1 2 3 4 [ Programming your 5 6 { Financial Future } ()]; freestonecapital.com 7 From stock options to tax planning, understand how to 8 crack the code and make sense of it all 9 10 11 12 The tech industry, especially on the Everyone has differing life events and 13 West Coast, is changing the way preconceived ideas about money and how to manage it. Deciding how to allocate your money 14 professionals develop their careers 15 is a very personal decision. As advisors, our role is and how companies structure 16 to equip you with the knowledge necessary to let 17 compensation. you decide what makes the most sense for your personal situation. 18 The competitive tech job market has led to a 19 favorable climate for employees with companies Our experience working with tech industry clients 20 offering attractive salaries and benefits. At the has demonstrated time and again that those 21 same time, the complexity of these compensation who plan or “write the code” for their future are 22 plans far exceeds what most are accustomed more likely to benefit from their current situation 23 to – gone are the days of a single W-2 filing, a and achieve financial independence. From tax 24 pension plan or a 401(k). This evolution means planning to navigating how to best handle your 25 tech professionals face a much more involved, company stock, our objective is to help you better 26 intricate task in setting the course for financial understand your situation and the implications of 27 success. your financial decision on your future. 28 29 30 31 32 33 Why Tech is Different Depending on the success of the company, 34 According to published reports, salaries for compensation in the form of equity can be a 35 corporate tech positions represent the highest meaningful way to create lasting wealth. Long- 36 median salaries compared to other industries.1 term employees and senior executives can 37 For example, starting salaries at Amazon benefit from high salaries and additional stock- 38 average around $80,000 per year.2 Employees based compensation, resulting in a net worth of 39 can take advantage of their increased income $5 million, $10 million, $25 million or more. 40 and begin paying off student debt or maximizing 41 Higher salaries coupled with company equity contributions to their 401(k). 42 differentiate tech professionals from many 43 Competition between tech companies to hire similarly aged adults in other industries. This 44 the best talent has also led to desirable places combination, however, can lead to unexpected 45 to work with office perks and additional tax implications or missed investment 46 benefits, including company stock. opportunities. 47 48 © 2020 Freestone Capital | www.freestonecapital.com | (206) 707-7300 49 50 51 Programming your Financial Future 2 52 53 Building a Good Foundation need to meet your goal(s). We also consider your 54 expenses and recurring withdrawals, including 55 With any plan, you need to define oury desired monthly expenditures. These expenditures 56 end result. What is it that you want to achieve? include obvious expenses like mortgage, car 57 Is it financial tabilitys , and the freedom to work loans, taxes and insurance, and also smaller 58 less? Or maybe you want to travel more or spend one-off costs that can quickly add up such as 59 more time with your family. We ask this question, travel, groceries, dining out, gym memberships, 60 among others, of all our clients. etc. This exercise helps us determine what your 61 Once you have defined your goal(s), the next annual cash requirements are, an important 62 step is to devise a way to get there - a financial component of your financial plan. 63 roadmap, or plan. 64 To fully understand your complete financial We start by reviewing your current assets (e.g., 65 situation, we also review your current investment accounts, employee stock plans, 66 investment allocations and assess tax liabilities property) debts (e.g., student loans, mortgage, 67 associated with your income or future estate car payment/lease), and projected cash flow to 68 plans. As your circumstances change, so does estimate the amount of future assets you will 69 your financial plan, acting as a living document 70 that continues to evolve as your life unfolds. 71 72 Below is an example of a balance sheet outlining a married couple’s assets and liabilities. 73 74 Statement of Net Worth 75 Spouse 1 Spouse 2 Joint Total 76 Assets 77 Investment Assets 78 Joint Investment $1,250,000 $1,250,000 79 RSUs $600,000 $600,000 80 Vested RSUs $75,000 $3,600,000 $3,675,000 81 Joint Bank $75,000 $75,000 82 Total Investment Assets $75,000 $4,200,000 $1,325,000 $5,600,000 83 Retirement Assets 84 IRA $44,000 $44,000 85 401k $425,000 $350,000 $775,000 86 Total Retirement Assets $469,000 $350,000 $819,000 87 Other Assets 88 Primary Residence $2,250,000 $2,250,000 89 Total Assets $3,575,000 $8,669,000 90 91 Liabilities 92 Mortgage $650,000 $650,000 93 Total Liabilities $650,000 $650,000 94 Net Worth $544,000 $4,550,000 $2,925,000 $8,019,000 95 96 97 98 99 100 101 Programming your Financial Future 3 102 103 Despite our ability to plan for the 104 factors within your control, there 105 are various external factors that // A financial plan is a comprehensive 106 may be out of your control, so we evaluation of an individual’s current 107 test your plan in an effort to ensure 108 and future financial state using that following your plan provides 109 you with a high probability of currently known variables in an effort 110 achieving your financial goals. to predict future cash flows, asset 111 112 values and withdrawal plans. // 113 114 115 116 117 118 119 120 Understanding RSUs, NQs and ISOs 121 122 As an employee working in the tech industry, your current income tax rate as the shares vest. A 123 where compensation in the form of company portion of your units typically are held to pay the 124 equity is common, it is customary to have a large income tax, and you receive the remaining shares. 125 portion of your assets held in a concentrated In rare circumstances, you may consider filing a 126 position; you own shares of a stock that 83(b) election at the grant date if you can ensure 127 represents a large percentage of your investment the value of the shares are going to increase over 128 portfolio. Therefore, it’s important to have a basic time. RSUs do not expire although any unvested 129 understanding of how to best utilize your equity. shares will be forfeited if you leave the company. 130 Most commonly, companies have structured their Non-Qualified Stock Options or NQs differ from 131 compensation approach to include Restricted RSUs. NQs are priced at the fair market value 132 Stock Units, Non-Qualified Stock Options, and when they are granted to you by the company, 133 occasionally Incentive Stock Options. All are a known as the grant date. The fair market value at 134 form of equity or interests in equity and offer the time of the grant is referred to as the strike 135 different benefits for the employee. price. As the options vest, you have the right to 136 buy the stock at the strike price. Ideally, the stock 137 Restricted Stock Units or RSUs follow a pre- price has increased since you were granted the 138 determined vesting schedule set by your options, meaning you are essentially buying the 139 employer. These units typically have no actual stock at a discount. 140 value until vesting occurs. As your shares vest, 141 you are automatically granted the units at the Once the options are exercised, taxes are 142 pre-determined date, which are assigned a fair typically owed based on the difference between 143 market value (typically the current stock price). the strike price and the current market price. NQs 144 The value of these shares is generally considered only have a limited term during which they may 145 ordinary income, meaning you will be taxed at be exercised, after which they will expire. The 146 147 148 149 150 151 Programming your Financial Future 4 152 153 expiration date is set at the time the options are (AMT), which should consider when determining 154 granted; commonly 10 years after the grant date. whether to exercise. The tax rules are complex, 155 If you do not exercise your options prior to the so we recommend discussing your options with a 156 expiration date, you forfeit the ability to exercise financial advisor or tax professional to ensure you 157 them in the future. If you decide to leave the avoid any potential adverse tax ramifications. 158 company, the expiration date is typically reduced In each case, you may choose to keep your 159 to 60 – 90 days. shares, but if you prefer to sell, the sale 160 Incentive Stock Options or ISOs are very similar proceeds will be taxed just like the sale of any 161 to NQs. The most important difference is that ISOs other security. 162 may be subject to the Alternative Minimum Tax 163 164 165 166 167 168 169 Considerations for Concentrated Stock Positions 170 Assuming you intend to keep your shares as they In the example outlined below, you’ll notice that 171 vest, it’s important to consider what you want to when the share price of Amazon stock drops 40% 172 do next.