional software.

For each grant, you should dedicate a line in a spreadsheet that details out:

  1. The type of equity compensation
  2. The grant date
  3. The number of options or shares
  4. The exercise price (for options) or the grant price
  5. The vesting dates
  6. The expiration date
  7. Any exercise rules or restrictions

Most employees with equity compensation will use a spreadsheet, and usually this spreadsheet has been shared with them by colleagues.  You can also find some options with a quick google search.  

There is professional software that you can use to help with the structure and items to keep track of.  I find StockOpter to be a helpful tool that encompasses the majority of issues that need to be tracked and considered.  

  1. Consider the price of the stock over the year and how that compares to past prices and future expectations.

While you may follow your company stock frequently through an app on your phone or random checks online, once a year you should take some time to do a review of more than just the recent price.  If your company is public, take a look at the stocks 52 week high and 52 week low.  Compare that with a 3 year high/low, 5 year, etc.  Most finance websites will provide some simple technical tools for you to look at as well.  I suggest learning about some widely followed technical like the 200 day moving average and reviewing a long-term chart versus those market technicals.  

With some quick analysis, you can start to understand the trend of the stock, its peaks and troughs, and the volatility the stock experiences.  Compare some of this information with competitors in your industry.  Read some articles that have been written by analysts on the stock.

If your company is private, you should look into collecting the most recent 409A valuations that have been conducted.  You can chart these prices using excel, and again, compare this with any public competitors.  

  1. If you have Incentive Stock Options, estimate your AMT exposure versus your current taxes.

If you are unfamiliar with the Alternative Minimum Tax (AMT), then it is worthwhile to learn about it.  Simply put, the AMT is an independent tax calculation that is compared to your traditional tax calculation.  If the AMT tax calculation is bigger than your traditional tax calculation, then you have to pay AMT tax.  AMT reduces the amount of deductions you can use and incorporates “phantom income” such as exercising Incentive Stock Options (ISOs).  

While the specifics of AMT are beyond the scope of this article, no annual review of your equity compensation would be complete without considering your AMT exposure.  

  1. How has your strategy faired since your last review?  Is an adjustment warranted?

This is the most subjective part of the review, but it is important to take an honest look at what your expectations were, what actually happened, and how that might influence your decisions going forward.  This is especially true for young companies and companies that are pre-IPO.  Much of the value of a young company is tied to its growth potential, and expectations around that growth can change dramatically and very quickly.  There are numerous examples of companies that have had large swings in their valuation from one year to the next, and your strategy for your equity compensation should consider these changes and the resulting impact to your net worth and tax situation.

  1. What is the plan for next year?  Is there any benefit to taking a planned action for next year in the current year?

The two main variables influencing whether you want to adjust when you exercise or liquidate your equity position is the expected taxes you will owe in one year versus the next and the expected stock price over the next year. 

Taxes have two main considerations; your AMT exposure in one year versus the next, and the tax bracket you will be in for one year versus the next.  Effective tax management considers what tax bracket you are exercising or selling in and considers how you can get as much income and capital gains exposure in the lower brackets.  If you are at risk of ending up in a higher bracket in the next year, you might want to consider the benefits of taking that tax in the current year when your bracket will be lower.  The same kind of consideration would be used for our AMT exposure.

If your company’s stock is trading at a depressed or elevated level, you might also want to think about the impact of exercising or selling in the current year.  Plenty of market factors can influence the price of your company’s stock, and it is not necessarily intuitive.  While the specific strategies are beyond the scope of the article, expectations in the stock price should be factored into your strategy.

As you can tell from this overview, there are a lot of moving parts to consider as you assess your equity compensation and plan associated with it.  When looking at the complexity, it should not come as a surprise that many people opt (pun intended) to seek the counsel of a professional when thinking through their approach.  Whether you choose to seek guidance or manage the process yourself, having a strategic plan that avoids emotional reactions and thinks through the variables positions you for the chance for a more successful outcome.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

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