Two decades ago most high net worth clients were business owners, specialist doctors, specialist lawyers and company executives. In more recent years, there is a new kid on the high net worth block: employees working at high growth tech companies who not only enjoy impressive salaries, but have also achieved vast amounts of wealth through their Employee Share Programs (ESPs).
I have worked with employees from companies like Apple, Cisco, Doordash and many more to help manage their Employee Share Programs and wider Financial Planning.
What is an Employee Share Program?
Employee Share Programs are offered by some listed companies (very commonly in the US tech industry) as a means of incentivising employees to mutually benefit in the companies growth and profits.
ESPs are commonly in the form of Stock Options or Restricted Stock Units (RSUs).
Stock options give employees the right (but not the obligation) to purchase a certain number of company shares at a fixed price, known as the exercise or strike price, within a set period. The exercise price is generally at a discount to fair share market value which benefits the employee. They have certain features including:
Grant Date: When the options are awarded to the employee.
Vesting Period: Typically, employees must stay with the company for a set period before they can exercise the options (for example, 3-5 years).
Exercise Price: The price at which the employee can buy the shares.
Expiration Date: Stock options usually come with an expiration date, after which they become worthless if not exercised.
Employees are generally required to pay taxes on the difference between the market price and exercise price when they sell the shares.
Restricted Stock Units (RSUs) are company shares given to employees subject to a vesting schedule. Unlike stock options, which require employees to purchase shares, RSUs are granted to employees outright, but the shares are typically not delivered until the vesting conditions are met.
The full value of RSUs is taxed as income when they vest, which could result in a significant tax bill, especially if the shares are worth a lot.
The Pros of Employee Share Programs?
Stock option exercise prices are generally at a discount to fair share market value which benefits the employee, particularly if share prices are expected to increase.
Restricted Stock Units (RSUs) are shares that are given to employees. Sure, you may pay 47% tax on the shares, but you are still 53% better off than if the company had no RSU program!
Employee share programs and high growth companies like tech companies are often a match made in heaven because these companies share prices can often increase exponentially, especially if you are an employee who works in the business at the early stages. As an example, it would have been nice to be an early stage employee at NVIDIA and received rates of return as high as 289,250%!
The Cons of Employee Share Programs?
If you participate in stock options, it's imperative that you do your due diligence to be comfortable that the share price is going to increase.
If you receive Restricted Stock Options and you are worried about a share price fall, it's important you sell them as close to vesting date as possible from a tax perspective.
If you participate too heavily in Employee Share Programs you can face several risks:
Diversification: By having too much of your wealth in one specific stock you have a considerable company specific (unsystematic) risk. This can be especially problematic as these tech stocks have a tendency to bounce around significantly based on overall market conditions. Let's look at uber as an example. It has been $21 on two separate occasions but it has also been as high as $86.
Income Tax issues compared to other alternatives (discussed later).
How does Source Wealth help clients with Employee Share Schemes?
If you had the time or inclination, you probably could have googled all the information above. So, how do we help clients? Here are key ways:
Should you participate in the Stock Options offer based on the company fundamentals?
When you work in the business it can be difficult to be objective regarding the prospects of the company you work for. As a Financial Planner, we can be objective in evaluating the specific company and guide you on when to participate and when to hold or sell.
Should you hold or sell your RSUs?
RSU's will create a large tax bill. We can help determine if you should pay for the tax with other cash/income, sell half of the RSUs to pay the tax or a mix of both based on your overall financial situation and in conjunction with meeting your other life goals.
How do Employee Share Programs effect your overall wealth?
A recent client I worked with had acquired $4.6m of company shares through participating in ESPs and benefitting from amazing growth in one of the world's largest tech companies. Sounds great, and it is... however this also means this client has $4.6m of assets which could easily create annual taxable income of $230,000.
As the client had turned 50, we could instead adopt a strategy whereby the income generated was partially contributed into superannuation (rather than the dividends being reinvested) to save huge amounts of tax. As the graph below shows, it most cases the client is paying tens of thousands of dollars a year less in income tax.
If you are receiving ESPs you are likely a High Income Earner and could benefit from Financial Advice like any other High Income Earners...
High income earns often benefit significantly from working with a Financial Planner by:
Creating a 'surplus cashflow' strategy to benefit from compounding investment returns, in a tax effective manner.
Assisting with tax planning and identifying opportunities to minimise tax.
Providing our clients with time back in their week by allowing them to delegate their personal financial planning analysis to us.
Protecting the assets which our clients have worked very hard to build.
Helping them define and achieve their ideal life.
Assistance with any other tax or business structures they may have, such as SMSFs, businesses and family trusts.
If you have Employee Share Program options or currently hold company shares you can:
General Advice only.
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