Tag Archives: stock options


When Should You Exercise Your Stock Options?

Stock options have value precisely because they are an option. The fact that you have an extended amount of time to decide whether and when to buy your employer’s stock at a fixed price should have tremendous value. That’s why publicly-traded stock options are valued higher than the amount by which the price of the underlying stock exceeds the exercise price (please see Why Employee Stock Options are More Valuable than Exchange-Traded Stock Options for a more detailed explanation). Your stock option loses its option value the moment you exercise because you no longer have flexibility around when and if you should exercise. As a result many people wonder when does it make sense to exercise an option. Tax Rates […]

How New College Grads Should Approach Stock Compensation

Over the past two years we have written numerous posts to help you evaluate job offers that include stock options or Restricted Stock Units (RSUs). We assumed in all our posts that job seekers were evaluating offers from companies at a similar level of maturity. For many new graduates, however, the comparison gets more complex if you aren’t sure whether you want to join a very mature company like Google or an earlier stage company like one of our recommended mid-sized companies with momentum. The purpose of this post is to help make that task much simpler. The Mechanics of Stock Options Let’s start with the basics of stock compensation. A stock option gives you the right to buy common […]

How to Trade Salary for Equity

These days it’s more important than ever to maximize the financial value you extract from your job. In You Need Equity To Live In Silicon Valley we made the case that it’s very hard for a Silicon Valley based couple who earns $250,000 per year to afford to buy a home and put their kids through college without generating wealth from an equity stake in a private company. We have written numerous posts to help you identify the kind of employer that is most likely to help you achieve your goals (peruse the Careers section of our blog to see them). This post focuses on how you might think about trading off some salary for additional equity, something we are […]

The Impact of Dilution

Most people don’t realize that the percentage of the company they are initially awarded when they start a new job is not  what they will ultimately own. That’s because private companies tend to raise additional capital as they mature and the ownership associated with the additional capital dilutes your ownership. Your ultimate ownership depends greatly on the maturity of your employer at the time of your offer and the rate at which it grows. Before I show the impact of future financings on your ownership I need to explain how a successful company trades ownership for financing. Dilution from Financing These days a very successful company may need four or five rounds of financing before it has the opportunity to […]

What You Need To Know About Vesting Stock

Most people don’t realize it, but your vesting schedule has an enormous impact on the potential value of your equity package. That’s why the topic of vesting deserves a deeper dive than our discussion in The 14 Crucial Questions About Stock Options. Before we analyze what vesting schedule is appropriate and how it can affect you, we need to provide a little background on why vesting came to be associated with stock options and RSUs. What is Vesting? Vesting refers to the process by which an employee earns her shares over time. The most common form of vesting in Silicon Valley is monthly over four years with a one-year cliff. That means you earn the right to 1/48th of the […]

How To Sell Your Single-Stock Position Tax-Efficiently

We recently launched the Single-Stock Diversification Service — an easy way to transition from large holdings of a single stock (perhaps that of your current or ex-employer) to a Wealthfront diversified portfolio. One of the problems we aimed to solve with the Single-Stock Diversification Service is tax-optimization. We knew that many of our Single-Stock Diversification Service clients would have multiple types and lots of employee stock that they would want to diversify. It becomes difficult to know which shares to sell first to get the best after-tax outcome when some of your shares come from restricted stock units (RSUs) and others from exercised stock options. To make matters more confusing, many of the shares have vested at different times and […]

The Reason Offer Letters Don’t Include a Strike Price

A common frustration we often hear with offer letters from startups is the absence of an exercise price for the options being granted. Many people interpret this missing information as an intention by the potential employer to obfuscate. This is not the case. Only a board of directors — not the management team — can technically grant options and set their exercise prices, which is why your offer letter should say that your future employer will recommend your proposed offer  at the next board meeting. Boards typically only grant options when they meet, which for private companies can be anywhere from once a month to once a quarter depending on the company’s maturity. A 409A Is Needed to Set Fair […]

Introducing the Wealthfront Single-Stock Diversification Service

When LinkedIn went public in 2011, the company had about 1,500 employees. Traditional private wealth managers were ubiquitous on campus in their efforts to sign-up the 50 to 100 early employees and executives who met their firms’ multi-million dollar minimums. Unfortunately, that was of little help to the 1,400 other employees at the company looking for support. At Wealthfront, we believe everyone deserves sophisticated financial advice. Today, we’re launching the service I wish the entire LinkedIn team could have had access to back in 2011. Introducing the Wealthfront Single-Stock Diversification Service. This service will help solve a critical problem for many that work at public technology companies: How to best diversify concentrated holdings in your company’s stock. Such holdings are […]

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 […]