Insights from Financial Advisor Josh Radman (MBA 2019)

Equity compensation can be an exciting ownership opportunity — but also one that can feel enormously complicated and confusing. When new hires receive equity grants as part of their compensation package, they often find themselves feeling a mix of excitement and uncertainty.

  • How should I value my equity grants—both in relation to other offers and as part of my overall financial picture?
  • What factors determine whether my shares/options will become valuable (or not)?
  • When should I exercise (buy), sell, or hold?
  • What tax implications should I be aware of?

These are the same questions that Josh Radman (MBA 2019) wondered when he first received equity grants upon joining the tech industry shortly after graduating from Harvard Business School (HBS). He searched for someone who could help him create a strategy around his equity compensation and who also understood his millennial needs. But that person didn’t exist. So Josh launched Presidio Advisors, a financial planning firm dedicated to helping millennials gain clarity and confidence around their equity compensation.

For those looking to take a more strategic approach to equity compensation, here are some key considerations.

1. Gain Clarity on What Your Equity Actually Means

Just knowing how many options or shares are in your grant isn’t sufficient to make an informed decision. You’ll likely want to ask your company for more details. Key questions, among others, to consider asking include:

  • What type of equity am I being offered? Not all equity is created equally. Most commonly, employees will be offered Incentive Stock Options (ISOs), Non-Qualified Stock Options (NSOs), or Restricted Stock Units (RSUs). Each type has different considerations, benefits, and drawbacks.
  • What is the vest schedule? Most new hire equity grants come with a four-year vest schedule, meaning that you can only earn your equity over time. But data also shows that most employees leave their companies after just two years. That may be worth broader consideration.
  • What is the 409a valuation of the company? The 409a is an independent valuation of common shares. But it’s also a critical metric in determining your equity grant price and future tax implications if and when you decide to sell your shares.

2. Plan for Pivotal Job Transitions

One of the most hand-wringing financial decisions related to equity comp occurs when employees leave a company. At that point, they must decide whether or not to exercise (buy) their options before their vested equity is forfeited entirely. Understanding that exercise window, the cashflow and tax implications, and how to negotiate around it is critical.

  • Exercising options can mean spending tens or hundreds of thousands of dollars on shares that may end up being worth a fortune—or nothing at all.
  • This decision often needs to be made within 90 days of leaving a company.
  • Some exercises may inadvertently subject shareholders to Alternative Minimum Tax.

Because of the high financial stakes, employees should meet with a tax or financial professional well in advance of a job transition. Having a clear strategy in place helps to ensure that these decisions are made thoughtfully while helping to prevent unanticipated surprises.

3. Beware of Common Behavioral Traps

Everyone is human! And humans tend to both make mistakes and have many cognitive biases around investing. Some of the most common mistakes – particularly for those at public companies – include:

  • Holding onto Restricted Stock Units (RSUs) for too long. Some employees mistakenly think there are tax efficiencies to be gained by holding shares for at least one year (there is not). Rather, this is just a confusion between how ordinary income and capital gains taxation works.
  • Forgetting that market returns are generated by outliers. The vast majority of companies significantly underperform the market (on both an absolute and risk-adjusted basis) and actually generate negative returns. Only ~10% of outlier companies generate exceptional returns and thereby lift the “average” returns for all. Employees who keep their shares past vest are essentially gambling when trying to pick those outliers.
  • Disregarding cognitive biases. The “Endowment Effect”, as an example, suggests that people value things that they own more than things that they don’t own and are therefore reluctant to sell their belongings. Nowhere is this more true than with employees who have put sweat, blood, and tears into the success of their companies – and intrinsically value their equity more than any external third party may do so.

4. View Equity as Part of the Bigger Financial Picture

While equity compensation can be an exciting ownership opportunity, the decision that is right for you must ultimately align with your guiding financial priorities. In deciding whether to buy, sell, or hold equity you must consider:

  • Tax and cash flows – Understand the cash outlay (including taxes) required to exercise your equity
  • Opportunity costs – Given cash flow considerations, ensure that you’ve considered how higher-priority decisions, such as buying a home or saving for a basement remodel, may be impacted
  • Risk tolerance and risk capacity – Ensure that your decisions align with how well you want to be able to sleep at night.

About Presidio Advisors

Josh is the founder of Presidio Advisors, a registered investment advisory based in Denver, CO and serving clients nationwide. Josh is a fee-only fiduciary, meaning that he is legally obligated to put client interests ahead of his own at all times and never accept any commissions of any kind. Josh offers a “flat-fee” service model, meaning that there is no charge for “% of assets under management”.