Stock Comp Planning (80/20 Rule)
The 80/20 rule applies with stock-based-comp: high quality decisions can generally be made by focusing on a few key items
Simplify the Process by Focusing on What Matters
With stock-based-comp every situation is different, and the details can definitely have a notable impact. That said, in most cases high qualify decisions can be made by focusing on just a few key items (i.e. the 80/20 rule):
(1) What Decisions/Choices Do You Have?
With stock comp, the decision(s) you need to make generally come down to a handful of key choices.
(1) Should you exercise/buy your options?
(2) Should you sell your shares/options?
(3) Or should you wait/do nothing?
(2) What Key Factors Should Be Considered?
Which decision(s) you're focused on impacts the specific key factors at play. But generally, the key inputs will come down to these four factors:
(1) What is the cost to buy your options (price to buy + taxes owed when exercising)?
(2) What is your financial plan and alternative use cases/need for cash?
(3) What is your risk tolerance, and how much concentration risk will/do you have?
(4) How do you feel about the company's business prospects/do you believe it's a good investment?
(3) Is There a Way to Optimize For Tax?
Optimizing for tax is usually a second-order focus (behind the investment and risk decisions), but it can have a notable impact on your after-tax dollars and definitely should be part of your analysis. Key tax-optimization vectors/areas typically include:
Can you reduce your income tax (mostly for choices related to NSOs and RSUs)?
Can you reduce or optimize your AMT tax (mostly for choices relating to ISOs)?
Can you reduce or optimize your capital gains tax (mostly for choices relating to stock from exercised ISOs/NSOs or vested RSUs/RSAs)?
Can you reduce or optimize your other taxes (mainly FICA and State taxes)?
For more information on tax optimization opportunities see: 50+ Tax Strategies
Last updated
