Tech Workers With Stock Option Gains Should Avoid These Costly Mistakes

Tech workers whose compensation includes a stock award may have seen a net increase in value from the continued rise of technology stocks this year. But if they cash out too early, they could run into unintended tax consequences and lose out on their future gains.

The Nasdaq Composite is up more than 20% this year, led by tech giants like Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META) and, most notably, artificial intelligence chip maker Nvidia (NVDA), which is up 170%. This year, it has reportedly created millionaires among its staff.

Investopedia I spoke with David Amann — a former tech employee who is now a financial advisor at Edwards Jones who works with clients with stock-based compensation — to find out how workers can navigate market volatility, learn about diversification, and what mistakes to avoid when dealing with… Stock options.

Here is an edited excerpt of that conversation.

Investopedia: Do you know people who are millionaires from their stock compensation? What are some mistakes they make when making money so quickly?

Personally, before becoming a financial advisor, I worked for Netscape since they went public in 1995. I got a front-row seat to see what can happen when you don’t follow some basic guidelines, like diversification and making sure you fully understand your stock compensation.

When I was at Netscape, stock compensation seemed like a lottery ticket, and I didn’t think about it as part of my long-term strategy. I was sure I was going to retire on a Greek island somewhere.

Investopedia: What are some tax mistakes you’ve made?

When dealing with stock-based compensation, I think it’s really important to work with a tax professional, and I certainly hope to do that.

Some types of stock compensation — such as incentive stock options or an employer stock purchase plan — can give you tax advantages if you hold them for certain periods of time. Others, such as restricted stock units (RSUs) or nonqualified stock options, don’t necessarily come with the same perks. It can get really complicated.

However, I don’t think people should let the tax tail wag the dog here. I’ve seen a lot of people focus only on the tax benefits of their stock compensation and forget about those other critical factors, like diversification or how volatile that underlying stock is.

Investopedia: For clients who have a significant portion of their compensation in stock options and there is volatility in the market, what kind of advice do you give them?

When I think about employer stock compensation, it’s about using those assets to achieve some meaningful long-term financial goals — e.g. [saving for] Educate your child or pay property taxes.

When we think about buying or selling stock options, we want to think about this [long-term] Strategy first. Whether or not people should buy or sell will be determined by what [someone’s] The goals are [and] What they are trying to achieve.

Investopedia: In general, what portion of people’s portfolios should be allocated to their company’s stocks?

You should always remember that you are not only investing in your company’s shares, but also… [but] You also get your salary from that company as well.

At Edward Jones, we generally have a rule of thumb that no one should have more than 5% of their net investable wealth in any one investment. When you consider stock-based compensation, you may want less than that. If your company is going through hard times, not only will stock-based compensation be less valuable, but there is also the possibility of layoffs, [which] It affects your employment status