Tag Archives: mistakes


Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 3

Wrapping It All Up: Tax Strategies In this third and final part to our series on the taxation of stock options and restricted stock units (RSUs), we’ll outline some strategies you can use to achieve better tax consequences. While the list below is definitely not comprehensive, it does cover some impactful strategies. Remember that — based on the various types of taxes described in Part 1 of this series — through good tax planning, you may be able to achieve a 19.6% improvement in your federal taxation rate. This improvement represents the difference between the federal ordinary income tax at 39.6% and the long-term capital gains rate at 20%. Early-Stage ISO Exercise and Hold While this may seem like it […]

Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 2

Applying the Tax Law to Common Employee Stock Situations In the first part of this three-part series, we discussed the four main taxes relevant to individuals. Now we’ll apply that knowledge to show what taxes would be incurred in five common situations faced by employees who work for venture-capital-backed companies. 1: Angel Investment or Founder Stock For many start-up companies, the first money in comes from angel investors or the founders themselves in exchange for preferred and common stock, respectively. In exchange for cash, investors (perhaps through a limited partnership) and founders receive shares of stock. The capital gains holding clock starts with the purchase of these shares, and it stops upon disposition of the stock. The shareholder realizes a […]

The Post-IPO Dilemma: Hedging Your Stock

If your company recently went public and your stock price has gone up significantly then you’re probably wondering how you can hedge your position. Unfortunately there’s nothing you can do while you’re still in the 180-day lock-up period. Most lockup agreements have extremely detailed restrictions included, designed to prevent almost any form of market participation with a security.  It’s too long to reproduce anything but a sample here, but it typically begins like this: In consideration of the Underwriters’ agreement to purchase and make the Public Offering of the Securities, and for other good and valuable consideration receipt of which is hereby acknowledged, the undersigned hereby agrees that, without the prior written consent of each of [names of managing underwriters], […]

The 14 Crucial Questions About Stock Options

Ask These 12 Questions About Your Options

In April 2012 I wrote a blog post titled The 12 Crucial Questions About Stock Options. It was meant to be a comprehensive list of option-related questions you need to ask when you receive an offer to join a private company. Based on the outstanding feedback I received from our readers on this and subsequent posts about options, I’m now expanding the original post a bit. I’ve done just a little updating and posed two new questions – hence the slight title change: The 14 Crucial Questions About Stock Options. Next time someone offers you 100,000 options to join their company, don’t get too excited. Over my 30-year career in Silicon Valley, I’ve watched many employees fall into the trap […]

When to Diversify Across Financial Advisors

Last month Wealthfront hosted an event that featured our chief investment officer, Burt Malkiel.  It’s wonderful to listen to Burt, because he discusses the markets with such clarity. Markets go up, and markets go down.  You can’t control them. As an investor, you should instead focus your efforts on the three things you can control that will make a difference:  Diversify your portfolio, minimize fees and minimize taxes. During our Q&A session, one of our clients asked Burt, “Does it make sense to diversify across financial advisors?” Burt’s answer was simple: “There is no real benefit to diversifying advisors if your advisor follows my advice of diversifying your portfolio across index funds that represent a variety of asset classes. Hiring […]

Angel investing? Rental property? What to do with your play money

An oft-heard request here at Wealthfront, at least among a significant portion of our client-base, has been a desire to set aside some play money. Just to be clear, we are referring to the Silicon Valley iteration of this concept whereby clients would like to invest some of their money outside of the rebalanced diversified portfolio of low-cost index funds we have created for them. Perhaps they have heard from friends or received suggestions or pitches to invest in rental property or become an angel investor. Such ideas are driven by a desire, innate in some of us (especially so among many bright young Valley professionals) to be active investors. Sure, our clients are more aware than most of the […]

7702 Retirement Plan? There’s No Such Thing

A growing number of insurance companies and independent financial advisors have been selling “7702 Plans,” sometimes referred to as a “7702 Private Plan,” for retirement. On Google alone, a query for “7702 plan” results in almost 1.5 million pages of matches. This is fascinating, largely because there is no such thing as a 7702 plan. A vehicle for selling life insurance If you go to one of the thousands of websites, you’ll find a description of something that sounds like a 401(k) or IRA, but is based on life insurance. The page will explain that unlike traditional retirement plans like 401(k) and IRA accounts, “life insurance retirement plans” have no limit on contributions or size, and no requirements for withdrawals […]

Three Ways To Avoid Tax Problems When You Exercise Options

I love the movie Wall Street because Gordon Gekko’s single-minded pursuit of money led to his downfall. This is not just a Hollywood story. In my past role as a tax accountant in Silicon Valley, I saw many executives and employees get greedy, too. By attempting to capture an early gain in their company’s stock, they exercised so many stock options that they didn’t have enough money to pay the taxes due on their gains. A surprisingly large number of people fall into this trap. Some of them are just ill-informed. Others, I believe, are overcome by their greed: It causes them to forget that stock prices can go down as well as up, or keeps them from embracing a […]

Why Whole Life Insurance Is A Bad Investment

When you have children, many people tell you it’s important to buy life insurance to protect your family. You’ll have two options: Term Life Insurance. Term life is a life insurance product that covers a limited term in return for a constant monthly premium over the covered term. For someone who is 30 years old, premiums can be less than $75 per month. Whole Life Insurance. Whole life is a hybrid investment and insurance product that covers you until death. For someone who is 30 years old,  the premiums can be less than $800 per month, and they don’t change over the life of the policy.[1] Whole life insurance is a more complicated product than term life insurance. Like universal life or […]

Burt Malkiel’s Rule for Young Investors: Save Regularly

Wealthfront CIO and Princeton emeritus economics professor Burt Malkiel sat down with us a few weeks ago to talk about two of his favorite topics: perseverance and patience. In other words, invest regularly, and stay invested. Burt cites a famous essay by Warren Buffett. Buffett uses it in part to explain his practice of placing big bets in good companies when the market is headed down, and then waiting for the stock prices to turn around. That’s beyond the scope of non-professionals. But there is a way young investors can benefit from the same idea. If you persevere by investing regularly, even in markets that don’t look promising, you are more likely to reap a large reward over time than […]