Today a reboot of one of the first episodes I did. Way back before I focused on equity compensation—and the audio was pretty bad too—so I decided to update it. This episode is an introduction to equity compensation and we're going to cover some of the basics in a 30,000 foot view. This is probably one of the more important episodes I've done as it provides the foundation so you can better understand your equity compensation. The more you understand it, the better the odds are that you will then make better decisions around your equity compensation. Additionally, when nearly 90% of employees say their employers need to provide more educational resources regarding equity compensation this leads me to believe most owners of equity compensation want to learn more. That’s where this podcast can help you out.
You will want to hear this episode if you are interested in...
What is equity compensation?
Equity compensation in its simplest form is benefits employers receive that are connected to their company's stock. The stock can be private or public, but for most people it's public stock. There are many forms that this equity compensation can take, but the most common ones I see are: Employee Stock Purchase Plan sometimes called ESPP, Non-qualified Stock Options, which is most often referred to as stock options, Restricted Stock Units, better known as RSUs, and finally Restricted Stock Awards, often called restricted stock, or restricted stock grants. Holders of equity compensation must understand how the stock values connect to their compensation package.
Having equity compensation doesn't mean you shouldn't participate in other retirement focused programs, such as your 401k plan. Equity compensation isn't a surefire guarantee to retirement success by itself but you should consider it one of the legs on your retirement stool.
Learn the lingo
Let's start at the beginning, and the beginning for me is to understand some common terms related to equity compensation. Here are some of the terms we covered in the episode. Check out the episode for a full list and a more in depth summary.
A Restricted Stock Unit or RSU is the right to receive stock after you have satisfied any conditions imposed by the company.
Restricted Stock Awards also known as a restricted stock grant, stock grant, or restricted stock provides essentially the same benefit as a restricted stock unit. The difference is you get the shares at the time that they are awarded to you.
Stock Options are an agreement that provides terms under which you can buy a specific number of shares at a set price. The hope is the value of your options will grow as a company stock price increases.
A grant or an award. This is simply when you receive the stock option, that's it.
Vesting this is how long an employer requires you to be there, or what goals you have to meet in order for you to have full ownership rights.
In the money is just when the spread is positive, it means the stock is now worth more than the exercise price. Underwater is the opposite of being in the money, it's when the spread is negative.
Option agreements are documents that your employer is going to make available to you when you're granted an option restricted stock units, restricted stock awards, even decide to participate in your employee stock purchase plan. It will have all the important information about your equity compensation.
Finally, the 83 will be election is a provision under the tax code, which gives you the choice of paying taxes on the total fair market value of the restricted stock at the time it is granted as opposed to the time down the road when it vests.
This week’s FLASHBACK: Haunted house FAIL
Today's flashback is a bit more of an admission. I think I've failed as a father. Why? Well, because my kids have always refused to go to haunted houses. Going to haunted houses is one of my favorite memories from growing up. I have several memorable haunted house stories, including one where I was hit by a car! (Listen to those in the episode) They were also my go to date in college! I haven't been to one in years as my friends all hate haunted houses. Now that my kids are off in college, I may have missed my window to drag them to one with me. Hopefully their college friends convince them to go to one at some point.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.