Estate Planning for Young Professionals

If you’re young, unmarried and haven’t accumulated much wealth, you may think having an estate plan isn’t relevant for you. While it’s true that part of estate planning is declaring how your assets will be distributed if you pass away; it may seem pointless if you’re just getting started on your journey to building wealth. We’re here to tell you that it doesn’t matter if you haven’t saved much yet and that an estate plan is not only applicable when you pass away but also while you’re alive. Think of it as a tool to eliminate stress and confusion in the future by communicating your wishes to your loved ones in the present. And perhaps more importantly, it can dictate what happens to you (and your assets) while you are still alive.

Given the recent disturbing events in America, with Roe v Wade being overturned and talk of marriage equality being next, we are reminded that it’s more important than ever to revisit your estate plan. Here at Xena Financial Planning, we are actively monitoring the Supreme Court/state decisions that could impact our clients. There are a number of steps that we are recommending for our LGBTQ+ clients, as well as couples who expect to undergo fertility treatments. Stay tuned for a blog post devoted to that topic!

In the meantime, here are some documents and other action items to consider at this stage of your life: 

Check your beneficiaries

Good news: this is something you can do today and it only takes about five minutes. A beneficiary is an individual or trust that receives the assets upon your death. Log into all your retirement accounts (IRAs, 401(k)s, etc.) and life insurance policies (even if it’s through work!) and make sure the beneficiaries are current. Adding beneficiaries ensures your money will go to those you intend, without having to go through probate, which is both costly and slow. 

Advance Health Care Directives 

When you turn 18, your parent(s)/guardian(s) can no longer make medical decisions on your behalf. If you were to become critically ill and unable to make major health decisions for yourself, then no one would be able to legally advocate for you. This is where a living will (a type of advance health care directive) would come into play. In this document, you state which medical procedures you would or wouldn’t want, and under which conditions these apply. It might be helpful to discuss any current health conditions with your doctor and how they might influence your health in the future. 

Additionally, you would elect a health care agent who would have the ability to make health care decisions on your behalf. This is often a family member, partner or trusted friend who can ensure your wishes are carried out. 

Considerations when appointing an agent:

  • Can you trust them to carry out your wishes?
  • Are they easy to get in contact with?
  • Do they live nearby?

Additional considerations:

  • Creating an advance health care directive does not require an attorney. 
  • You can create one by going to Five Wishes or eForms.  
  • It is always a good idea to add more than one person listed in the event your primary person is unavailable. 

Durable Financial Power of Attorney

With a durable financial power of attorney, you appoint a trusted individual, called an agent, to have legal authority over your finances. In this document, you spell out what your agent is and isn’t allowed to do and when they have the authority to act on your behalf. For instance, if you were to become disabled you can grant your agent access to your bank accounts to continue paying the bills. It’s important to make sure your power of attorney is durable to ensure that the document remains in affect if, and when, you become incapacitated. 

Considerations when appointing an agent:

  • Are they organized?
  • Do you trust them to manage your financial affairs?
  • Avoid choosing someone who doesn’t have a good record of handling financial matters. 

Once the document is fully executed (signed and notarized), provide a copy to the appointed person. If your situation is fairly simple, you can create a durable power of attorney on Legal Zoom or contact an estate attorney. 

Last will and testament

A will states how your assets will be distributed after you pass away. Even if you don’t have a lot of assets chances are you may own a car, an extensive sneaker collection, or have kids/pets. If you do not have a will, the state decides what happens to your estate including your dependents. In the will you appoint an executor who will be responsible for properly executing your wishes and distributing assets accordingly. You can also establish guardianship and other wishes regarding children and pets.

Considerations when appointing an executor:

  • Do I trust this person to make sound decisions? 
  • Are they organized, emotionally stable, patient and trustworthy?
  • Will this person deal with my beneficiaries fairly and competently?

Considerations when appointing a guardian:

  • Is this person able to take on the responsibility of raising children (or pets)?
  • Do I trust this person to make sound decisions with regards to parenting? 

If your estate is complex (dependents, assets in other jurisdictions, multiple properties, etc) you should contact an estate attorney. If your situation is simple, you can create a will using Legal Zoom. 

Additional considerations

  • We strongly suggest that you use a password manager to store account logins.
  • Keep an inventory of your digital assets, investment accounts, where legal documents are stored and who has access to what. 
  • Revisit your estate plan at least every 10 years or when significant life events occur. 
  • Write out your funeral and burial wishes or discuss your preferences with your loved ones. 

Don’t wait until you’re older or have accumulated assets to create an estate plan. By planning ahead, you eliminate stress and confusion for your loved ones that will occur if you were unable to make medical and financial decisions for yourself. It’s much better to have control over what happens to you, your belongings and your dependents. So why wait and risk the chance of giving that up?

Should I still participate in my company’s Employee Stock Purchase Plan- Even When the Stock Price is Trending Down?

Tech stocks have had a terrible year thus far. So far this year, the tech-heavy Nasdaq Composite Index is down 23%. Among the worst-hit have been Amazon.com (-25%), Tesla (-32%), Meta (-42%), Zoom (-40%), and Shopify (-74%). We’ve been hearing from so many of you about whether to continue to participate in your company’s employee stock purchases plan (ESPP) when the company stock is declining.

Using the Apple ESPP to illustrate how it works

Essentially, a company that offers an employee stock purchase plan is giving its employees the option to buy the company stock at a discount. Let’s use the Apple ESPP as an example. Suppose your base salary is $200,000. You can contribute up to 10% of that salary – in this example up to $20,000 (ESPP contributions are capped at $25,000 per year, based on the full fair market value of the stock). 

At the start of each purchase period, which goes for 6 months, Apple will withhold the percentage you elect. At the end of each purchase period, they will use the funds withheld over the prior 6 months to purchase stock at a discount. The amount you pay for the shares is the lower of two prices—the offering date price or the purchase date price—plus an additional 15% discount. Apple has their 2 purchase dates as January 31st and July 31st. 

The amount you pay for the shares is the lower of two prices—the offering date price or the purchase date price—plus an additional 15% discount.

Here is an illustration that shows what the timeline for Apple’s ESPP looks like.

Note: Apple’s offering period and purchase period are the same, though that’s not always true. 

In this example, if you had participated between August 1st, 2021 and January 31, 2022, you would be purchasing at a discount on the lower price from August 1st. On January 31, Apple would use the $10,000 withheld and purchase Apple stock at 15% less than the August 1st price of $145.52 (80 shares of AAPL. Note: Apple does not allow the purchase of fractional shares in their ESPP). 

If you sell immediately, at the market value on January 31st ($174.78), you gross roughly $14,000. You’ve immediately gained almost $4,000, which will be taxed at whatever your ordinary income tax rate is. For the sake of simplicity, I’ll assume you’re in the 35% tax bracket, so you’ve netted a little more than $2,500. Not bad!

Money withheld from your paycheck$10,000
Share price on August 1, 2021$145.52
Share price on January 31, 2022$174.78
# of shares purchased on January 3180
Sales proceeds (80 shares x $174.78)$13,982
Gain$3,982
Estimated tax @ 35%$1,394
Net proceeds$2,588

What if the stock price had actually gone down from August to February? 

You would still get a discount on the lower stock value, but it would be worth less when you sell and you would only gain the 15% discount. Let’s imagine the stock prices were reversed- $174.78 on August 1st and $145.52 on January 31st. You would still receive 80 shares of AAPL stock, but you would only be able to sell it for about $11,600. Again paying 35% tax on the gain, you would net about $750. Still better than nothing but quite a bit less than the first example.

Money withheld from your paycheck$10,000
Share price on August 1, 2021$174.78
Share price on February 28, 2022$145.52
# of shares purchased on March 180
Sales proceeds (80 shares x $145.52)$11,642
Gain$1,164
Estimated tax @ 35%$407
Net proceeds$757

In a market where your company stock is trending down, the maximum gain you would realize over a 6-month period is $12,500 (50% of the annual IRS limit) less $10,625 (50% of the maximum annual contribution, assuming a 15% discount) or $1,875- and that’s before you pay taxes.

Tax Implications: Selling the shares immediately

In the above examples, I assume you sell the shares as soon as you’re able (which is very close to immediately after the end of the offering period). This is considered a non-qualifying disposition, and you’re required to pay ordinary income tax rates on whatever the discount amount is. 

Tax Implications: Holding onto to the stock for more than a year

If you hold the stock for a full year from the purchase date, and 2 years from the beginning of the offering period in which you purchased shares, then the stock would be eligible for a qualifying disposition. In this instance, any gain would be taxed at long term capital gains rates, which are more favorable than ordinary income tax rates. Many people are enticed by the possibility of paying lower taxes, but holding the stock for longer is risky, and you might have no gain at all, or even a loss.

There is very little risk involved in participating in an ESPP if you sell the stock right away. If you hold the stock, your risk increases significantly.

Factors to consider

One of the most relevant issues here is- can you afford to have that reduction in every paycheck for the 6 month period before reaping the benefits at the end? For some folks, this is a fantastic way to automate savings. It enforces a certain behavior and then at the end of 6 months you can sell your company stock and invest how you see fit. In other cases, you just can’t afford to take a reduced salary. Given the limited benefit when the stock is trending downward, if the regular paycheck deductions present a challenge, I would likely not participate in the ESPP.

The other consideration is having too much exposure to your company stock. If you’re already receiving Restricted Stock Units or stock options, you may have a large portion of your portfolio in one stock. Add to this the fact that your salary and benefits are tied to this same company, it can get pretty risky.

How should I decide?

To recap, some pros of participating:

  • Enforced savings
  • Free money! Admittedly, LESS free money when the stock price is on a downward trend.

And cons:

  • Concentration risk
  • Increased tax complexity
  • Reduced cash flow
  • Potential volatility if you hold the stock
  • The manual process of selling and then reinvesting into some other vehicle (or as I like to call it, the “hassle factor”).

I have a bit of a love-hate relationship with ESPPs, but they are often worth doing, even in a down market. The potential benefit is quite small, but if you can afford to participate, it might be a good idea regardless of the way the stock is trending.

Tech companies with unique employee benefits

Given the great resignation, people increasingly want to work at places that not only offer flexibility but also for a company whose values align with their own. Tech companies are facing a shortage of qualified workers, and have upped the ante with a host of new benefits to entice top talent. 

Tech companies are well known for their nontraditional perks of employment, like ping pong tables, free food, and modern offices. They’re also known for generous salaries and equity compensation, but what are some unique benefits beyond that? 

Here are some tech companies to work at if you value…

Travel

If traveling and creating experiences with family/friends is a significant priority for you, then finding companies that offer travel perks may be best for you. 

  • Google gives its employees the option to take a sabbatical, work remotely, and covers travel insurance for personal trips. 
  • Airbnb offers a travel stipend of $2,000 per year along with a generous vacation policy.
  • REI offers their employees 30% off their trip if they book with REI Adventures. 
  • MOZ encourages its employees to go on vacation by covering vacation costs of up to $3,000 annually. 

Starting a family

If you’re planning on starting a family, taking time off to recover and bond with your new child is essential. While the government only requires companies with 50 or more employees to offer 12 weeks of unpaid family leave, tech companies are known to go above and beyond those limits. 

  • Netflix offers the longest paid family leave (52 weeks) out of all the tech companies. You’ll have to be an employee for 12 months in order to take advantage of this. 
  • Spotify and Adobe offer 26 weeks of paid parental leave.
  • Google, Amazon, and Microsoft each offer 20 weeks of paid parental leave. 
  • Twitter offers breast milk shipping. If you’re traveling for work and need to ship milk back home, Twitter’s got you! 
  • Both Google and Facebook offer an on-site clinic & mother’s room, and free on-site laundry. 
  • Facebook gives its employees a $4,000 baby bonus for each new child and a $3,000 reimbursement for child care. 
  • Google will reimburse you up to $40,000 of surrogacy fees; one of the highest amounts compared to other companies. 

Want to see what other tech companies are offering? Check out this list of parental leave in tech. Other common benefits include fertility support, such as egg freezing, adoption assistance, and surrogacy fee reimbursement. 

Financial wellness 

Carrying student loan debt can feel like a huge financial burden and may be stopping you from achieving your other goals. Luckily, it’s becoming more common for employers to offer student loan assistance to retain talent. 

  • Google will help you with student loans by matching 100% of contributions up to $2,500 per year. The amount will be applied to the principal balance, making an even more significant dent in the loans. 
  • Doma offers an even higher contribution towards your student loans of up to $5,250 per year. 
  • Slack offers legal services at no cost. This benefit is huge if you have yet to complete your estate planning documents or need to make updates. 
  • Duolingo offers a mortgage benefit of up to $10,000 for your first home in Pittsburgh.  
  • Google offers a one-on-one financial coaching program. 
  • T-Mobile offers a coaching program called LiveMagenta. They also provide gender-affirming services, including surgery and autism coverage, including Applied Behavioral Analysis services (ABA). 

Giving back

If giving back either with your money, time, or both is important to you, here are some benefits to factor into your charitable planning strategy. 

  • Google and Apple employees receive a 100% match of charitable contributions up to $10,000. 
  • Microsoft and Linkedin match charitable contributions up to $15,000. 
  • Netflix will double your charitable contributions up to $20,000!
  • Salesforce employees are eligible to take up to 7 days of paid volunteer time off per year. They also have the ability to win a $10,000 grant to give to the nonprofit organization of their choice (if they rank as one of the top 100 volunteers). 
  • Microsoft and Apple employees receive $25 per hour to volunteer.  

Other unique benefits 

  • Google, Linkedin, and Microsoft offer on-site car washing and detailing. You can go into work with a dirty car and leave looking fly. 
  • If you just got a new pet and want to take some time off, Reddit offers one week of paid leave to spend time with your new pet. 
  • Need assistance completing all your errands? Slack offers concierge and errand running while you work. 

Tech companies will offer extensive benefits and perks to retain top talent and stay competitive. If you’re evaluating job offers, make sure to look at the full benefits package. You can use this information to compare competing offers during your negotiations. 

Source: Levels.fyi 

What Should You do with Extra Cash?

One of the questions we get asked all the time is “where should I keep my emergency reserve (aka rainy day fund)?” or “What should I do with my extra cash?”

How Can I Get My Cash to “Work for me?”

If you haven’t already, I suggest setting an emergency reserve target. I generally recommend establishing a target of 3-6 months of living expenses. Although, like with all things related to personal finance, this is a highly individual decision and there is no right answer. There are many factors that can influence the target, including whether you are a single-income household or have highly variable income.

Before we move on, let’s establish up front that you’re already in good shape with regards to consumer debt (i.e. you don’t have significant credit card bills). That said, it bears mentioning that it is possible to build your emergency reserve and pay down high interest debt at the same time.

Where to keep your emergency reserve

High Yield Savings

My top recommendation for an emergency reserve (as of this writing) is a high-yield savings account. I always check bankrate.com for the best rates and as of April 2022, most banks are offering something like .60% – .70%. I prefer this account being separate from whichever bank you use for your checking account; I like the idea of it being ever so slightly harder to access these funds. Please do not be fooled by Bank of America (and some of the other big banks) whose “high yield” savings account actually only earns .05% interest. Don’t get me started on the inaccuracy of that claim!

CDs

In the past, CDs were a reasonable option for an emergency reserve. I, myself, used to have laddered CDs that came up each quarter, which I would then renew. Based on the current rates, CD rates are only fractionally higher than high yield savings accounts, so there’s no compelling reason to have your money “tied up” in a CD.

I Bonds

I bonds are all the rage the past few months. Rates are at 7.12% through April 2022 and will increase to an estimated 9.62% in May which is frankly jaw-dropping! 

There are a few stipulations that you should be aware of: 

  • The rates reset every 6 months. The current rate is good on new I bonds purchased through April 2022. 
  • You can only buy $10,000 in I bonds per individual, per year. Depending on how much your emergency reserve target is, there’s a good chance you won’t be able to buy enough I bonds to hit that target, but you could always supplement with a regular high-yield savings account.
  • Note: You can cash the bond in after 12 months. However, if you cash it in before it is five years old, you lose the last three months of interest. So it’s not quite as liquid as a traditional savings account. 

Finally, in my opinion, it’s quite a bit of work! But if you’re up for the extra logistical steps required, you can buy bonds directly from the US Treasury.

Beyond the emergency reserve

Ok so you have a high yield savings account set up for your emergency reserve. Go you! What about any extra cash? How and where should you keep it?

Cash for short-term needs

Here’s where we start to talk about timing. Let’s take a step back and revisit your goals. What is that cash for? Are you earmarking it for something in the next, say, 3 years? (Think new car, big vacation or significant house project). If so, you should probably keep it in cash. The above ideas are still great options for anything you’ll need in the next 3 years. I know, I know, you really don’t want your cash “just” sitting there. I get it. However, this is where I get to put on my financial planner hat and remind you that investing in the stock market is inherently risky. If you invest excess cash (which you know you’ll need in the short term) and the market takes a nosedive, you could be in a real bind. In other words, you may have to sell for less than what you put in and/or less than you need.

FDIC Insurance

I’d be remiss if I didn’t also mention FDIC insurance, and the importance of making sure your emergency reserve (and other cash) is fully insured. Federal limits provide FDIC insurance of up to $250,000 per individual, per institution. If you’re single, that’s pretty straightforward: $250,000 per bank. If you have more than $250,000, be sure to open an additional account at a different bank to make sure all your funds are insured.

If you’re married, you can have up to $500,000 per bank (assuming joint accounts). As above, if you’re keeping more than $500,000 cash, spread the money across banks to make sure you’re fully insured.

Cash that you don’t need within 3 years (long-term needs)

For cash that you don’t need in the next three years, you’ll definitely want to have a conversation with your financial advisor. Depending on your risk tolerance, goals, etc. it’s likely that investing anything “extra” makes good sense. If the cash is for very long-term goals (such as retirement), you could invest and there are a variety of account types that may or may not be available to you (such as a brokerage account or Roth IRA).

There are also options like paying down your mortgage or other debt (I’ve already assumed you don’t have significant consumer debt, such as credit card debt). Using a combination of several strategies mentioned above will help you make the best use of your cash. There are so many factors at play here, it’s impossible for me to give a general recommendation. The good news is, if you have your emergency reserve fully funded and still have extra cash, you have plenty of options!

Organizing your financial life: Beginner’s guide

Last month on our IG Live, Danika and I talked about negotiating job offers, why you should do it, and how to go about it. In case you missed it, you can view it here.

Now that you’ve landed your dream job, advocated for yourself, and got the salary you deserved, what now? First off, way to go. Great job!

Take some time to celebrate your success in a meaningful way and set aside some time to organize your finances. Yup, you read that right, celebrate and finance in the same sentence. 

Getting your financial house in order is an act of self-love. What better way to celebrate than setting yourself up for long-term success? It’s not going to happen overnight. So give yourself some grace, and if you’re reading this, you’ve already made that initial step of seeking guidance. Below, is a 6 step guide to begin organizing your financial life.

How to get started:

Step #1: Know your financial flow

“Budgeting” gets a bad rap, but we think it’s vital whether you’re just scraping by or earning six figures. If you don’t know where your money is going, how can you make the most informed decision with everything else? 

I’m not going to sugarcoat it. Budgeting is a huge challenge for most people. Danika writes about this phenomenon and how to handle cash flow here. You may also find it surprisingly empowering to know exactly where your money is going.

Be kind to yourself. Don’t judge yourself for the financial decisions you may or may not have made. Instead, ask yourself if your past holds you back from building healthy financial habits moving forward? If someone ever does shame you about how you spend your money, especially if it’s a financial professional, it’s time to reassess that relationship.  

Action steps:

Have a recurring money date (alone or with your partner if you have one). Set an hour aside. Pour the tea. Pick out the playlist. Spend time looking over your spending history from the last few months.

Ask yourself these questions:

  • Is there anything you spent money on but don’t enjoy?
  • Is there anything that looks off (i.e. an amount that is too high/low or doesn’t make sense)? 
  • What is one small thing that you can do today to improve my spending picture?

Step #2: Take advantage of your employee benefits

If you’ve just started working at a new company, you’ll be eligible to choose your benefits. However, keep in mind that after the initial 30 days or so, you can’t make any changes until the next enrollment period; pick wisely. 

Action steps: 

Obtain your employee benefits booklet and all necessary information to make an informed decision. Don’t hesitate to reach out to your employer for clarification or seek out professional advice. 

  1. Enroll in the 401(k) and contribute at least as much as the company matches (free money!) One of the fastest ways to build wealth is by taking full advantage of your company’s match. 
    1. If you have a 401(k) from a previous employer, consider consolidating it into the current 401(k). See Step #6. 
  2. Evaluate the health insurance options. If the plan offers an HSA, consider choosing a High Deductible Health plan. Why? Read here
  3. Opt into life insurance, short-term disability (STD), and, most importantly, long-term disability (LTD). 
  4. Check to see what other perks you’re eligible for. Some companies offer access to legal help and even financial planning! Other unique perks we’ve seen include reimbursements for fertility treatment, health club costs, and travel stipends, to name a few. 

Step #3: Build a rainy day fund

Emergency savings is a must-have and is non-negotiable. It can make a big difference in handling life’s unexpected moments without moving further away from your financial goals.  

The rule of thumb is to set aside between 3-6 months worth of living expenses. However, if you’re single, we recommend aiming for the 6-month mark as you don’t have the buffer of a partner’s income. 

You don’t have to fund an emergency reserve all at once. Start putting aside a small amount each month until you hit the target. If you have high-interest debt, you should still fund your emergency savings. The last thing you want to happen is an unexpected expense where you don’t have the cash on hand and have to put it on your credit card, resulting in more debt payments. 

Action steps:

  1. Open a high yield savings account earmarked for emergency savings. Then, start putting aside as much as you’re able to until you hit your target.  
  2. Automate savings. Consider setting up an automatic transfer to the emergency reserve each month.

Step #4: Break the debt cycle

If you have significant credit card debt or other consumer debt, you’ll want to devise a plan for paying it down. There are multiple ways to go about paying off credit card debt. Some key ways include: 

  • Stop using your credit card(s). Shred it if it’s too tempting seeing it in your wallet. Use debit cards for purchases moving forward until you get a handle on your debt. 
  • Come face to face with your debt by making a list of the account(s) that carry a balance. Note the balance, minimum payment, and interest rate. 
  • Look at your budget and determine how much more money you can allocate towards the monthly payments. Ideally, you will pay off anything with high interest as aggressively as possible.

Action steps:

  1. If you carry a credit card balance, stop using your card. 
  2. Make a plan to pay off your high interest debt. If you don’t pay more than the minimum, your debt will only increase. 

Step #5: Set your money intentions

You can afford anything but not everything. Get clear on what you want and why you want it. It’s okay if you don’t know precisely what you want yet. Be flexible and understand that goals change all the time. Values, on the other hand, tend to change less frequently. Start by deciding what truly is essential to you. 

Action steps: 

  1. Write down what your goals are. Be specific and determine whether they are short-term (less than 5 years) or long-term (5 years+) goals. Ask yourself these questions: 
  • What’s important to you? 
  • What do you value?  
  • Where do you want to be in 5-10 years?
  1. Make a plan to invest towards your goals. Whether it’s buying a house, starting a side hustle, or simply growing your net worth, start saving as soon as your emergency reserve is fully funded. 

Step #6: Keep track of your account(s) 

Making sure you know where all your accounts are might be an obvious point. However, life gets busy, and before you know it, thirty years have passed, and you can’t recall where that 401(k) from your first job out of college is, or that you even had one to begin with. If you get into the habit of organizing your finances now, your future self will thank you. 

One easy step you can complete today is to start a finance folder (physically or electronically). Label it however you want; Finances, My Rich Life, Financial Stuff. I labeled mine S.H.I.T.: Salary, Home, Investments, Taxes. The point is to have fun with it. Finances don’t have to be boring unless you want them to be. Store any financially related document in there. Think tax returns, insurance policies, estate documents, budgeting worksheets, etc. 

Action steps:

  1. Set up a secured online folder to store all your financial information.
  2. Know where all your accounts are and make sure you have access to them. I strongly suggest using a password manager like 1Password or LastPass to keep track of login and passwords. 
  3. Consolidate 401(k)s from former jobs into your current 401(k) or a rollover IRA. 

Getting your finances in order is an excellent way to set yourself up for future success.

Incentive Stock Options, AMT and Qualifying Dispositions- Oh My!

If you have incentive stock options (ISOs) from your employer, you’ve likely considered when to exercise your options, and whether that will trigger the dreaded AMT. 

What are Incentive stock options (ISOs)?

Incentive stock options or ISOs are a type of stock option. A stock option is essentially the right to buy your company’s stock at a set price. They are commonly granted to employees as a part of their compensation package, especially in the tech industry. 

Here’s an example:

Your company grants you 10,000 ISOs with a strike price of $1.00 per share. The current Fair Market Value (FMV) of the company stock is $9.00. This means you have the option to buy up to 10,000 shares of your company stock at $1.00 per share, which is actually worth $9.00 per share. What a bargain! Why wouldn’t you do that? 

Incentive Stock Options (ISOs) at a public company

If, in fact, your company is publicly traded (i.e. anyone can buy the company stock), then you can turn right around and sell this stock for the $9 fair market value. You will be taxed on what is called the bargain element, which is the difference between the strike price and the fair market value. Note: the bargain element is a preference item under the AMT calculation. More on that below.

Incentive Stock Options (ISOs) at a private company

However, if you work for a private company (your company stock is not traded on a public market, like the New York Stock Exchange, it’s more complicated. You can buy those options, but more than likely you will not be able to sell them. So why would you do this? If you expect the value of the stock to increase and especially if the company might go public in the future, you are taking advantage of potentially lower tax rates on the growth of that stock.

That said, this is a highly risky proposition with regards to private company stock. If the company does NOT go public, you may have paid money to exercise stock which is ultimately worthless. 

What about taxes? And what is this dreaded AMT?

The trickiest part of working with ISOs is the tax implications. In particular, when you exercise ISOs, that triggers something called AMT or alternative minimum tax. AMT has been known to cause absolute panic in otherwise level-headed people. It’s not really all that scary, but many have been instructed to avoid “triggering” AMT at all costs. 

As referenced above, when you exercise ISOs, there is no tax due under the normal tax structure, but you will be taxed on the bargain element under the AMT structure. This only impacts you if you exercise ISOs in one tax year but do not sell them in that year. If you exercise and sell in the same calendar year, there is NO AMT. Instead you will pay ordinary income tax on the bargain element. Clear as mud, right? The scenario where you exercise and sell in the same calendar year is considered a disqualifying disposition. It’s not the most advantageous from a tax perspective, but it’s very straightforward.

What is a qualifying disposition?

A qualifying disposition occurs when you sell your stock at least 2 years after it was granted and at least 1 year after it was exercised. If these two criteria have been met, then you will be taxed on any gain at the long term capital gains rate (typically 15% or 20%, depending on your income). You still owe AMT on the bargain element in this case, in the year of exercise.

Many people have strong feelings about holding stock options long enough to have a qualifying disposition. While this is definitely better from a tax perspective, it may not be the best choice for you. By holding your company stock for a full year, you are opening yourself up to potential volatility.

How do you decide what to do?

In addition to tax considerations, as mentioned above, if your company is private, you must decide how much of your money (if any) you are willing to risk by exercising. How much can you afford to lose? This is a complex question and must be considered in conjunction with your larger financial picture in mind.

Additional considerations include:

  • Where will you get the money used to exercise options?
  • How will you pay the AMT tax bill when you file your taxes?
  • What is the general outlook of the company? Are you confident in its long-term prospects?
  • There are additional concepts around leverage and dilution that may be relevant.
    • Leverage refers to the difference between an option with a strike price of $1 (and FMV of $9) as compared to an option with a strike price of $8.50 (and FMV of $9). Which one would you rather have
    • And the percentage of ownership that your shares represent can have an impact, especially as those shares are likely to be diluted if the company issues more shares to other parties.
  • Read your company’s stock plan agreement to look for things like “repurchase rights” and “early exercise” options. You’ll want to know as much as you can about both your rights and the company’s. 

The final word: ISOs ARE complicated and there are a lot of things to bear in mind. It is unfortunately easy to “make a mistake” and end up with a surprise tax bill. Consider working with a financial professional and/or a tax advisor to thoroughly understand the implications of any transaction. And do as much research as you possibly can to understand the restrictions in place from your company. Check out our Instagram Live for more conversation about ISOs.

How to Prepare for an IPO

You’ve been working for a startup for a while now, and there have always been rumors about the company going public, but now it’s actually happening! What the heck should you do about it? How should you prepare? What’s the big deal with IPOs anyway?

What is an IPO and why do people get so excited about them?

An IPO, or initial public offering, represents the first time a private company is listed on a stock exchange, which means anyone can buy stock in the company. When a company is private, the stock is typically only held by employees, founders, and private investors.

“There have been 5,744 IPOs between 2000 and 2021. The least was in 2009 with only 62. The full year 2020 was an all-time record with 480 IPOs, but 2021 beat that record with 1058 IPOs.” (stockanalysis.com). Not only that, but 49% of high profile IPOs in 2021 are currently trading below their list price on IPO day. 

People get very excited about IPOs as there’s often a lot of money to be made in the early days of trading. If you can purchase this new stock at a relatively low price and benefit from explosive growth, doing so around an IPO might be the most likely time for that to happen. The potential IPOs we’re looking forward to in 2022 include Stripe, Outreach and Qualia.

A company might go public for a variety of reasons, from raising capital to cashing out early investors or raising the profile of the brand. So how does all of this impact you?

How to prepare for an IPO

Know what type of stock you have prior to IPO day

Is it restricted stock or stock options? How is the vesting structured? It is critical that you have a basic understanding of what your situation is. Stock options (incentive or nonqualified) are treated very differently from a tax perspective, and restricted stock units are unique in their own right.

Once your company establishes a plan to go public, they will likely have a number of information sessions for employees. I highly recommend attending as many of these as possible. The sessions will help you get a good understanding of the type of equity you have and how the IPO is going to unfold. Keep an eye out for restrictions on selling stock, lockup periods, and so on. 

Get to know your trading platform

These platforms tend to struggle on IPO day with lots of employees using the site at the same time. Be prepared for hiccups, but also know how the platform works in advance so you are less impacted by any glitches.

Consider working with a professional

It should come as no surprise that I highly recommend working with a financial planner and/or CPA to help you navigate this process. The sooner you start, the better. They’ll help you explore things like: What is the potential money for? How will you use it? Do you “need” it for a house down payment or is it truly “extra”? What are the tax implications of the IPO and selling/exercising shares? Note: the taxes around an IPO can be incredibly complex. With some strategies, you may need to have funds available to exercise options or pay taxes before you are able to sell shares. It is very easy to make a mistake here and a professional who knows what to look out for is well worth it!

Devise a strategy for diversifying out of this stock

IPOs often result in a very significant portion of your net worth being tied up in a single stock. A financial advisor will help you devise a strategy for diversifying out of this stock; having so much of your net worth focused on one stock is a huge exposure, particularly when that stock happens to be especially volatile as a recently public company’s stock generally is.

Be comfortable with uncertainty

Things change all the time with potential IPOs. Until your company files their S1 (the official filing with the SEC), you probably won’t know when it’s happening or what it will look like. Even after an S1 has been filed, there are still a lot of unknowns, and there’s no guarantee the IPO will even happen. You may have heard about the failed WeWork IPO in 2019. They finally went public in 2021 at a valuation of 80% LESS than it was worth in 2019.

Get used to the idea that things will change. IPOs are volatile and unpredictable so the sooner you accept these facts, the better equipped you’ll be to handle them.

Plan for as much time “away” as possible; from co-workers, the company Slack channel, and so on

IPOs are incredibly exciting and emotional and you will absolutely need time to decompress. Breathe, drink water, “try” not to obsess. I suggest to my clients that they allow themselves a certain amount of time to check the stock price or read the latest updates on the stock. The rest of the time, turn off notifications and try to avoid looking at the activity throughout the day. Doing so is a sure way to increase your anxiety.

IPOs are a wild ride, to be sure, and can absolutely provide you with a life-changing amount of wealth. Buckle up, and good luck!

Introduction to Equity Compensation (aka Alphabet Soup)

If you’re new to the tech industry, the world of equity compensation might be unfamiliar with all the types of stock/stock options. It is, in fact, fairly complex and the terms and acronyms can seem like a ​​foreign language. To be honest, it often just takes time to get comfortable with the various concepts. In any case, I’d like to present an overview of the most common types of equity comp and how you can think about those.

I think it’s worth taking an even bigger step back and defining the word equity, as used in this context. Equity, at the most basic level, is a form of ownership. Stock is a type of equity and is used by many tech employers to make employment more compelling. When an employer grants equity to their employee, not only are they providing a better overall compensation package, they are typically hoping the employee will be more engaged and work harder as the individual stands to benefit from any increase in the value of the company.

Restricted Stock Units (RSUs)

If you work for a public tech company (and especially one of the FAANG companies) it’s very likely that you will be granted Restricted Stock Units (RSUs). RSUs are perhaps the easiest to deal with, both from a tax perspective and also from a decision-making point of view. As in, there are fewer decision points when it comes to RSUs. I wrote a more detailed explanation of them here.

With RSUs, your company will give you a grant of, say, 500 shares of their stock. But they don’t give them to you outright, they come with a vesting schedule.

It generally works something like this:

Beginning on 11/1/21, your shares will vest quarterly, 1/16 per quarter (or in this example ~31 shares per quarter). Or they might use something called cliff-vesting; the most common version being 4 year vesting with a 1-year cliff. In this example, 1/4 of the shares vest after 1 year and the rest vest as above, 1/16 per quarter for the remaining 3 years. In this case, that would be 125 vesting on 11/1/22 and then ~31 shares quarterly thereafter.

What exactly does vesting mean?

Essentially, it means the shares are now yours to do with as you choose. You can either sell them and use the cash for something else OR you may choose to hold on to them if you think the company’s future prospects are strong. It also means that the value of the shares on vest date is added to your taxable income for that year.

When you start a new job, you will typically be awarded an initial grant. In subsequent years, you may be offered a refresher grant, but the number of shares could be quite a bit less than the initial grant. This leads to a lot of “job hopping” as employees are not incentivized to stay after the initial grant has fully vested and their total comp declines.

There are multiple variations on how RSUs can work and the above examples are the most common. Recently I’ve seen companies shifting to an award that is based on dollar amount vs number of shares. Stripe recently shifted to this model (to the consternation of many employees) and now, instead of a specific number of shares vesting, you will be awarded a set dollar amount (say $5,000). Stripe will then calculate how many shares that is equivalent to on the date of vest. The downside with this structure is that there is less upside potential for the employee. If you hold the RSUs after they vest, they can always increase in value, but you have less opportunity to reap the benefits between grant and vest date.

Incentive Stock Options and Nonqualified Stock Options (ISOs and NSOs)

Another common type of equity compensation is stock options. Unlike RSUs, with stock options you’re not granted actual shares of stock, but rather the right to purchase stock at a certain price. Like RSUs, stock options are typically granted with a vesting schedule. There are two types of stock options- Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs). The primary difference between the two types is in how they’re treated from a tax perspective. 

Stock options are far more complicated than RSUs. Along with the decision about when to sell, they have an added decision-making component- with stock options you have to decide if/when to exercise (aka buy) your options AND when to sell. With RSUs, your only decision is when to sell.

How Stock Options Work

Your company might issue you stock options at a certain exercise price (i.e. the price you pay for the stock). For example, you might be issued stock options with an exercise price of $5/share. If the current value of company stock is $15/share, you can imagine these options being attractive! You can buy a share for $5 and then turn around and sell it for $15. Not a bad deal. This is where it gets tricky- the difference between the exercise price and the fair market value (also known as the “bargain element”) is taxed. In this example, the bargain element is $15 – $5, or $10. And the amount of tax you pay depends on the type of stock option and how long you hold the stock once you buy it.

Exercising ISOs

When you exercise ISOs, you trigger something called Alternative Minimum Tax (aka AMT). The mere idea of triggering AMT causes many people to panic, but not many people fully understand how AMT works (and I’m not going to explain it in detail for this article). But if you exercise and sell in the same calendar year, you simply pay ordinary income tax on the bargain element. Easy right? Not exactly.

If you plan to exercise and/or sell stock options, it is HIGHLY recommended that you work with a CPA who has knowledge in this area. The tax implications are significant and it’s very easy to make a mistake.

ESPP, PSUs and other forms of equity comp

RSUs, ISOs and NSOs are far and away the most common types of equity comp. There are others, however, and the Employee Stock Purchase Plan (ESPP) is one that has become increasingly popular.

Employee Stock Purchase Plan (ESPP)

The basic idea with an ESPP is that your employer allows you to buy the company stock at a discount, which you can then sell for a profit. The company withholds an amount from each paycheck for 6 month periods. At the end of each period, they take all of the accumulated contributions from your paycheck and purchase the stock for you. They’ll use either the price on the first day of the 6-month period or at the end of the 6-month period, whichever is lowest, and the discount gets calculated off the lower price. I wrote a detailed example of how this works here.

Restricted Stock Awards (RSAs)

Yet another type of equity compensation is Restricted Stock Awards (RSAs), which are NOT the same as RSUs. RSAs are generally issued by very early stage private companies. The shares are issued at grant and held in escrow until they vest. RSAs are eligible for something called an 83(b) election which allows you to pay tax on the “gain” (usually 0 or very close to it) up front, thereby enabling you to pay future gains at your capital gains tax rate.

Performance Share Units (PSUs)

You might be granted something called Performance Share Units (PSUs) which function much like RSUs but are tied to performance, not a traditional vesting schedule. The tax treatment of PSUs is the same as RSUs; in other words, the value of the shares on the date of vest is part of your taxable income.

Final thoughts

If you’re lucky enough to be granted some form of equity compensation, you’re likely recognizing some benefit from the value of your company’s stock. I’ve worked with clients who had 4 different types of equity compensation from their employer which gets incredibly complex. There are a host of considerations; from taxes to if/when to exercise and sell and what the proceeds will be used for. It’s incredibly useful to work with both a financial planner and a CPA who have expertise in this area.

The real fun begins when we start to discuss what opportunities you have available to you if your equity compensation ends up significantly changing your financial situation, as it very often does. 

Negotiating Job Offers

Woman Shaking Hands

If there’s one thing I love, it’s negotiating. I know it can be intimidating and scary, but I tend to see it as a game to be played. I’ve negotiated every single job offer I’ve received (some successfully, and others less so!) as well as various car/house purchases and so on. I am by no means an expert, but I’ve learned a few things, and have helped both friends and clients with the process.

WHY should you negotiate?

I’m not going to get into reasons for the gender disparity here, but suffice it to say women are less likely than men to negotiate. Women are also more likely to face blowback when they do negotiate. That said, if you don’t negotiate, you’re facing a long term reduction in salary and benefits that can compound significantly over the course of a 30+ year career.

Given the potential for a negotiation to go sideways, a lot of people simply accept the offer as given. A couple reasons to consider asking for more include:

  • More money (or other benefits, such as more PTO)! Of course, an increase in pay is the most likely ask. The vast majority of offers presented are in a range. The company giving the offer to a prospective employee rarely presents an offer at the top of the range to start. If the salary range is $100,000 – $120,000 they might offer $105,000 (for example). The company generally expects you to negotiate. It’s built into the process and their initial offer.
  • Depending on the type of role, your negotiating skills can be seen as a tremendous asset. Showing your ability to have the conversation and successfully bargain can be a huge benefit. When my sister, an attorney, was offered a job recently, I coached her through the process and her prospective employer was incredibly impressed with her bargaining skills. Not only did she get more money, but they were even more pleased about their hiring decision.

How to go about the process

The absolute most important thing you can do is PREPARE. I definitely do not recommend just categorically asking for additional salary with no basis for the request.

  • Do as much research as you can. Use sites like Salary, Glassdoor and Indeed to find out what typical ranges are for the role. For tech roles, I especially like Levels.fyi as a reference. Also, feel free to share some of the things you have successfully achieved in the past and how you might bring your skills to the new role. For instance, “I can bring value to this organization by implementing XYZ.”
  • Do not demand more money or threaten the hiring manager. I view this as part of the process and the ultimate best outcome for both sides is a mutually satisfactory job offer. The goal is for you to be compensated appropriately, not to extract as much money as you can from the company such that there are unrealistic expectations or any financial burden on the employer’s part.
  • I prefer to have this conversation a bit later in the process. It’s helpful to know what their range is, as early as possible. If you’re expecting $120,000 and find out after 3 interviews that their range is $90,000-$100,000, then you’ve wasted a lot of everyone’s time. But if the range is in line with your expectations, I wouldn’t throw out a number too early. That said, if there’s something else you’re very attached to, I think it’s fair to signal that to the employer on the early side. Don’t wait until you’ve been offered a role to mention that you only want to work part-time or need to work from home 50% of the time.
  • PRACTICE!!!! If you’re at all nervous, practice with a friend or family member by role playing. Have a very good idea what you’re going to say and how you’ll respond to the possible answers. You should know ahead of time if there’s a number you just won’t go below. Also, be prepared for them to essentially say, “No, this is the best we can do.”  Again, I know this part can be scary but it doesn’t have to mean you’ve botched the whole process and ruined your prospects. This has happened to me and I have typically responded with something like, “Well, I’m disappointed but I’m still very excited about the opportunity and I look forward to working together.”

What exactly should you negotiate FOR?

Salary is the most typical thing to negotiate for but there are plenty of other things to consider. Not everyone cares all that much about a few extra thousand dollars. You might prefer extra PTO, flexibility in your work schedule or even a different title. What are the options? Again, it depends what your priorities are, but you could consider negotiating for:

  • A higher starting salary
  • Equity in the business (or a path to equity)
  • A signing bonus
  • An extra week or two of PTO per year
  • The ability to work from home
  • Flexible work hours
  • Travel expectations (how often, what level of travel)
  • Professional development/continuing education budget
  • Frequency and timing of reviews 
  • Bonus terms and target (i.e. X percentage of salary)
  • A different title or other modification to the job duties

Some final thoughts

I recently had a conversation with some other financial planners on this topic and there were some great gems from our discussion.

  • Consider interviewing for a job you do NOT actually want. It’s great practice and can give you more confidence negotiating as there’s not a big risk.
  • Remember that there is a LOT more to your success in a role than the money. 
  • The skills used in negotiating are transferable to so many other areas of our lives, both professional and personal. Take the opportunity to work at advocating for yourself in as many settings as possible. Again, not just for the sake of it, but because it’s great practice to be able to voice what you need and why.

I will always make myself available to women who are struggling with this. If you ever want to role play or ask me a question, please email me: danika@ xenafp.com

Being flexible in life, and in financial planning

If there’s one lesson we’ve learned from the pandemic, it’s how to be flexible. Whether your life was completely upended, or barely impacted at all, there’s no question that the world around us has shifted dramatically in the last 13+ months. When this all began, many businesses and even industries were forced to pivot and engage with their audiences in a new way.

And as individuals, many of our lifestyles changed significantly. We may have experienced one or more of the following:

  • Working from home 100% of the time, which for many people led to the purchase of a bigger home or renovations of an existing home.
  • Radical changes to spending, such as reduced/eliminated travel, gas, parking, eating out and entertainment costs.
  • Perhaps most profoundly, a reexamination of what is most important to us and whether we want to make any shifts, professionally or personally.

How does this relate to financial planning?

There are a couple of parallels here. You may have noticed that I do NOT offer a standalone/one-time financial plan. Why not? It’s TOO STATIC! One of the primary reasons I structured my engagements with clients to meet on an ongoing basis: life changes ALL THE TIME. 

In the last year, how many of these things have you experienced?

  • Major house repairs/renovations, 
  • A large bonus or salary increase, 
  • A job change or new business opportunity,
  • Significant changes in your spending (see above, but largely travel/entertainment=down, home improvements=up),
  • A refinance of your primary mortgage, reducing your monthly payment amount,
  • An IPO, merger or other significant change at your employer,
  • Hiring a nanny/educator or beginning private school for your child(ren).

There’s certainly some value in a one-time 75-page plan, but it’s fairly limited, in my opinion. I prepared some of these standalone plans for clients in January and February 2020 (at my former firm). Many of these were totally obsolete within a couple months.

The process of financial planning is just that: a process. And a highly dynamic process at that. The exercises I work through with new clients, around goal-setting and defining values, are likely to be revisited and reviewed every single year. While some people are unwavering and single-minded in their focus, the vast majority of people I’ve worked with have shifting priorities.

Walking the walk

If anyone had told me 18 months ago that I would quit my job (which I very much enjoyed) to launch my own firm, I would never have believed them. Here I am, almost 9 months in with nearly 50 clients and tremendous growth; you better believe my situation is different. My cash flow has changed profoundly, and I’ve had to thoroughly revise my plans for everything from work-life balance to retirement. And that’s OK! In fact, it’s more than OK. Among other things my job satisfaction is dramatically improved. As I said, I liked my former job, but the ability to create something from the ground up is satisfying on a different level. 

My financial situation has changed and I’ve had to incorporate those changes into my “plan”. Again, I don’t love the idea of a static plan, but having something that one can adjust as needed is much more impactful. Imagine working with a planner and having an annual meeting cadence. In my case, my life a year ago could not look more different. Would my planner be able to adapt to my changing circumstances mid-year? Or would that have prompted a response like “we’ll review the changes at our next meeting” (in, say, 9 months)?

Takeaways

If you’re looking for a financial planner, I’d encourage you to consider working with someone who has this mindset around the dynamic and flexible nature of this work. Financial plans are not set in stone. If the planner or firm doesn’t have a mechanism to easily manage updates and changes to “the plan”, I’d consider continuing to search. 

If you already have “a plan”, remember that, while useful, it is likely to need regular updates and modifications. As planners, we make assumptions all the time: about inflation rates, and longevity and all sorts of things which are ultimately “unknowable”. Our job is to react to changing information and help you continue to move forward with confidence and reassurance that your money is set up to help you live your most fulfilled life.