Reports of a recent survey of Nvidia employees show approximately 80% of employees are millionaires and 50% are worth over $25 million. Jensen Huang, CEO of Nvidia, recently noted, “I’ve created more billionaires on my management team than any CEO in the world.” We have also seen a number of our clients caught up in the recent AI hiring blitz at companies like Meta and Google. Participating in a company stock plan can produce a sudden and significant increase to wealth. With sudden wealth, you may experience a turbulent transition period.
Whether you are a job seeker or already an employee with access to company stock as part of your compensation package, you have a number of decisions to make. How will you approach your future employment decisions and the myriad of stock plan packages available? How do you balance realizing the upside of a rapidly appreciating stock, while balancing the concentration risk? Most importantly, how do you determine the purpose of the funds and ensure they align with your values?
Defining Stock Plans: RSU vs. Stock Option vs. Employee Stock Purchase Plan
- Restricted Stock Units (RSU): a company grants shares that, at vesting, are taxed as ordinary income.
- Stock Option: a company enters into a contract that gives an employee (and sometimes other parties) the right to buy company stock at a particular price for a period of time. Examples: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs or NQSOs).
- Employee Stock Purchase Plan (ESPP): a program that allows employees to buy company stock at a discount via payroll deductions.
- Other plans: Restricted Stock Awards (RSAs), Stock Appreciation Rights (SARs) and Phantom Stock are other plans employers use to reward or compensate employees.
Evaluating Employee Benefits
We often first encounter clients at the beginning of their journey with a new employer. You may have received an employment offer, or more than one, and have to quickly evaluate your choices. Many of our clients in early to mid-career stage transition between employers more frequently, which means evaluating compensation packages in real time as they evolve. Additional considerations include whether the company is publicly traded or private, small business or large, startup or a mature enterprise. Employers move quickly to adjust their compensation in response to market changes and their business needs. Job seekers need help navigating the most up to date offerings and how to develop a decision making framework.
Tax Surprises
Awarded options or stock can have varying tax impacts depending on plan type, timing of exercise or sale, and your personal tax situation. If you have no plan for decisions such as whether to exercise, make an 83(b) election*, or when to sell, you may be surprised at tax time.
Many tax preparers don’t counsel you ahead of time on timing of stock transactions. FCA Corp counsels financial planning clients ahead of time, in real time, and provides tax preparation services to cover all angles of these complex choices.
One strategy we discuss with clients is whether it makes sense to increase RSU withholding beyond the standard rates—22% for amounts under $1 million and 37% for amounts over $1 million.) Several companies allow employees to set a higher withholding rate for the entire amount set to vest (35% or 37%). It’s also possible to increase your regular paycheck withholding by submitting an updated IRS Form W-4, as well as make quarterly estimated tax payments.
Buildup of Risk
If you allow your company stock holdings to accumulate after RSUs vest, you could end up with a concentrated position, which introduces significant financial risk. The same thing could happen when participating in other stock plans.
We help our clients evaluate whether selling their RSUs upon vesting is the best strategy, or if setting a maximum percentage of company stock in their overall portfolio makes more sense. Our tech industry clients are often surprised to find they own the “Magnificent 7” already in their portfolio through accounts like a 401(k), hidden as part of large cap mutual funds or target date funds.
Concerns for Tech Industry Professionals
Current trends in the tech industry have an impact on your RSU strategy, whether to participate in the ESPP plan or to exercise ISOs. You have the potential opportunity to build wealth through the available stock plans as part of compensation, but what if you are entering the industry and receiving/buying company stock at the top of an AI bubble? Your personal preferences for risk, ability to take risk and your belief in how the company stock will perform in the coming years will all affect your decisions.
Companies that are becoming more aggressive with hiring or acquisition include OpenAI, which is currently private. Evaluating their stock plan is difficult because OpenAI recently restructured and there’s more uncertainty with how their employment package will evolve in the coming years.
Contact Us Today
Whether you are a job seeker or mid-career professional, decisions abound; RSU vs. Stock Option? Startup world vs. aging giant? Where will you take your hard-won expertise? How will you capitalize on the incredible compensation packages being offered?
FCA Corp acts as a key partner before, during and after these decision points through a deep understanding of your goals and your overall financial picture. Our tax planning and preparation for full service clients means you have a team on your side to navigate The Way Forward™. Contact us today to get started.
Footnotes:
* An election to pay taxes on restricted stock at grant rather than vesting.
Sources:
https://finance.yahoo.com/news/nvidia-producing-unprecedented-wealth-employees-003124691.html
Huang Interview at Hill and Valley Forum “Winning the AI Race”: https://youtu.be/9WkGNe27r_Q
