Financial

Investing Options with Your Employer

Ever heard of the terms RSUs, stock options, ESPP, and ISO?  (The financial world loves its acronyms, doesn’t it?)  Those are options that you may have for investing that come from your employer.  All of these options may not be available with every employer; you may have one, two, or even none.

When investing through your company, they generally fall into two different categories – the shares of stock are being given to you as part of your overall compensation package or you have the option to buy the company stock at a discounted price. 

Typically, there are generally four ways in which this can happen: restricted stock units (RSUs), stock options, incentive stock options (ISOs), and employee stock purchase plan (ESPP).

Restricted stock units are shares of stock given to you by your company outright; you do not have to purchase them.  However, since they are considered part of your total salary compensation, you do owe tax on these once they vest.  What I mean by vested is that at that particular point in time the shares of stock are 100% yours and there are no restrictions on whether you have to hang on to them or can sell them.  Companies will provide a vesting schedule for these shares of restricted stock units: for example, if you are given 100 RSUs over a 4 year period and it vests 25% each year, then on your first year you will have 25 shares that are yours.  The next year, 50.  So on and so forth.  If you leave the company before all your RSUs vest, then you lose the ones that did not vest (you keep the ones that have already vested).

Stock options, ISOs, and ESPPs are all opportunities for you to purchase company stock at a discounted price.  

Stock options are a chance to buy stock of the company at a set (i.e. strike) price.  These options are on a vesting schedule as well.  Many times you will see stock options with startup companies and also companies that are not yet publicly traded.  Some things to keep in mind with stock options, (1) this is not free stock from the company, you still have to buy the stock just like you would have to do in a regular investment account.  (2) You do not owe any taxes on stock options until you purchase them, they start trading on the public stock market, and you choose to sell them for a profit (“realizing your gain”) or the company pays dividends (you’ll owe tax on the dividends received in that tax year).  (3) If you leave the company and still have options available, you usually have 30-90 days after your last date of employment to purchase the options if you’d like.  If you don’t purchase, then after that set time they are gone and you don’t have the option to purchase them at a discount anymore.

ISOs are like stock options, but the advantage here is possible tax breaks on the profit.  If this is an option you have, you would need to speak with an accountant to help determine your tax obligation.

An employee stock purchase plan (ESPP) is when you have the option to purchase company stock at a discounted price and the purchase of these shares are deducted directly from your paychecks.  There are no restrictions on these shares, no vesting period, so you could sell them right away if you would like.  One thing to keep in mind with an ESPP program is that you would be purchasing more and more shares of your company’s stock (usually either 24-26 times a year, depending on your paycheck schedule).  A good rule of thumb to adhere to when investing is that you really don’t want more than 5% of your entire portfolio (this includes taxable investing and retirement investing) in one particular stock.  So if you are participating in an ESPP, then you’ll want to keep an eye on how much of that company stock represents all of your investing.  If it’s more than 5%, then you should look to sell some of the shares of the company stock and diversify. 

Overall, when it comes to investing your money into shares of your company the main things to keep in mind is (1) do you believe the company is going to do well that you want to place your faith in it by investing your money and (2) always keep an eye out for how much of company stock you own, as you would not want it to represent all of your investing portfolio.



Source
Investing Options with Your Employer is written by Jenny Harp, A Certified Financial Trainer for financialgym.com

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