You can see the money now, can’t you? ???? ???? 

Your company’s hit their IPO, and you finally get to cash in on your stock options. ????????

You’ve received all the exciting emails from HR about what you’ll be able to do and when, and your trading window is about to start. To say you’re excited is an understatement. ????

We work with A LOT of people in this stage of excitement, and we’re excited for you too. There’s nothing cooler than seeing one of our clients advance her financial plan by YEARS because the IPO she’s worked towards has finally happened.

????‍♂️ BUT… and this is a big but… we see a lot of really common mistakes with employee stock options people do during their first trading window that we’d like to help you avoid, so we’re going to go over those in this article.

Mistake #1: Not Acting on Day One

As soon as you get the dates for your trading window, you need to make DAY ONE of that trading window your tip-top priority. I know it sounds counter-intuitive because trading windows last 4-6 weeks and that feels like a lot of time, but it’s really not.

You only get four trading windows per year. Each window is only open a few weeks, so that’s roughly 70% of the year that you can’t sell your shares.

First things first, educate yourself and know exactly what actions you’re going to take on day one to sell you shares so you can reach your financial goals. You can do this by talking to a financial planner, and thinking about what you’d like to do with your money once you get it.

After that, book the time in your calendar to execute on your plan. Create a phantom meeting with yourself if you need to. Schedule a day off if you’ll need more than a few hours. Work from home so you won’t be interrupted by co-workers walking up to your desk. Have your schedule cleared, with no interruptions, so you can take the action you need to take.

Mistake #2: Not Selling RSUs ASAP

Here’s the thing about RSUs: they’re the bully of the playground when it comes to employee stock options. They’re taxed just as much as regular salary, your tax bill isn’t covered with their withholdings, and the stock price could go down while you’re holding them, but you’d still owe tax on their value on the day they vested. (You can read more about the mess RSUs create here.)

Even still, some employees like to use “yeah, but… “ reasoning to hold onto their RSUs because, after all, they might raise in price and be worth more in the future.

This is one of the worst mistakes with employee stock options, because if the prices don’t go up, you’re out of luck and stuck paying taxes on more money than you actually have.

Even if you 100% believe your company’s stock will go up and out-perform the stock market as a whole, it’s still in your best interest to sell your RSUs when they vest.

Here’s the explanation:

Let’s say you work for the best company since Zoom, and really want to invest in the stock. This is good, because the longer your work there, the more RSU grants you get.

Any time you get an RSU grant, they’re first given as a total dollar amount (sort of like a cash bonus), but then that dollar amount is converted into a number of shares at the current stock price.

Let’s say you get an RSU grant worth $800,000 over four years. If the 30-day average price is $20 per share, that means you’ll get ~40,000 shares total, which equals about 833 new shares every month. Ultimately, RSU grants are for a fixed number of shares and not a fixed dollar amount.

If the stock goes up during the four-year period when you’re vesting this $800,000 RSU grant (40,000 shares), that’s great: when you sell, you’ll get more money than the original $800,000 grant value. (And you can do what you want with that money, including exercising other stock options that carry a better tax benefit.) However, if the stock price goes down on those 40,000 shares over time, you still get cash when you sell immediately instead of holding onto sinking shares, and you have the freedom to get a new job at a better company, instead of staying in one whose stock price is dropping.

Mistake #3: Not Being Mentally (or Financially) Prepared for Taxes

Never, ever assume your tax withholdings are enough to cover your tax bill, especially after the IPO.

The withholdings help a little bit, but almost everyone is left with a large tax bill they have to pay to the IRS on April 15th. The best way to prepare is to work with a professional to figure out what your tax bill will be, and set that money aside.

The number will probably seem scary at first, but the longer you have to get used to it, the easier it is to pay your bill when it’s due. (And the less likely you are to get yourself in trouble for not being able to pay your bill.)

Mistake #4: Using Limit Orders Instead of Market Orders

In theory, a limit order is a good idea: you specify a price you’d like to sell at, and you can “set it and forget it” until the stock reaches that price, and the sale goes through.

In practice, though, it’s pretty terrible and is one of the saddest mistakes with employee stock options I see happen.

If your company stock was $40 and going up when the trading window opened, you may have set your limit order price at $41 per share.

But if the stock never quite reached $41 during the trading window, you’d have no cash at the end of it, would have to risk the stock going down before the next trading window, and have no cash to pay for the taxes of your RSU.

I saw this exact thing happen to one of my clients this year, and I hated it for him.

My client’s indecision around selling, combined with his FOMO (fear of missing out) of a higher stock price left him in the dust of the IPO. More than 6 months later and with a tax bill looming the stock is still trading below $40, much less the $41 his limit order was set at.

To solve this problem, stick with using market orders instead of limit orders. Market orders will execute on the same day you set them up at the best price that day, so you’re not left behind.

Mistake #5: Selling the Wrong Thing

Selling the wrong thing happens in two main ways:

1. Mistaking the acronyms of stock options and selling the wrong type of stock option
2. Selling the wrong lot of shares, even if you sell the right type of shares

The first way of selling the wrong thing, with stock options, happens when people confuse ISO (incentive stock options) with NSO (non-qualified stock options.)

For NSO, we recommend exercising and doing a same-day sale, but sometimes people mess up and do an exercise and same-day sale with ISO. (The best strategy for ISO, on the other hand, is to exercise and hold for a year or more to benefit from lower long-term capital gains tax.)

This can mess up your taxes, especially since there’s no payroll tax on ISO, meaning the income from a same-day sale of ISO will show up on your W-2, but it won’t show up on your pay stub. (When financial advisors are estimating your taxes, your pay stub is one of the main things they use, and if you have a large chunk of income not reported there, that can be a big problem.)

Lesson being: pay attention to the acronyms of which options you’re exercising and selling.

The second way people sell the wrong thing is by selling the wrong lot of shares, which can result in paying more taxes.

For example, if certain types of shares (like those from ISO) have been held for a year or more before they’re sold, they qualify for long-term capital gains tax, which is less than regular income tax. But, if you sell shares from ISO in less than a year, you pay regular income tax on those gains.

If you’ve been exercising your options for a while, you may have anywhere from 10 to 100 different lots of shares, so pay attention to their dates. Some lots may qualify as QSBS (qualified small business stock) that you can sell immediately at a 0% capital gain tax rate, while others you’ll need to hold onto for a while to reduce their taxes.

Five Steps to Avoid Mistakes With Employee Stock Options

In summary, when you know your IPO is coming up, work with your financial planner to:

1. Create an action plan for day one of the trading window
2. Sell your vested RSU ASAP
3. Plan your tax payment
4. Set up a market order instead of a limit order
5. Make sure you’re selling the right thing

When you follow these five steps to avoid the five most common mistakes of tech employees selling shares, you’re more likely to make the most of your company’s IPO, use your wealth well, and reach your financial goals.

If you’d like, you can get in touch with one of our experienced financial planners to start putting together a plan for your IPO. (Or to recover from some of these mistakes if you’ve made any.)

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Bonus! ???? – Mistake #6: Over Analysis

P.S: I know I gave you a lot of “to-do” tasks in this article to avoid mistakes with employee stock options, but here’s another big one:

Over analysis.

SO MANY TIMES I see people going through their first IPO busting their brains to come up with the best possible scenario, and losing sleep over what they think will be the perfect set of decisions and financial actions.

The truth is, there is no perfection here. It’s impossible to predict the future and know what stock prices are going to do.

But even though you may not come up with a spotless plan doesn’t mean you shouldn’t go ahead and create an amazing plan that will still benefit you greatly. Perfectionism serves no one during an IPO, and we want you to advance your financial future as much as possible, instead of missing out on your chance.

The big picture steps are pretty easy:

• Sell your RSU shares as soon as possible
• Exercise and hold ISO
• Exercise and sell NSO anytime you need more cash or like the stock price

That’s really all there is to it. If you’d like more help planning exactly which lots to sell and when, get in touch with one of our advisors to create a plan that will work wonders for you. ????

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