Speaker 1: Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we talk to my friend JT about how he handled his tech company compensation.
Guest: Of the three most common kinds of stock based compensation you might see, uh, one is the employee stock purchase plan. The most common form that you’ll see is the restricted stock unit, or the RSU. And then some kinds of companies for some kinds of employees will also offer uh, in an options package where those employees will get the option to to purchase shares of stock at some particular price.
Mindy: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my RSU, Really Smart and Unique co-host, Scott Trench.
Scott: Thank you, Mindy. That was a, um, I’ll I’ll I’ll definitely exercise the option to be called really smart and unique.
Mindy: That was good. Very just on the ball.
Scott: Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or participate in the success of your business through an employee stock purchase plan, option, or restricted stock units. We’ll help you reach your financial goals and get money out of the way so that you can launch yourself towards your dreams.
Mindy: Scott, I think that the, this disclaimer is most important on this particular episode. So the contents of this podcast are informational in nature and are not legal or tax advice. and neither Scott nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Also, JT is not telling you how you should handle your stock availability. Uh, he’s just sharing how he handles his. Okay. Now, we are talking to my friend JT, who works at a large tech company and gets stock options, stock restricted stock units and, uh, the potential for cash as part of his compensation package, his overall compensation package. So we are talking to him today about specifically what those mean and how he handles his distributions.
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Mindy: Today, we’re chatting with my friend JT who works at a big tech company. JT is here to share how he handles his RSU. Welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.
Guest: Thanks, Mindy. I’m glad to be here.
Mindy: Before we start, let’s get a little bit of back story on you so our listeners understand where you’re coming from.
Guest: Sure thing. Uh, well, I have always been interested in in computers and technology. I was uh, every bit the mid 90s, you know, mid to late 90s high school nerd that uh that you could imagine from from all the movies. Uh and I was able to take that interest in computers and math and science, uh, get a bachelor’s and a master’s degree in computer engineering and build that into a career, uh developing and designing microprocessors. So I’ve worked for companies like Intel, AMD, Apple, Samsung, Amazon, Google. You know, some of those I’ve worked for, some of them I haven’t, but those are the kind of uh companies that, you know, will really go and decide, hey, I need my own little computer chip to do something. And those that’s what I help work on. It’s a it’s a pretty awesome job.
Mindy: That sounds like uh something I am never going to be competing with you for a job for. That okay, let’s get into your compensation. Let’s talk about uh this whole concept of extra compensation or bonus compensation. Can you explain the framework surrounding stock-based compensation?
Guest: Yeah, stock-based compensation is is pretty common in some fields and less common in others. Uh in in my field in tech, you’ll hear programmers, you know, software developers, hardware designers, uh will often have a pretty significant or even the majority of their, you know, final compensation be due to stock rather than due to a salary. Um, different companies are going to handle this in in different ways that are uh consistent with their culture, but it’s it’s very common in uh, tech companies ranging from, you know, the smallest startup to the largest public companies to have a pretty meaningful um part of their employees compensation be uh in some kind of of stock-based scheme. Uh, the three most common kinds of stock-based compensation you might see, uh, one is the employee stock purchase plan, which is not really a a compensation. It’s really more of a of a perk uh or a benefit you might have working at a company. and I think that’s more broad across a variety of of different kinds of companies and not just tech. Uh, when you really start getting into compensation packages, the most common form that you’ll see is the restricted stock unit, or the RSU. And then some kinds of companies for some kinds of employees will also offer uh in an options package where those employees will get the option to to purchase shares of stock at some particular price. Though all these things are kind of different, they all uh and they differ a lot in the the particulars, they all kind of follow the the same general path as you go through your career. There’s a point where the company says, okay, I’m going to make you a grant or or give you an offer where if you meet a certain set of requirements, we will either sell you stock or grant you stock or possibly grant you an option. So that’s the the grant phase. Uh over time, as the employee meets whatever those requirements might be, uh they’ll uh those areas of compensation will vest. Often times they’ll vest over a period of time, but some of these things will vest kind of all at once. And that is when the stock goes from not really under your control and not really yours, it’s just a promise to actually being under your control and you can, you can sell it, you can vote with it, you can receive dividends because of, you know, because you own it. All a benefits of being a shareholder, you know, are now now yours for those shares. Uh and then the last phase that’s part of this, this compensation is at some point, maybe you’ll want to sell that stock. And all three of these different, you know, forms of of compensation have a lot of different rules uh when you sell around, how is it taxed? Um, how much are you taxed on? Does it matter like when you sell versus when you got it? Uh but that’s going to be, you know, the the third phase is when you decide, hey, I don’t I don’t want this this stock anymore. I either need the cash or I want to be, you know, in some different financial position than just having all this stock in one company.
Scott: JT, are these are these different types of packages um in your experience? Do you are available typically with public companies, large public companies that are going to offer their employees this? Um, or do you have any experience with with folks um who have gotten these types of um interests in privately held companies or smaller businesses?
Guest: Yeah, so it depends on on which package it is. Um, employee stock purchase plan, I think is typically only available to, you know, larger companies that trade publicly. Um, but when you start looking at uh a little bit restricted stock, um and then definitely in the options space, those will be available more in in smaller companies and and startups. For a lot of tech employees who really uh like working at at startups and really want to uh make that part of their career. often times the the salaries are going to be lower and most of their upside for being, you know, working at at that startup instead of a large public company is going to be the the options in that company that they receive as part of their compensation package. Uh and that, you know, that tradeoff is you you end up in something more uh uncertain. Lots of startups fail and your options are going to be worth $0. but there’s always the chance that, you know, you’re working for the next Uber or the next stripe or the next, you know, big giant large tech company that when they decide to to go public or sell to a uh private equity firm, whatever their exit is, you now get this huge payout that would have been practically impossible for you to see at a at a large public company if that’s where you took your career.
Scott: Awesome. Let let’s get into definitions a little bit more deeply. Let’s let’s explore the difference between an employee stock purchase plan, restricted stock um units, and then uh options.
Guest: Sure thing. And we can frame it in terms of those three phases of the grant, the vest, and then the sale. So the employee stock purchase plan is going to be the most common one. Uh it’s available across lots of different companies, across lots of different uh different sectors. And the the grant for for that or the offer involved there is you as an employee will have an option to uh take some of your salary and put it aside in some special escrow account for some period of time. And at the end of that period of time, the company will use that money to buy stock, often times at a discount, and then you’ll have control over that stock. Different companies are going to do this in different ways with, you know, different times and different discounts. Um, but a a common um a common grant might say, if you uh, put in some percentage of your salary, it’s usually up to maybe 15% of your salary from the beginning of April through the end of September, will purchase at the end of September. You’ll get a 15% discount and you’ll get that 15% discount on the lower of the price at the beginning of April or the price at the end of September.
Scott: So my my old company used to have this option and the limit was you could put up to $25,000 into the plan um and buy all the stock at a 15% discount. I’m not sure if you had the same rules about the at the lowest price in that range. But you could also just sell the stock the very next day after it was bought. So you’d put all your money aside for the quarter in like a pool of maybe five, 10 grand, buy the stock, and then you’d immediately have a 15% more value. And so’ I’d just sell it and pay the short-term capital gains tax. I didn’t want to invest in the company necessarily. I just wanted to take advantage of that perk. I I would highly encourage anybody listening to explore their ESPP um uh plan at work and consider doing something um with that because it is a perk typically and depending on the rules of your plan, you may have the option to do what I was doing, for example. Um, yeah, there’s a risk it could go down that one day, but I could do it for three or four quarters before I left and um every time made a nice 15% gain. Again, short-term capital gains tax applies for sure, but it’s it’s just it’s just a why wouldn’t I take the few thousand extra dollars. Um is that your opinion on those plans as well?
Guest: That that’s yeah, that has been how I’ve approached those plans as well. Every company I’ve been at that has offered an employee stock purchase plan, I have taken advantage of that plan and done the same thing that you did. Uh as soon as the the purchase settled and came under my control, I would sell it immediately uh and and take the the difference between um the the amount that I I got the stock for and the amount that it currently in was and just take all of that as um either income or short-term capital gains depending on, you know, what it had done in the two or three days between the purchase date and the settlement date. Uh there is there is some risk there though, right? Um, you know, some companies are incredibly volatile and you might have, you know, a really bad news event that happens the day that the sale is there and the stock does go down more than 15% in the three days, you know, or so before they purchase and it uh and you’re you’re able to sell it. Um, I think that’s not super common. Um, you know, and and like you I haven’t experienced that, but it it is there as a, you know, as an outside risk.
Mindy: Okay, Scott just said, quote, I didn’t want to invest in that company. I just wanted the perk. and uh Scott’s last company shall remain nameless, although if you’ve listened to the show, you know which company it is. Um so it wasn’t part of his plan to own stock in that specific company. Does your opinion of the financial viability of the company have any influence over your decision or would you would you handle your RSUs the same, no matter what?
Guest: Uh so there’s there’s what I would theoretically do and kind of what I have actually done. Um, I think the like like everything else that that you all talk about, right? Uh the important thing I think is to have a plan. and and to decide ahead of time what it is that you want to do with that money.
Mindy: Yes.
Guest: The the main way that I like to think of it is, imagine I was walking down the street and I found $1,500 laying on the street or whatever. and I picked it up. Would my first thought be, I’m going to go take this $1,500 and go buy my company’s stock with this $1500? I think for most people in the financial independence space, that’s not what they would do. We’ve had, you know, beaten into us and I think rightly so that index funds are better than trying to pick individual stocks. that you’re almost certainly going to do better, you know, picking a a broad basket of stocks than than betting it all on one individual company. Uh but I see a lot of people that as soon as it’s not cash, it’s stock and it’s not, you know, it’s stock in the place that they work and they want to, you know, they want to think that it does well and they want to think that it’s only going up from here. And I think they get maybe a little overly optimistic uh and maybe they think they have more knowledge than they actually have over how their their company is going to work. Um, you know, my opinion is if you actually do have that knowledge, you’re under very, very careful watch from your company to make sure you don’t violate insider trading laws. And if that’s not you, you probably don’t have as much knowledge about, you know, the upcoming financials of your company as you you think you might. Um, so I I I think it’s, you know, unless your plan is if I found $1,500 on the street and I go turn around and put that right into into my company’s stock, um, that you you should try not to be fooled by either the tax implications, and there are some some really beneficial uh tax consequences to holding some of these things for a longer period of time, especially when you start looking into options. Uh, but, you know, don’t don’t let the the tax tail wag the dog. And then try not to get overly exuberant about, you know, your opinion of what your company’s going to do, uh unless that’s your plan. If you think, hey, I think there’s upside here, I want to take a gamble. This is no more or no less of a gamble that me betting on any other company in the stock market just because I work there, but I want to take a gamble and try to capture, you know, some upside that I think is there. Uh, you know, I think that’s fine. and I’ve done a little bit of that. but largely, I think, you know, I think most people are better served by by selling and following their uh their current investor plan for where my next dollar of money goes uh to meet my, you know, my financial goals.
Mindy: Mkay. When it comes to selling this stock at a discount, Scott, you sold it the next day. Uh, can you make a game time decision or do you have to initiate the sale in advance and just hope it doesn’t go down between the time that you sell you you initiate and the actually sells?
Scott: So I I can actually take for for my situation, because I was on the finance team and we prepared the financials for that, I had to set up such a system with the HR group in advance that said, I’m not going to I’m not trading on any insider knowledge. I’m just setting up my plan to set it to buy the maximum amount of this of the stock and then sell it the next day ahead of time, I clearly don’t have knowledge about what’s going to be true three months or six months or nine months down the road. I’m just setting up that as the parameters of my plan way in advance and there’s no way my knowledge of the business could or could not impact it. It’s just I’m just I’m just taking advantage of the perk and harvesting a 15% spread.
Guest: And I I have I have never been in that position where I have actually known more about the financials of the company than you could read from any of their publicly facing documents. Uh, so for for me, as soon as that stock settled, I could sell it as though it were any other stock in a broker’s account that that I had. Um for for many companies. Uh some companies will impose a a blackout period where no employee is allowed to trade that company’s stock. Uh and usually it’ll be, you know, sometime from several weeks or maybe a month before the end of the quarter until when they announce results, so that they can just be sure that everything is public information. Uh and I’ve had to, you know, sign agree statements saying I will abide by these blackout periods as part of my employment contracts for some of the companies that I’ve worked for.
Mindy: Okay, so how frequently does one receive stock-based compensation?
Guest: That’s another one of those things that varies pretty pretty broadly from one company to another. Um, at the the companies that I’ve worked for, there are typically three events uh as part of your career where you may be granted uh some some form of stock. Uh a common one is when you sign on to the company. So the company might say, hey, uh we would we want you to come work for us. Uh here’s the position that you’re going to have. Um here is what your salary is going to be. And then we’re also going to make a stock grant um for for you of restricted stock or maybe options or maybe you get to choose um what what you would like to to have that compensation take the form of. Often times the the sign on grant will have a very specific vesting schedule. and vesting again is when the shares become available for you to have control over and do what you want with them. Uh a very common vesting schedule will be to say, you don’t get any stock for the first year. at the end of your first year being employed at this company, we’ll give you 25% of the shares represented in this grant. And then over the next three years, every quarter, you’ll get an additional 1/16th of that grant. So that that vesting schedule is is kind of known in the industry as a four-year grant with a one-year cliff that will vest quarterly. So you you you you get nothing for a while, you get this big chunk at a year, um, which is always really exciting. and then you get, you know, bits and pieces of it through the remainder of of that grant. The other times you might see uh additional grants are uh if you’re promoted, uh sometimes that will will come with a grant as well. Uh you’ll get, you know, some salary increase uh as part of that promotion and then an additional grant uh that may have the the same vesting schedule as your sign on grant. Um, less frequently, you’ll see the cliff because if you’ve been promoted, they already know that you’re doing good work and they don’t need to to try to keep you there for a year to make sure everything’s going to work out. So it might just be you’ll get 1/16th every quarter or 1/8th every six months or however it is they decided to do their vesting schedule. Uh and then some companies will also do uh additional grants as part of their uh semi-annual or annual performance reviews. So when I go through and and talk to my boss, I might get uh uh you know, some amount of of a a salary raise and then uh a follow-on grant. Um sometimes it’s called a refresher grant as well. Uh is and that just sort of keeps, you know, that that flow of restricted stock, um kind of coming to me as I as I work through the the company. Different companies will work differently. I’ve worked at companies that’ll do a sign-on grant and then that’s really kind of all the stock that you see. I’m aware of companies that uh instead of doing these refresher grants every year, they might give you a grant when you sign on and say, well this stock will vest over two years or three years or four years, and you don’t see anything until that two or three or four years is up and then they’ll make another grant based on your performance and how the company is doing and um, you know, all those all those other factors. Uh so they they they they do tend to to work a little bit differently, but this, you know, sign on bonus with annual refresher, I I think is is pretty common uh especially in the in the tech industry.
Mindy: It sounds like when you are negotiating your employment compensation or presented with it, you need to read the fine print, read it all the way through instead of just listening to what HR says. Oh, we’re going to do this. like read all of these documents specifically so you understand exactly what’s going on.
Guest: Oh, 100%. Yeah, um it’s it’s very important um for RSUs and then when you start getting into options, uh options especially at smaller companies, you really need to have a good understanding about how your company’s a specific program uh is going to work and and what the the risks are for you, what the tax implications are for you uh and what the potential upside is for for you as well. Uh another point on that is often times the the stock-based compensation is one of the more negotiable parts of your sign-on compensation package. and depending on the company, uh you may be able to buy as your compensation either toward salary. You might say, hey, I’ll take in I would like an additional $10,000 a year in salary, but you can take $80,000 off my grant, or you might say, hey, I’m willing to take a smaller salary, but I want, you know, a larger amount of this stock-based compensation, just depending. Some companies will allow that. Some companies, you know, have less flexibility there, but it will allow you to buy as your compensation to fit sort of your um your preferred risk profile for your career.
Scott: Yeah, I I I think that to highlight what you’re saying here, this is an investment decision in a lot of cases for a for a lot of folks, right? To buy as your your compensation one way or the other, right? I am an aggressive personal finance, you know, nerd with all this stuff and I like to make probability weighted things. So in, you know, I first of all, I would want to think that I would try to join a company that had good growth prospects. That’s the gamble part of it, but that’s that’s something I would try to research very very heavily with that. And then I would probably want to buy us if I were able to do that, and I thought the company was fairly valued more towards the option upside and less towards the cash compensation today. But that’s a tradeoff that I think a few people understand very well. So for example, you know, you if you have a choice at a at a public company that had a higher salary with a fair but not glamorous option pool, and a startup that just raised money at a crazy valuation. The startup’s going to give out equity like candy, right? Because they they just got this incredible valuation from a venture capital firm, their equity is, you know, they they don’t have the revenue to support it at this point in time, all that kind of stuff. And that’s something to uh just just be aware of, right? They’re going to try to pay you less, it’s going to reduce their expense profile on their their their their income uh statement and they make things look good and you’ve got a a spin, but maybe not a very high probability one compared to um a more stable company that’s producing larger amounts of cash flow. They might give you less equity, but there might be more of a like a clear trajectory towards growth and track record of success. And I think that folks don’t really think that through all the time with when they’re making these decisions. Would would you say that that’s been true with any of your peers or folks you’ve mentored in the past?
Guest: Yeah, most of, you know, most of my career has been in larger companies. So I don’t have a lot of experience in that sort of startup options package. Uh but it you don’t have to go far uh to hear stories um where even good bets with startups end up being uh being very problematic for individual employees. And I would certainly encourage anyone who’s looking at working at a startup, uh intrigued by the the allure of possibly owning, you know, 0.2% of of the next, you know, stripe uh or door dash or whatever, to to really understand um the risks that you’re you’re taking uh even assuming that the company does well. So, uh you should certainly talk to a a professional around it, but when you’re really at at that part of the company, you take on dilution risk. If the company takes on additional investors, your value of your amount of the company that that you own may be less than you think. Uh you take on a lot of tax, you know, tax kind of risk. Um, largely due to the you know, a lot of times you’ll get these options for this private company that there’s no market for. So you still have to deal with the tax implications of potentially, you know, millions of dollars of value, but you can’t sell your shares afterwards. And you’re like I said, you don’t have to go far to read stories of of people who have gotten into the startup, even a startup that that goes well and they just can’t do anything with their with their stock-based, you know, compensation because of the circumstances of of their life. So it’s it’s really important to to have a good understanding of, you know, what happens with these plans in in your circumstances, especially for some of these smaller startups.
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Guest: So restricted stock is is definitely less common than the the employee stock purchase plan. Um, it is part of your compensation, um, instead of just being something that that you can’t take advantage of. Uh, again, you can sort of split it up into the grant, the vest and the sale. Uh, for the grant, your company will usually say, hey, if you continue to be employed, then at at some vesting schedule, we will grant you control over some amount of stock. And it’s often times presented either as a cash amount, they might say, we’ll grant you $10,000 worth of shares. Uh and then at some point, the board of directors will approve that grant across all the employees that might fit under that grant. And at that time that $10,000 will be converted to shares and it’ll stay as shares through the rest of the vesting period. So if you had, you know, $10,000 and your stock price was $10 when the board approved the grant, they grant you 100 shares and that would be what what you vest on. Um, as you go through your employment period, when you meet that vesting schedule, you just get those shares and those shares are now under your control. They’re just as though you had purchased them um off of the the market. And when they vest, that’s counted to you as income at their current value. So if you had, you know, 100 shares uh that were vesting and even though it if it grant, you know, your stock may have done been $10 a share, if now it’s $20 a share at that 100 shares, you’ll owe or it’ll it’ll count as $2,000 of income and be taxed as income when it vests. And then from that period, it’s as though you bought it at $20 and all the regular short-term and long-term capital gains are are going to apply, but you’ll, you know, you’ll pay you’ll pay the taxes at vesting time and it’ll it’ll come out as um as income and be tax as income at the value it is when it vests.
Mindy: That, I think, is important to note that you are paying income level taxes, not long-term capital gains taxes on this. And I guess short-term capital gains are basically the same as your income level, right? So it wouldn’t matter if you were getting the options and then instantly selling it. that’s the same thing.
Guest: That’s right. Yeah, so if if you were to get restricted stock and then sell it immediately, assuming the stock was flat, there’s probably going to be a little bit of movement. You know, any any change in the stock uh price between when you vested and when you sold would be, you know, a short-term gain or a short-term loss. And then the value of the stock when it invested is counted as income to you. One trap people can kind of get caught in here is the uh the withholding rate for restricted stock is not the same as the withholding rate for your income. And especially if you are uh, a high income earner, you might find at the end of the year that you haven’t withheld enough taxes and that you owe more. Uh, so that’s a, that’s a, you know, a pretty common uh, place especially for, you know, either either high income earners who are in some of the higher tax brackets uh or individuals who have uh a significant portion of their compensation being stock-based compensation because just the withholding is all different and as far as I as I know, there’s no way to elect to withhold more uh to actually meet your, you know, your tax withholding requirements. You just either end up needing to pay estimated taxes or make it up at the end of the filing season.
Scott: Yeah. So if you become come into money in this in have have a have a big success like this or really in any other format and get a large and are able to put a large amount of cash in your bank account through something that’s other than payroll from your company, it’s probably a good idea to hire tax council and to be very conservative with that money until you have filed your taxes completely and feel like you understand that because these types of traps can happen in a lot of different different ways if so if if you’re used to an employer withholding and handling your taxes more or less uh entirely for you throughout the year and get a big refund.
Guest: Yeah, and there there are taxes withheld for restricted stock. Um, you you’ll typically have an option to either prefund uh your account with your custodian with money to pay taxes or they’ll sell, you know, whatever percentage of shares is required to uh to meet the withholding requirements. But you just need to be careful for for some tax brackets, the withholding rate on RSUs is going to be higher than what your your final tax rate is going to be. And for other higher income earners, um it’s going to be lower. So it’s just something you need to pay attention to.
Mindy: Okay, so while you may not know of any way to change the withholding for the RSUs, you can change the withholding in your paycheck if you don’t want to pay the IRS on April 15th to any uh, extra that you owe. Um, on episode 360 with Natalie Kolody, she Kolody, she, um shared that now is a really great time to sit down with your tax pro to get some tax planning uh to do some tax planning for the year in advance. If you know that this is part of your tax compensation or your uh employee compensation and you are going to be hit with a surprise bill this year, which many people are because changes to the tax law, yada yada yada. Maybe now is a really good time to sit down with your tax pro and say, hey, what can we do going forward so that I don’t have this on April 15th. I personally don’t love writing a big check to the IRS, but I would much rather write a check to the IRS than have them send me a check because that means I have given them a free loan for the whole year and I don’t like that. Um but I digress.
Scott: Well, the IRS is going to charge you charge you interest if you’re if you’re if you owe them too much. So, you know, you’re going to be careful about that too because you know, I I don’t like paying the IRS uh more interest in the spread of my my my savings account for example.
Mindy: Yes, and I’m self-employed as a real estate agent, so I have to pay quarterly taxes anyway. Um, so my specific situation is different, but yes. Uh, I I always was fine writing them a check on April 15th.
Scott: JT, what is your specific strategy with how do you personally handle all of this given the the wealth of information you shared with us today?
Guest: Um, so for my restricted stock and for my uh, employee stock purchase plan options uh, or shares, uh, those are ones I’ll sell basically immediately. Um, I I, you know, my position is like I said before, if I were walking down the road and found some money on there, I would not go buy, you know, stock in in in my company. Um, and when I looked at uh, the the value of those that restricted stock, um it seemed a better position for me to go turn it into VTIVSAX or whatever the rest of my my allocation plan um looked like. There have been times, you know, so I’ve I’ve been at my company for a number of years now, um, and there have been periods of time where that was a very uh unfortunate financial decision. Uh and and had I held on to the company stock and sold it later, uh it would have been a meaningful difference in our financial position to the tune of, you know, several hundreds of thousands of dollars. There have been other times, uh at the same company, where I have been very glad that I have sold my restricted stock immediately because the current price is down quite a bit from some of the levels in in which I in which I sold. Um, and I I’ve just learned for me, like, I can ignore my index funds for months or years at a time and it’s fine. But you give me like one share of company stock and I’m looking at it, you know, every day. Is it up today? Is it down today? Is it been up for the week? Is it been down for the week? Um, so I I clearly don’t have the the temperament for individual stock investing. Um, but if I go put it, you know, in uh in an index fund, I’m happy to leave it alone and let it grow and it doesn’t freak me out whether it’s up a little or down a little or up a lot or down a lot, it just does its thing.
Mindy: Mkay. I love that. You have a plan and just like paying extra on your mortgage even when it’s a 3% mortgage rate versus not paying extra on your mortgage, it gives you the hebi GBs to have this stock in your portfolio. You don’t want to be an individual stock portfolio or individual stock investor. So what that tells me is you’ve thought about it. I think that’s the most important takeaway of this entire episode is that you need to think about what you are doing with your investing strategy. What is the episode that we just did an episode about coming up with an investment plan and that was episode 362. Um come up with an investment plan and follow it and I don’t want to say it doesn’t matter what you do as long as you have a plan. It kind of matters what you do. But most important is that you think about it. You hear about these people who are losing everything in crypto or losing everything in meme stocks. It’s because they’re getting in at the end. Oh, everybody’s talking about it and must be good. That’s not true necessarily. Just because everybody’s talking about it doesn’t make it good. It just means everybody’s talking about it. Okay, so given that you work for a tech company and tech stocks are down, is there any threshold that you would not immediately sell?
Guest: Um so there there are and we could also I guess talk a little bit about options if we want to talk about options.
Mindy: This is specifically for RSUs, which are those are granted to you, right? Those are given to you. So you’ve paid zero dollars for it. So even if it was worth a penny, when you sold it, you’ve still made money on it.
Guest: Yeah, and I I’ve I think every every RSU grant I’ve gotten or every RSU I’ve had that’s vest vested, I’ll sell within, you know, a couple weeks to uh to exit that position and and funnel that money into the rest of our financial plan.
Mindy: Um, so RSUs you’ll instantly sell. uh, you have RSUs, cash and options. Have you ever taken the cash?
Guest: No, and that’s so so different, you know, as different companies will will work differently in their their performance reviews. Um, my my current company often times when they do the performance, you know, the the the merit compensation for this longer term stuff, will have uh a choice between whether we wish to take that uh amount in in cash that still vests, right, all the vesting is effectively the same. But they’ll say, hey, we’re going to give you $10,000 of compensation. You can have $10,000 of cash that vests over, you know, three or four years or whatever. Uh you can get $10,000 worth of restricted stock or you can get that $10,000 in options. And then, you know, at this company, we get to elect um which one of those things we want that whole award to to be given to us in.
Scott: And is there any threshold that you would not sell? Like obviously, if you take the option, you have the option to buy X number of stock at this price. So if the stock, let’s say it’s $50. If the stock is currently trading at 35, it doesn’t make sense to buy it at 50 and sell it at 35. unless unless you need losses, but that doesn’t I don’t know, I don’t like losses.
Guest: No, don’t do that.
Scott: What they’re doing is they’re giving you let me ask you this from a psychological standpoint. Um, you know, when I was doing the SPP, my colleagues didn’t do it and I was kind of baffled by like, what, why wouldn’t you do this? You know, and there’s I think a psychological element of, no, this is a test from my employer. And you could wonder if in your situation, if the employer, if employees might be thinking, this is a test. The options, if I take the op the option option, the option option, uh that then that means that I think that the company’s going to blow up and do great over the next couple of years. The RSUs because I just own the stock are a more middling option. they don’t have even if they go down, they’re still they’re still be worth something. so I I have some value there. Um and then the the cash is the the most conservative. Do you think there’s any element of that uh to be to be factored in or is that all in people’s heads?
Guest: Uh I think largely that’s that’s in people’s heads. Um the the the way that I look at it is it gives you an opportunity to sort of shape the risk profile of your compensation. You can really like the company that you work for and think that it’s going to do really well and not want to own its stock. You can really not like your job, right, and and think your company is terrible, but on the off chance that, you know, it has a really great year and the stock price quadruples in value, you want to be open to that upside. So I I think it’s, you know, that that election really says more about um, you know, the the way you want to shape your compensation and the amount of risk you want to take as part of your career and your salary, right? Um, more than, you know, it that you think there’s some, you know, some director or C-level executive who’s like, look looking at a spreadsheet of everybody who took, you know, cash instead of options and are like, hmm, I don’t I don’t know about that that, you know, that one. Clearly, they don’t, you know, they’re not invested in the company.
Scott: Mkay. And then last question I’d have is around taxes. Um, let’s go I’ll use my example, right? I had an employee stock purchase program. I uh, if I put $10,000 of my salary into it, I could buy $1,150 worth of stock, right? A 15% discount. Um that then I turned around and sell it, that 1,150 not only am I getting taxed on my salary, of course, but I’m also getting taxed on the the short-term capital gain, the one-day capital gain of that uh spread between 1000 and 1150. I could have left that money in the stock for one year in order to avoid, you know, convert that from a short-term capital gain to a long-term capital gain tax. At that point it didn’t matter very much because my tax bracket was very low and they’re very comparable. But for for some folks, that might make a a big difference. How would you how would you um propose approaching that problem? It sounds like you sell, you know, sell immediately for for a lot of this stuff. But are there circumstances could we tweak those circumstances in such a way where you would begin playing the tax game?
Guest: Sure. And I I think the the place that you do that is with options. So the the nice thing, the simple thing about restricted stock is when when you vest, that’s all income. Can’t do anything about it. You have, you know, number of shares times value of shares, amount of income that is attributed to you and you owe taxes on it right away. And that’s your cost basis for the stock. So, yeah, the stock may go, you know, up a little bit or down a little bit between when you invest and when you’re able to sell. But there’s not really a lot you can do from a tax perspective at that point. Uh the employee stock purchase plan like you mentioned, um, there are some real tax consequences to to holding for either one year or it gets even a little better at two years. Um, if you especially if you have that look back period. So, uh, if you have the look back, you could say, um, you know, my my stock, you know, the value of the stock at the beginning was 100, and now it’s 150, and I still pay 85. So, when you sell, the 85 to 100 is always income. That 15% discount is always, always income. Depending on when you sell, the 100 to 150 may be income, it may be long-term capital gains.
Mindy: Wow, so I made the right decision, but out of ignorance, not out of smarts. So,
Guest: Well, and and I think you mentioned your your plan didn’t have this lookback provision in it anyway, which is really where this this extra piece comes in. Um for employee stock purchase plan for most people, I I think I take the same perspective you do and that the values just really aren’t large enough to make enough of a difference in your financial position to really worry about or to to justify the risk of holding on to that stock for 12 to 18 months given whatever volatility might be in the stock. Different people are going to calculate that risk differently, but I don’t, you know, I don’t think the the extra taxes on that, you know, that $50 per share um warrants holding on to that stock for two years. Uh options are going to be a a somewhat different story um because they can be worth a lot more and there’s a kind of option that has a similar kind of of tax uh behavior as the employee stock purchase plan. And those are the incentive stock options. And those will allow you to say, okay, I’m going to I’m going to exercise, you know, this stock. Um there’s a difference, you say can say, uh, hey, uh, JT, we’re going to give you a bunch of options at $1. Just great. You know, you have the option to buy a stock at, you know, your company’s stock for a dollar. If the stock price is $10 when you exercise those shares, then, uh then it all starts becoming interesting. What do you do with that extra $9? For some kinds of options, it’s the same thing. That’s income, and it’s income right away and you need to, you know, you need to account for for taxes on that income. For these incentive stock options, it’s not necessarily income depending on when you sell. So if you hold the if you hold the stock for a year after you exercise and two years after the grant, that $9 is long-term capital gains. And if the company has gone up enough and the amount of, you know, the number of shares that you have is enough, now you’re not necessarily looking at, you know, uh uh 10% of, you know, $500 or whatever, you’re potentially looking at, you know, uh uh top bracket earner in the state of California, right? This is this is potentially hundreds of thousands of dollars for holding the stock for a year versus selling it immediately. And again, that’s going to be an individual decision. Do you think, uh do you think it’s worth taking the risk of holding on to that stock for the year until you’re able to sell it or do you not want that risk, you’re willing to pay the taxes and and you just, you know, you you’re willing to sell and and go into whatever else your, you know, your financial plan has for those extra dollars. But it it can end up being like real, real money. Um depending on what the company’s stock price has done and and when you decide to exercise.
Scott: JT, this has been fascinating. Thank you for coming on the show and discussing this topic with us. Um, I think that uh, you know, it it’s some folks, hopefully many of our listeners have the opportunity to participate in plans like what we discussed today and when you do, please refer back to this episode and and uh know that there are options for your options and uh thing decisions to make that can have uh major impacts on your life. JT, where can people find out more about you and the uh financial planning and tax strategy firm that you’ll be starting soon?
Guest: Yeah. Uh I think I’ll stick with microprocessor design. Um no, uh I probably the the best way to get a hold of me if you really want to is in your Facebook group. Uh I’m I’m active there. I’ll I’ll pop in ahead of time if uh if if you want to tag me on there, you know, I’m happy to talk about all this stuff or um, hear disagreements as to why my my approach is is not the best one to take. So,
Mindy: Respectful disagreements.
Scott: I don’t think you’ll get too many of those. But you can find that group at facebook.com/groups/bpmoney. Thank you for being a part of the group, JT, and thank you for listening and thank you for sharing your wisdom on um this pretty complex topic today.
Guest: Yeah, thanks. I had a great time. I like thinking about this stuff. So, it’s fun to talk about.
Mindy: Thank you, JT and I’ll talk to you soon.
Scott: And that was JT, a big tech employee talking about his compensation package. Stock compensation packages in general and how he handles his particular compensation package. Scott, what did you think of JT?
Scott: JT is super knowledgeable. has is clearly given this a ton of thought, has experience across multiple different companies, although mostly public companies as he acknowledged. Um, and and has really kind of thought this through, um, and I think in a way that that probably has benefited himself and I suspect many of his his close colleagues that um have have benefited from his wisdom over the years. So, and I’m sure he’s done very well and chosen the companies that he works for wisely as well to the point where they they’ve probably have produced very well inside of these plans.
Mindy: Yeah, I think that what is most important to take away from this show is that he has a plan in place. He has given it thought. He has decided that he wants his investment portfolio to look like this, to be comprised of these systems and these portions and these investment vehicles. So that’s what he’s doing. He’s not going off on tangent. He’s not venturing down this path to try this out, try that out, try that out. He has a plan and he’s sticking to it. And I think that’s really important. You don’t have to sell your company’s stock instantly if you don’t want to. If, like he said, you found $1,500 on the street and you would go use that money to buy your company’s stock anyway, then getting the grants and holding on to that stock is great. That’s a great plan. But that’s the keyword here. It’s plan. He has a plan in place and he’s executing his plan. And I think that’s really great.
Scott: Yeah. I I also think that, you know, towards the end, we we heard this framework and it was, well, if I had invested in my hot shot tech company, I probably would be up a few hundred grand over my index fund strategy. Yet, he is also happy with that outcome or can live with it because that’s he he’s not thinking in terms of outcomes. He’s thinking in terms of bets, probability-based thinking, thinking in bets with Annie Duke. Um its a great book for example to to understand this. He says my my portfolio, my plan is this and I’m happy to live with it even though I probably I actually would have done better if I had dumped it all in my company’s stock. That’s a really wise position to take, um, in my opinion, and and something that I think is is hard for a lot of people. They want, um I think it’d be really hard to miss out on on company growth like that, but I think I I respect in and his approach and and and I would be likely to take the same um steps that he’s taking in his position.
Mindy: His company could very well have gone the route of Enron or Worldcom where he got the grants, held on to them and then lost everything. Just because his company went up, doesn’t mean that it’s always going to go up. He works at a big tech company. Right now the stock is down. but that doesn’t mean that it’s always going to be down. It’s just like you said, it was a gamble, like he said, it was a a gamble. He was gambling on the stock being different than it ended up being. And that’s okay. He took an educated gamble guess and it didn’t work out. He’s still doing well. It’s not like he lost everything. He just didn’t see some of the explosive growth that other people did. But he also said, I don’t have any issue with what’s going on with my index funds. Those are set it and forget it. In his mind, he can put money into the index fund and leave it. In his mind, if he owns even one share of his company stock, he is constantly thinking about it. And that is not worth the mental real estate that it takes up to him. So he has foregone that in an educated way, and I think that’s the the right maneuver. It’s just have a plan and stick to it as much as you can.
Scott: Yeah, I agree completely.
Mindy: Well, you have to because he’s right. Okay, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, ciao ciao, Brown cow.
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Mindy: Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.
