Strategies for Managing Restricted Stock and Stock Options

Equity compensation is often a major component of an executive’s total pay package because it helps to align the interests of management with shareholders. Two primary forms of equity compensation are Restricted Stock and Employee Stock Options. When managed effectively, equity compensation can be a substantial contributor to long-term wealth creation. 

Not all financial advisors are specialized in executive compensation. At Lucas Capital Management, we work with many executives to help with both tactical management of their equity compensation as well as building its value into their financial plan. It’s wise to seek professional help when you have financial questions like these, because not taking the right steps can materially impact your future. 

If you are unsure of what strategies to use to manage your equity compensation, here are 3 important considerations: 


  • Understand what you own
  • Consider the risk of over-concentration in one company
  • Build equity compensation into your overall financial plan


Talk with us. The financial advisors at Lucas Capital Management can help. 


Understand What You Own

Probably the most important advice is to fully understand the grants you have received and the company’s strategy for future grants. Annual grants of Restricted Stock and Employee Stock Options will have specific vesting requirements and expiration dates. At a minimum, you should:

  • Know the vesting dates and expiration dates of your grants
  • Keep a schedule of your portfolio of grants
  • Understand expectations for future grants

Restricted Stock

By “restricted,” it means that employees cannot dispose of the shares until vested. In most cases, vesting is time based. Some companies might also set performance milestones in addition to time as conditions for vesting. When vested, restricted stock has the same value as regular shares trading in public. Granting of Restricted Stock does not trigger a taxable event; it’s only as the shares vest that employees incur taxes. Typically, vesting takes place in installments over a multi-year span. Each year, a specified portion of the shares become the property of the employee. As vesting occurs, employees must record the stock value on the vesting dates, which is treated as taxable ordinary income. Whether vested or not, all received restricted-stock dividends are taxed as ordinary income.

Employee Stock Options

Employee Stock Options add an additional layer of complexity. They are call options, which give you the right (but not the obligation) to purchase shares of company stock up to the expiration date at a stated price (the strike price). Two different types of stock options granted by companies are Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). Your company will determine the compensation scheme for executives and may issue either NSOs or ISOs. The principle difference between NSOs and ISOs is tax treatment after exercise. Neither type of Employee Stock Option generates taxable income when granted. 

NSOs result in profits being taxed as ordinary income when the option is exercised. For example, if you exercise an NSO that was granted one year ago to purchase 1,000 shares of company stock at the strike price of $10/share when the market price at exercise is $30/share, you will be taxed on $20,000 of profit (your option allows you to buy the stock at $10 compared to its value of $30). You have a choice to exercise and hold the stock, or exercise and immediately sell the stock. Many public companies offer “cashless exercise” so that you will receive the net proceeds from exercising and selling the stock simultaneously.

ISOs provide favorable tax treatment over NSOs because they are generally non-taxable when exercised and allow for long-term capital gains treatment when the underlying stock is sold. There is no reportable income when an ISO is exercised. If the stock purchased on exercise is held for at least two years from the grant date and one year from the exercise date, all profits are taxed as long-term capital gains. Using the same example as above, if you exercise your ISO a year after it’s granted to purchase 1,000 shares of company stock at a strike price of $10, and one year later sell the stock for $35/share, the entire $25,000 profit is taxed as a long-term capital gain. Recognize that this tax benefit comes at a cost. To realize the favorable long-term capital gains rate, you need to exercise and hold the stock for one year, requiring payment for the shares received (no cashless exercise). 

Consider the Risk of Over-Concentration in One Company

What percent of your overall wealth would you invest in one stock? It’s much easier to diversify your investment portfolio then it is to consider your employer as a single company risk. Most company executives are committed to the success of their businesses and become comfortable having a large portion of their overall wealth invested in their company. Our advice to executive clients is to consider the implications of concentrated risk. In addition to the company stock and options owned, your job is also tied to the same company. If some unforeseen catastrophe happens, your life might take a big turn for the worse in a short period of time. This can be avoided by managing your equity compensation as part of your overall portfolio and financial plan. 

By understanding current holdings, expected future grants and vesting schedules, we can appropriately size the holdings of your employer’s stock. Subject to minimum stock ownership requirements, we may advise clients to sell a portion of their company’s stock or exercise and sell Employee Stock Options. 

Build Equity Compensation into Your Overall Financial Plan

For executives, it’s not uncommon for the value of equity grants to exceed the value of cash compensation over time. A comprehensive financial plan will factor in future compensation and the value of all forms of equity grants. Unlike your salary, which usually increases on a steady pace throughout your career, equity compensation will have spikes and valleys based on factors outside of your control. If your company’s stock has a few good years and doubles in value, the Employee Stock Options you received a few years ago may be worth more than your current salary. Alternatively, if the overall stock market declines, your company’s stock may go down in value even if the company is performing well. A declining stock price will result in options having no value if the stock price dips below the strike price. 

At Lucas Capital Management we specialize in comprehensive financial planning, which includes all aspects of your financial goals and wealth generation. Factoring in equity compensation for corporate executives is a critical component that we fully understand.

Work with the Right Financial Advisor

There is a lot to consider when it comes to equity compensation, so to help ensure you’re making the right decisions, work with a financial advisor who understands. If you think you can handle your finances on your own, read our recent blog post: Do Your Emotions Hinder Your Investment Results?