What should I know (and ask) before hiring a financial advisor?

In lieu of my usual weekly post, I thought it would be helpful to share some content from The National Association of Personal Financial Advisors (‘NAPFA’).

The financial advising world is full of different ways of making money from clients, with some ways more transparent than others.  Some advisors use commissions from investment sales to primarily pay themselves (sometimes up to 8%!) and others use a percentage of assets (AUM) only.

NAPFA is kind enough to offer resources to the public detailing great questions to ask potential advisors, how to obtain a full picture of your advisors compensation, and what is important about having a fiduciary in your life.

If you are considering a financial advisor, take advantage of these resources HERE.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

RSUs in your investment portfolio

If you receive a large grant of RSUs or company stock, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will need to decide whether you will keep the stock once vested, or if you prefer to sell the stock at vesting date.
Concentrated Positions
A concentrated position occurs when you have a large amount of your finances wrapped up in one company. This can cause problems by increasing risk in your portfolio, causing tax issues, and liquidity needs. These risks compound if you have a long time horizon for your investment or your tolerance for risk in your financial plan is different.
Holding onto your company stock can leave you very dependent on one company’s success.
Chances are your salary, your 401(k) match, and your stock compensation are all tied to one company. This one company can ‘make or break’ your future financial freedom based on how well they do.
 
Example: If a competing product comes out, this may drop your stock value and require lay-offs longer term. Many smaller tech companies realize this pain when Amazon or Google announce a competing tool. The stock can plummet by 50% within a week.
Example: If a company ends up like Enron or WorldCom, then the drop may even be worse – wiping out your earnings and stock value completely. It may be hard to think this could be your company when we tend to be overconfident when we have an insider perspective on our employer’s prospects.
 
In these price drop scenarios, you may have paid significant taxes on the vested stock already as well.
On the flip side, if you hold on to the shares and the company goes gangbusters, you may also have significant capital gains accruing. Selling the entire position may not be tax-efficient and cause you a different headache.
Diversification
Holding a large position in one company stock exposes you to higher risk of large movements in the stock price from day to day. Diversification is used to help investors choose a portfolio that offers the best return for a given level of risk. Why take on more risk than is necessary to achieve a given level of return?
A diversified portfolio is based on academic research into the disciplines of economics and finance. Research holds that investing in many different asset classes (i.e. emerging markets, U.S. large cap funds, etc) and in many companies within an asset class will reduce your investment risk. This seeks to avoid damaging investment performance by the poor performance of a single company stock or asset class.
 
At SeedSafe Financial we practice diversification for long term success.  Find out more about our investment management services and consider giving us a call.
 
Find out how diversified your portfolio is through our free online tool.
 

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Stock Options and the Alternative Minimum Tax

Stock options and the AMT

Alternative minimum tax (“AMT”) is a hard proposition for many tech employees.  When you exercise incentive stock options it increases your net worth, but you don’t actually get any cash.   This puts you in a tough spot for paying any AMT later on.  This is an important topic for start-up tech employees with a stock option plan and it is easy to miss.

Incentive stock options (“ISOs”) are qualified stock options available under a company stock option plan.  They must be held one year from the date of exercise and two years from the date of grant.  Otherwise, they are considered non-qualified stock options (“NQSOs”).  ISOs receive favorable long-term capital gain tax rates upon sale instead of ordinary income rates.  However, in the year you exercise ISOs, you may be subject to the the alternative minimum tax.

A basic discussion of what happens when you exercise an ISO can be found at How to Report Stock Options on Your Tax Return

At year end, your company will report your ISO exercise on IRS Form 3921, per the stock option plan requirements.  The IRS and you will receive a copy shortly after year end.  This form will help you and your accountant complete the AMT calculation for your annual tax return.

What is AMT?

AMT is an alternative tax system that takes your regular taxable income from Form 1040 and makes adjustments for special items.  ISOs are one of those adjustments. The adjustment amount is calculated as the difference between the value and exercise price at the time of exercise.

Other adjustments generally include state and local taxes paid, real estate taxes, interest on home equity loans, etc.  This is a complex calculation and we are discussing a high level view in this post.

This generally results in a higher alternative minimum taxable income (“AMT income”) that is subject to either a 26% or 28% tax in the year of ISO exercise.

When you sell your ISO shares, this will decrease your AMT income for the year of sale and reduce your AMT liability below regular tax.  As a result, the AMT credit produced from the exercise can then be used to recapture a portion of the AMT you previously paid.

When does AMT apply?

The AMT income exemption amount for married filing joint at $133,300 or single at $85,700 (for 2024).  This begins to phase-out for higher earning households at $1,218,700+ joint or $609,350+ for single.

AMT is generally applied to AMT income at a 26% to 28% tax rate.   The tax bracket raises at $206,100 for both married filing jointly and single taxpayers.

Confused yet?  This is why tax accountants and experienced advisors are so important for tech employees!

How do I minimize AMT?

A few ways include:

  • Determine the number of ISOs you can exercise without generating additional AMT liability.  This ‘AMT cushion’ amount  utilizes the difference between regular tax and calculated AMT tax.  If a cushion exists, consider exercising ISOs toward the end of the year when you have a better estimate of taxable income.
  • Exercise ISOs and sell qualified ISOs in the same calendar year.  This ‘ladder’ approach works with ISO exercises over a few years and may significantly reduce the overall AMT you pay over time.
  • Exercise ISOs and exercise NQSOs in the same calendar year.  This will increase taxable income and AMT income at the same time and may reduce the difference under these two tax systems.
  • Use a prior year AMT credit. An AMT credit is a little convoluted in calculating.  In general, this is a credit for the difference between regular tax and alternative minimum tax in the year AMT is paid.  When your regular tax liability is higher than your AMT tax liability, you may use a prior AMT credit against your regular tax liability.

If you work for a public tech company and already exercised ISOs at the beginning of the year, look at the prices again.  You may be able to do something similar to ‘exercise ISOs and exercise NQSOs’ by selling those earlier 2024 exercises and disqualifying them.  When you disqualify an exercised ISO, the stock sale becomes compensation income similar to NQSOs and may open the door for exercising and holding way more shares.  Of course, this also depends on your risk level and what you can personally do based on the market environment and your own emergency needs.

Where are you in your start-up adventure?

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

If you live in a state with its own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.  If you live in a state with its own form of state AMT, this further complicates the matter.  AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.   

How do trading restrictions affect you?

Are you subject to restrictions in selling your company stock?

Many public companies, like Amazon, institute ‘trading windows’ for key employees and executives.  

Whether you are a ‘key employee’ generally boils down to access to company profit and loss details. Profit and loss access generally includes: an executive with control over a piece of the income statement or department backend data access to revenue amounts and metrics.  These key details may influence the company’s stock price once made publicly available.

A key employee with this insight may trade company stock ahead of the earnings release and profit from the transaction.

Thus, trading windows generally occur after released earnings reports.

What does this mean for you?

The Problem:  Many employees decide to sell stock to pay for important expenses or to reduce risk. Employees may wish to buy additional stock based on their understanding of where the company value will be longer term.  It may not be ideal for them to wait until a trading window opens.

The Solution:  Create a trading plan (SEC Rule 10b5-1).

A trading plan allows you to establish a buying or selling program for your vested company shares over a specific period of time.  The plan is then approved by the company and implemented by you.

These plans are very specific in detail to minimize trading flexibility and you may not deviate from the plan instructions, but they do help you through the trading restrictions you are otherwise subject to.

Why should you sell your company stock, anyways?

Find out what RSUs or company stock does to your investment portfolio.

Once you sell your stock, what is next?

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Our Attention Span and Money

The average attention span and short-term memory recall has declined over the last ten years.  Some say it’s due to our ability to look up anything we need so our brains no longer find it a vital function.

Either way, I have strong memories of 9-11 and the 2008 crash.  I can remember exactly where I was, what the room looked like, who was around me, etc. Why do I remember the bad instances so much more?

Human psychology is so much more focused on the bad due to evolution.  Those who remembered the poison berries another ate lived longer.  Remembering bad moments in great detail allowed us to survive a longer time.

Thanks evolution – you take away my good memories and attention span and leave me with the bad ones?!

So what does this mean for today’s millennials?

We remember what it felt like and what is looked like, but we didn’t know the problems were primarily at home, and not worldwide.

The table below is a great example of how different types of stock (U.S. large stocks, U.S. small stocks, emerging markets, international, real estate, etc) can widely differ in performance from year to year.

Follow the S&P 500 (U.S. large companies stock) for example.  In the late 90s the S&P 500 was on a roll, and then when 2000 hit it became one of the worst performers for the year.  Each year is different and you won’t always know what makes it out on top.

JP Morgan returns JP Morgan returns from JP Morgan Quarterly Market Review, Q3 2024

Looking at the changes in this 10 year period of time, I can only imagine how frustrating it must be for new investors.  How can you consistently pick the right asset classes for greatest return?

In my mind, you can’t.  This is why I believe markets are efficient and few investors can outperform, because it is all priced into the stock over time.

This allows me the freedom to ask:  how do I protect and maximize my return while reducing the likeliness of large jumps like the S&P 500 in the above table?  I do this by holding a portfolio of many types of stock.  When one type dips, I have another that may rise in value or help counteract the effect.  Thus providing a more stable return over time.

So what about keeping my money in all cash?  There is no risk to that, right?

I am all for maintaining an emergency fund based on your lifestyle and needs in cash.  I also believe large expenses in the next few years are better left in cash.

However, I do believe there is a strong argument for investing into the stock market to combat long-term inflation.

Remember when you could get gas in the 90s for less than $1.00?  Remember when bread was less than $1.00 and you could scrape together a lunch with the change you found in your parent’s stash?

The changes over the last 20 years are a prime example of what could happen to your cash pile over the next 20-30 years.  In fact, we’ve seen inflation every decade since the 1940s and only over the last three years did it momentarily slow down.[1]

Our memories can be fickle friends and keep us from making good long-term decisions.  Adding to an already emotional topic – money.

If you are interested in talking to someone about growing your wealth, start now and schedule a time for your free 30 minute consultation with me.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

______

[1] For more information and a great chart, check out InflationData.com, “Average Annual Inflation Rates by Decade” by Tim McMahon on June 18, 2015

This post was inspired by the article in The New York Times, “Praise Is Fleeting, but Brickbats We Recall” by Alina Tugend: March 23, 2012 and the book Moonwalking with Einstein: The Art and Science of Remembering Everything by Joshua Foe

How to make an 83(b) election for your company stock options

Many individuals are interested in making the 83(b) election to minimize long-term tax due. However, this may or may not be a good choice for you. I will not go through the analysis and pros/cons of such a choice in this post. This is for information purposes on the mechanics of making the election.

Before making the election, it is important to understand whether your stock option agreement allows this. Your company should share an 83(b) election form with you, if you are eligible for this. You can also look at your stock option plan documents to see if it allows for accelerated vesting of your options.

You need to review your agreement to ensure it allows accelerated vesting. This gives you the choice to exercise your option and buy your stock now to show the stock was transferred to you and is in your control. You will likely still have restrictions on the stock in case of separation with your company.

Please review your stock option agreement and talk to your finance department to find out if you are eligible for this election.

Now on to the mechanics of Completing the 83(b) Election your company provided!

First: Pay your Company for the shares

The first thing you should know about making the 83(b) election is that you must elect to accelerate your vesting and pay for your shares first. Paying for your shares shows you own the stock and the risk of forfeiture is sufficiently minimized from the IRS’ perspective. Once you own the shares you may now make an election on your shares.

Next: Completing the 83(b) Election form

The election form is generally provided by your company (or their attorney). This form asks for your personal information and information on the shares you wish to elect this treatment for.  The election must be made within 30 days of receipt of the shares.

The fair market value of the shares is generally the most recent 409(a) valuation or Series funding value for non-publicly traded companies. This is something you should ask your company for.

Gross income is the total fair market value less the amount you paid for your shares. This amount is something you may owe taxes on, depending on the situation. Ask your company if they withhold taxes due via payroll for your election, or if you will be personally responsible for them.

Once the form is complete, it’s time to prepare all the paperwork!

Cover Letter and Copies, copies, copies

Preparing to file the 83(b) election requires a bit of paperwork. This paperwork ensures you have proof of the election if it is lost at a step in the process: on the way to the IRS in the mail, at the IRS office, etc.

You will need to create a cover letter for the election (sample here)  or provided by your employer). The cover letter will tell the IRS that you’d like a copy of the election stamped as received, and sent back to you in the mail. This ensures you have proof the IRS received your election request. Make sure you include a copy and a self-addressed, stamped envelope for ease.

To the IRS

    • Cover Letter

    • Original signed 83(b) Election Form

    • Copy of signed 83(b) Election Form

    • Self-addressed and stamped envelope for returning confirmation to you

    • Send to the IRS via your IRS home office location (where you file your Form 1040). Take the package to the U.S. Post Office and attach a Certified Return Receipt (example here). This receipt will serve as proof of the post-stamp date in case the IRS claims you did not send it within the 30 day period. Keep this for your records.

To your employer

    • Check for shares (already should be with them – but double check you did this!)

    • Copy of Cover Letter

    • Copy of signed 83(b) Election

    • Copy of Certified Return Receipt

For your records

    • Original signed 83(b) Election Form

    • Original Certified Return Receipt

    • Copy of Cover Letter

    • Copy of Check for Shares

    • Stamped IRS returned copy of signed 83(b) Election Form (once you receive it in the mail)

This post does not include a discussion on the pros and cons of making an 83(b) election. This post is for informational purposes on the mechanics of the election. Discuss whether making the 83(b) election makes sense for you with your accountant or financial advisor.

Where are you in your start-up adventure?

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Offer Letter Basics: RSU taxes and how it works

offer letter RSUs

Revised as of January 2024

How do you evaluate an offer from a large tech startup or established tech company like Microsoft or Google?  The first step in evaluating your offer is to understand it!  Below, we discuss one of the components of your offer letter – how Restricted Stock Units (RSUs) and RSU taxes work.

Restricted Stock Units (RSUs)

Structure: Each RSU equates to a share of the company stock.  ex.  1 Google GSU = 1 GOOGL stock.

Value: RSU value is tied to the price of the actual traded stock price.  RSUs are a little different than stock options, and have an implicit value above $0.  As long as there is a stock price at vesting, then your RSUs have value.

Vesting: The initial RSUs grant generally vest over a few years with a 1-year cliff.  The 1-year cliff requires you to be an employee for at least a year before receiving any portion of vested stock.  At vesting RSUs are taxed.

RSU Taxes:. At the time of vesting, withholding for taxes is made.  Depending upon your overall income level, this may or may not be enough to fully cover your tax bill at tax return time.  Federally, the withholding tax rate on stock compensation starts at 22% and then converts to 37% on stock compensation above the $1 million mark.

Other general vesting requirements/rules:

  • Look at the small print – when you terminate employment, vesting stops immediately.
  • If you are considering parental leave, look to see if your RSUs stop vesting during any non-paid leaves.
  • Unlike stock options, your RSUs become actual shares at vesting and do not expire like stock options would.
  • Think the company will go gangbusters over the next few years?  Review your incentive stock option plan to understand if you may make an election to pay tax on the value of the RSUs now (Section 83(b) election).  Talk to your accountant or financial advisor, since this does come with significant risks.
  • Trading window: once your RSUs vest into stock, you will only be allowed to trade the stock at set windows through the year.  This prevents insider trading.  If you have a large set of RSUs vesting, you may decide to make a 10b5-1 trading plan for regular scheduled sales over a period of time.

1 Year Cliff Taxation: RSUs are generally taxable as ordinary income when vested.  The first year this happens can be a bit of a shock for some.  Watch our YouTube video HERE for a visual breakdown of what will happen.

Single Trigger vs Double Trigger RSUs:  RSUs can have different vesting requirements.  Most private companies offering RSUs provide ‘double trigger’ RSUs.  These require time vesting and an exit (IPO, acquisition, etc) before the RSUs fully vest to you and become compensation income.  If you have double trigger RSUs, check out this blog post for more information.

What are the main issues surrounding RSUs?

When you are negotiating your offer – most of the time they will have an internal analysis to support RSU and salary trade-offs.  As long as they keep within the boundaries of the model, then your ‘target compensation’ will be the same, from their view point.  This allows you to toggle up or down your own risk level.

So how do you feel about RSUs vs. cash salary?  Keep these things in mind when weighing your options.

Cash flow impact: Withholding RSU taxes are usually paid through a portion of RSUs sold at vesting.  These taxes paid are generally displayed on your W-2 as part of your total tax withheld.  Most larger tech companies will offer a signing bonus to help you transition to the RSU schedule for the first year.  The goal of this sign on bonus is to act as additional incentive to wait for the 1 year cliff vesting date.

Investment strategy: If you receive a large grant of RSUs, you will have many risks.  Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few.  You will also want to decide if you will be keeping the stock once vested, or if you prefer to sell the stock.

Evaluating many offers:  Evaluating RSUs and stock options 1 to 1 is generally not appropriate. Employees will generally receive fewer RSUs than stock options since RSUs do not depend on company performance to the same degree. Evaluate your options with your accountant or financial advisor..

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management service

Our Philosophy

We believe everyone deserves a complete financial plan. A plan that incorporates your values, goals, and finances to help you lead a wealthy life now and build future wealth. 

Our financial plans:

  • define the current factors affecting your ability to build wealth,
  • provide recommendations and a clear framework for tackling your concerns in living a wealthy life, and
  • create an action plan for ongoing progress over our relationship.

Then, we continue to evaluate, implement, and monitor financial changes through ongoing progress meetings.  We review major changes in your personal life, identify your priorities, and review progress toward building your wealth.

Our journey together is about being honest on where you want to go, where you are now, and making a best guess on how to bridge the gap.  We help you balance the trade-offs in what you have to invest: money, time, energy, and skill.

We believe traditional Wall Street doesn’t fit Gen X & Y: the attention you receive should not be based on the amount of your investment assets.

Money decisions are often driven by desires to feel happy, safe and secure. By having a plan that matches your values with how you spend your money, you save time and increase happiness.  Everyone deserves happiness!

Our fee structure is built on the complexity of your current financial situation – not based on your investment assets.

We believe each person and family is different: you should work with someone you can trust and who is an expert in your situation.

It is important to work with a financial advisor who understands your current situation.  Do they have the professional network to assist you with your individual needs and do they understand your major concerns?

We focus on tech entrepreneurs and employees because we understand many of their particular issues:

Do you work for Amazon or Microsoft?

We understand their benefit plans and integrate RSU planning into our financial process.

We also know how to help you transition from the corporate life to a new adventure if this is your main goal.

Do you work for a local early startup? 

If your startup does not have a 401(k) yet or provides limited health benefits, we can help you determine the best options for you.

Want more information on your stock options?  We can help you think about the tax effects of these and make a plan for when to exercise your vested options.

Are you an early stage entrepreneur struggling with cash flow?

We can talk through budgeting, short term debt options, and how to think about your savings during this hard time.

As your career progresses, we assist you with tax planning for founder’s stock, minimizing risk in your portfolio, and protecting your family long-term.

Find out more about us on our About Us page.

Why I created SeedSafe Financial LLC

I am a fan of personal financial education.

I grew up in a self-employed single-mother home, where the highs were amazing and the lows were extremely stressful. I was my mother’s helper in her business and kept track of the business finances in QuickBooks.

In our home, business finances equaled personal finances, and we were often in the red.   The stress this caused in our relationship and our relationships with others was constant.  This period of my life is known as “hormonal teenage years x 10”.  While financially treading water, my mom tried to give us a typical Texas suburb life.

When I arrived at college, I realized I wasn’t alone in my financial confusion.  At my orientation, banks handed out credit card applications and promised a free t-shirt for signing up. Students fumbled through living independently on a budget or worked to make ends meet while attending classes.  None of us knew the best way forward in optimizing our financial situation.  In the case of money, we felt like 1st graders learning multiplication without a teacher’s guidance.

So I dove in and learned as much as possible about personal finance.  I taught seminars on credit scores and what to look for in credit card applications.  I worked as a book keeper for small businesses and developed my tax skills working on tax returns for a regional accounting firm.  Then, I began consulting with self-employed individuals in tax planning for their businesses.

Clearly, this was the time I found my inner tax geek and I never looked back.  I went on to work in public accounting, continued consulting with small business owners, and become a financial advisor.

SeedSafe Financial LLC is the result of my ongoing passion to make financial decisions attainable for Gen X and Y.

We help you figure out your financial options.

My goal is to change the way the financial industry thinks. Instead of doing real financial planning with only $1 million+ clients, I believe we should be proactive in helping you build wealth early on.

SeedSafe Financial LLC meets you where you are (before you are a zillionaire).  We work with Gen X & Y when you have time on your side for small changes to make a huge impact on your life.

Schedule a discovery call with us to learn more!