6 employee equity mistakes to avoid, according to experts

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There’s something about the words “stock options” that makes an employee’s compensation feel royal, but fairness isn’t just a badge of prestige.

“Employee stocks are a great way to start an investment portfolio,” said Anthony Martin, CEO of Choice Mutual. “When managed correctly, they can become very lucrative.”

“Managed properly” is the key phrase.

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Stock options, restricted stock, employee stock purchase plans and other types of equity compensation are complex and unfamiliar to most.

GOBankingRates asked the experts about the most important mistakes to avoid when managing equity compensation. Keep reading so you can see the traps before you fall into them.

Not understanding the basics

If your employer compensates you with stock options, congratulations on your participation in the company. But being an owner requires a certain degree of skill and knowledge. If you don’t take the time to learn at least the basics of what you’re getting into, costly mistakes are almost certain.

“There are a few key mistakes to avoid when it comes to stock options and other forms of employee compensation,” said Lucas Solomon, New York-based financial, business and investment consultant and founder of fx4biz.com. “Employees can make a lot more money if they understand what their stock options and stock compensation really mean. Make sure you know how many shares you have, what the strike price is, and when the options will expire.

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Failing to plan and strategize

One of the most common mistakes is treating stock options the way most people treat their 401(k) plans – only to put them on autopilot and forget about them. Equity compensation requires a bit of careful consideration, especially if your employer is going through ups, downs, or changes.

“If you think your business is doing well or is likely to be acquired, contact your human resources department and ask about exercising your options or cashing in your stock,” Solomon said. “Waiting until the last minute could mean losing valuable compensation.”

The easiest way to circumvent all the many pitfalls is to have a plan before you receive your first slice.

“The best course of action with any stock, especially company stock, is to have an investment strategy,” Martin said.

Ignoring taxes

Just because you receive equity as compensation doesn’t mean the IRS treats it as regular income. If stock options are part of your salary package, start planning for a more complicated tax season next year.

“When you exercise your stock options or cash in your shares, you will have to pay taxes on the profits,” Solomon said. “Be sure to budget for this and factor it into your overall financial plan.”

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Not playing the long game with an ESPP

If you believe in the value or growth potential of your company’s stock, you may be able to pursue a discounted property raise for the duration of your employment.

“If you’re interested in company stock, take advantage of an ESPP, if your company offers one,” Martin said in reference to employee stock purchase plans. “This type of program allows you, as an employee, to buy shares at a reduced price. There are no taxes due on this type of inventory until you sell it. The reduced rate will also earn you even more if the stock continues to appreciate over time.

Treating company stock as a silver bullet

You can’t be blamed for feeling like you’ve stepped into the investor category when you land your first job with an equity stake, but don’t get a narrow view. The old investment rules still apply, in particular the one on protecting your assets through diversification.

“Stock options and other equity-based compensation can be a great way to build wealth, but it’s important to spread your risk by investing in other assets as well. Don’t put all your eggs in one basket.

Martin agrees.

“Take full advantage of employee equity opportunities, but always make sure you have a balanced portfolio,” he said. “It may seem exciting to keep buying as many shares of a company as you can, especially at a reduced rate. However, it is a general rule not to have more than 15% of your portfolio tied up in a stock in downside, otherwise you risk losing everything.

Go it alone

Managing stock options, restricted stock, restricted stock units, phantom stock, stock appreciation rights and ESPPs is not the same as putting 10% of your check in an ETF once a month. It’s very likely that getting the most out of your equity compensation requires expertise that you simply don’t have. If you’re not up to the task, ask for help.

“That’s probably the biggest mistake of all,” Solomon said. “Employee pay equity can be complex, and it’s important to get professional advice to make sure you get the most out of it. »

Martin agrees.

“Having a financial advisor can also help you understand your options if you’re new to the market or have additional questions,” he said.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was previously one of the youngest nationally distributed columnists for the nation’s largest newspaper syndicate, the Gannett News Service. He worked as a business editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as an editor for TheStreet.com, a financial publication at the heart of New York’s Wall Street investment community. .

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