Financial Planning For Stock Options
Babylon Wealth Management provides comprehensive financial and tax planning for your stock options. Our firm is a fiduciary financial advisor for tech professionals in the San Francisco Bay Area and nationally. We are committed to bringing simplicity to your complex world of equity ownership, employee stock options, restricted stock units, deferred comp, and employee stock purchase plans. Our mission is to provide you with unbiased and trustworthy financial advice to help you make well-informed decisions considering your financial goals, risk management, and tax implications.
Why we are different?
Babylon Wealth Management is a fiduciary financial advisor committed to providing stock options financial planning advice that is in your best interest only. With a diverse background in accounting and finance, we can help you understand your stock options and maximize your financial outcome.
Why financial planning for stock options is unique?
As a financial advisor to tech professionals, we know that you have distinctive financial needs based on the unique characteristics of the tech and start-up industry. As most tech professionals, you receive a large portion of your earnings in the form of stock options or RSUs. The type of equity compensation can vary significantly from one company to another. Your stock options can drive a financial windfall and tax burden. Additionally, personal and family circumstances can contribute to the additional complexities of your financial life.
What are Stock Options?
Employee Stock Options (ESO) are a type of equity compensation. ESO is a contract between the employee and the employer, giving the employee the right but not the obligation to purchase company stocks at a pre-determined price in a set period.
They are a favorite tool by employers to attract, reward, and retain top talent. Many tech professionals receive stock options alongside their regular earnings. Stock Options offer you the potential ownership of your company. It can be a great source of your future wealth.
What are the main types of Stock Options and Equity Compensation?
Incentive Stock Options
Incentive Stock Options (ISO) are only granted to company employees. They can be vested for up to $100,000 of underlying stock value each year. ISO must expire after ten years. They are not transferrable. ISOs have preferential tax treatment. The tax rules for ISOs allow you to pay long-term capital gains if certain conditions are met.
Long-term capital gain tax is payable on the difference between the sale price and the exercise price. To receive this tax benefit, the ISO holder must keep the stock for one year and one day after the exercise date and at least two years and one day from the grant date.
If the sale date does not meet the above requirements, ISO is disqualified as such and treated as NSO. In that case, you will owe ordinary income tax and short/long-term capital gain taxes.
Alternative Minimum Tax is applied on the difference between market price and exercise price in the year of exercise. You have to report the difference (also known as the bargain element) to IRS. This may have an impact on your final tax at the end of the year, depending on various other deductions.
Non-Qualified Stock Options
Non-qualified stock options (NSOs) ) are a type of employee stock option that does not qualify for the favorable tax treatment of ISOs.
NSOs are usually granted to company employees, but they can also be given to vendors, clients, and the board of directors.
NSOs can be exercised at any time between their vesting date and expiration date. They offer more flexibility than Incentive Stock Options but have less favorable tax treatment. The IRS’s key requirement for NSO is that the exercise price can never be less than the fair market value of the stock as of the grant date.
The owner of non-qualified stock options will pay income taxes on the difference between the stock market value and exercise price at the time of NSO exercise.
If you decide to hold on to the stocks after the option exercise, you will owe long-term or short-term capital gains taxes, depending on your holding period.
Restricted Stock Units (RSUs)
Restricted stock units (RSU) are a type of equity compensation given by an employer to an employee in the form of company stock. Technically, RSUs are not stock options as they lack the optionality element when vesting. Often you may receive RSU alongside your stock options. Their tax treatment resembles NSOs and can impact the decision process of exercising your stock options.
Employees receive RSUs through a vesting plan and distribution schedule after achieving certain performance milestones or remaining with their employer for a set period. RSUs give an employee interest in company stock, but they have no tangible value until the vesting is complete.
The fair market value of your vested RSUs is treated as personal income in the year of vesting. Typically, companies withhold part of the shares for federal and state income taxes. The remaining shares are given to the employees. At this point, you can decide to keep all shares or sell them at your wish. If your employer doesn’t withhold taxes for your vested shares, you will be responsible for paying the corresponding taxes during the tax season.
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Financial Planning
Proactive Financial Planning of your Stock Options is essential to achieving your personal and financial goals. As fiduciary financial advisors for tech professionals, we believe that your unique circumstances require tailored solutions targeting your specific needs and priorities. We will develop a personalized roadmap to help you meet your personal and financial milestones. Our firm uses the best-in-class fin-tech platform that allows creating collaborative, transparent, and dynamic financial plans which update in real-time as your life and financial circumstances change.
Scenario Analysis
Exercising your stock options present unique challenges and hurdles. There is also a vast range of possible outcomes depending on the value of your equity and the timing of your liquidity event. We will present you with a set of scenarios that can help you understand the financial and tax implications of your decisions. Depending on the exact combination of ISOs, NSOs, and RSUs, our scenario analysis can find unique opportunities to maximize your financial outcome and lower your tax dues.
Strategic Tax Planning
For many tech professionals, successful financial planning of your stock options requires a strategic and effective tax strategy. Owning and exercising stock options can lead to massive taxable events, Our goal is to make sure that you get the most out of your stock options. Many of these financial and tax decisions will evolve through the various stages of your company’s business cycle. We encourage you to contact us as early as possible so that we can take a proactive (not reactive) approach to solve your complex tax circumstances.
Early Exercise
Planning for Early Stock Option Exercise can offer lucrative opportunities to maximize your financial outcome and lower your taxes. In many cases, early stock option exercise can be overwhelming and challenging due to liquidity constraints and business uncertainty. Waiting to exercise until the IPO or another liquidity event eliminates a lot of uncertainty. However, waiting has a significant trade-off – paying higher taxes and concentration of risk. We can help you understand if early exercise makes for you.
Section 83(b) election
The tax code allows certain stock options and restricted stock award owners to elect to pay an ordinary income tax based on the stock’s fair market value on the day it is granted. Section 83(b) election provides a lucrative tax-saving opportunity for many techs and startup professionals. Contact us if your company offers 83(b) election and if it makes sense for you to pursue it.
Managing concentrated positions
Having concentrated positions of company stock and stock options is a common premise for tech workers and executives. While concentrated positions could be an enormous source of future wealth, they are also representing a risk to our clients who have short-term and near-term financial needs. As an experienced financial advisor to tech professionals, I can help you create a personalized long-term investment, tax, and exit strategy for your concentrated positions.
Managing sudden wealth and extra cash
Receiving sudden windfall is a dream of many hardworking tech professionals. While sudden wealth can bring a lot of exciting changes in your life, it can also have various financial, legal, and core repercussions. We strongly encourage you to form a team of financial and tax professionals who can address all your questions in a timely and proactive fashion.
Qualified Small Business Stock
If your employer is a Qualified Small Business under Sec. 1202, the gains on selling qualified small business stock (QSBS) held for five years are partially or entirely excluded from your income. The cumulative limit of QSBS is $10 million. The Qualified Small Business must be a c-corporation with less than $50 million in assets at the time of the stock purchase. Owning QSBS offers unique tax benefits for prudent, disciplined investors and stock option owners.
Our Services
Wealth
Management
Babylon Wealth Management is a boutique financial advisor for tech professionals in the San Francisco Bay Area. Our wealth management platform offers tech professionals and their families a unique one-stop solution combining personalized financial planning, expert investment management, tax-smart asset management, estate planning, tax advisory, and risk management. We employ investment strategies geared towards your specific near-term and long-term financial needs and circumstances.
Financial
Planning
Our comprehensive financial planning is an ideal solution for do-it-yourself tech professionals who need some initial guidance. Our personalized advisory service brings a comprehensive view of your personal and financial life. We will help you build a roadmap to achieve your financial goals and personal milestones by developing a tailored financial plan. Through the course of our relationship, we will provide you with a specific list of recommendations on how to achieve your priorities and objectives.
Stock Option
Tax Planning
Our stock options tax planning helps busy tech professionals make the most out of their equity compensation plans. We will work together to build an effective tax strategy to exercise your stock options and maximize your financial outcome. We will craft a personalized strategy that takes a snapshot of your equity holdings, analyzes a wide range of scenarios, and offers a path to unlock the value of your equity ownership.
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