When you walk onto an airplane, you know the pilot in the cockpit has taken all of the necessary precautions to get you safely to your destination. The flight plan has been reviewed. The instrumentation panel has been checked. This process is followed before each and every flight, and the pilot has likely done it countless times before.
The experience is similar when you hire a financial advisor when being offered equity in a company. By working with an advisor who specializes in equity compensation planning, you can be sure the pilot of your financial plan has flown this route before and knows exactly what to look and plan for. They can guide you through asking the right questions and gathering the necessary information to help you make an informed decision.
Here’s a closer look at the questions you should ask when being offered equity in a company and how an experienced wealth manager can help you chart the course to reach your financial goals.
Questions to Ask When Being Offered Equity in a Company
When being offered equity in a company, it is critical to ask the right questions so you can decide if the equity is a good fit in your portfolio. An advisor will guide you through important questions such as:
Is the offering company private or public? The answer to this question will tell you how your stock will be valuated. If you work for a private company, there are multiple ways for the business to value its own stock that could involve an internal board or a third-party valuation team. If you work for a publicly traded company, your stock is valuated nearly on a daily basis. The share price is broadcast to the world through the New York Stock Exchange or another stock exchange.
This is important because you may want to sell your equity or shares of company stock at a later date. Knowing how to value your equity will guide you in your decision to sell or hold onto your shares.
How is the company structured? Is the company structured as a C-Corp, S-Corp, LLC, partnership, or another type of business entity? The structure of the company will affect the type of equity being offered. For instance, most C-Corps will offer stock options. Other types of equity offerings could include restricted stock, stock appreciation rights, or profits interest.
Different equity holdings are taxed at different rates. These tax implications are an important factor in deciding whether to take the equity being offered. In addition, you must account for those taxes when developing your equity compensation plan.
Who else owns part of the company? Being offered equity in a company means that you will have a say in how the company is managed. How large that say is will depend on your percentage of ownership. The other shareholders in the company will also affect policy changes and ongoing strategies, so it is important to know who these people are and ensure your ideals align before you opt into the equity.
Are there any stock restrictions? Many companies set restrictions on their stock options and other equity shares. These can be found in vesting schedules and other plan documents. The vesting schedule will tell you when you are eligible to exercise and sell your company stock. It’s important to go through any plan documents that pertain to your potential ownership with your financial advisor so you’re aware of any restrictions that could affect your equity compensation strategy.
Will the company pay dividends? Not all companies offer dividends to their shareholders. However, if your company does plan on offering dividends, you will need to devise a tax strategy around them. Your strategy will depend on how the company stock is held and in what type of account, along with your personal financial situation.
Many executives are excited to hear their company will offer dividends because that indicates the business is growing. However, they fail to consider the tax and other financial ramifications. For example, will dividends be paid into a qualified account, allowing you to delay taxation on them? Or will they be paid outright, causing a taxable incident? This is something a financial advisor can help you plan for.
What is expected of you? When being offered equity in a company, you need to clarify what exactly is expected of you moving forward. As a top-level executive, some companies will require you to own a certain percentage of the company, which could mean you must purchase more shares as the company grows. Some companies may only offer equity based on your performance as an executive. Sharing these expectations with your financial advisor can help in developing an all-encompassing equity compensation plan designed for you.
What is the long-term outlook of the company? While this is not something that you would want to outright ask your CEO, it is something that you will want to consider before accepting any equity or stock options. The last thing you want to do is hold partial ownership in a company that performs well for a couple of years and files for bankruptcy in year three. You will have lost all of the money you invested in the company, and more importantly, the time that you could have been putting toward a career with a company with more longevity. A well-developed financial plan should address the long-term sustainability of a company.
One of the important aspects of all of this planning is to take a step back and think like an investor, not as an employee. When deciding whether you should accept equity in a company, it is easy to look purely at the fact that you will be guiding the company as a top-level executive and, in turn, the company should grow. While your contributions should not be understated, if you think like a prudent investor, you would look at balance sheets, business plans, and comparables companies, just to name a few.
A trusted financial advisor can help you formulate a flight plan that addresses all of your concerns as an investor and as an employee when being offered equity in a company. You can then develop a strategy that addresses your unique financial situation and offers you confidence as you step into your new role as partial owner.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for integrated asset allocation and equity compensation management. For more information on how Wade and the Carpenter Team can advise you when you are being offered equity in a company, reach out today for a complimentary consultation.
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