Equity compensation, stock compensation, share-based compensation — it’s all the same thing.
No matter what it’s called, stock options or restricted stock units (RSUs) are often granted to employees as a supplement to their traditional, cash-based salary.
Unfortunately, many people are never taught how to value or handle these types of assets, so they aren’t able to accurately incorporate them into their wealth management schemes — or take full advantage of their worth as it (usually) grows over time.
If you find yourself in that category of people wondering what the heck to do with unvested employee stock options or other non-cash company assets, keep reading for all the details.
What Are Unvested Stock Options?
In short, a stock option gives an employee the right to buy shares of their company's stock at a specified price within a set period of time, once it’s vested. That specified price is known as a strike price or exercise price, which is the stock price based on fair market value at the time options are issued.
The timeframe for exercising stock options — aka paying the price to convert them to actual stocks — is usually 10 years, unless employment ceases.
If your employment ends and you still have unvested stock options, the timeframe to exercise your options typically decreases. In these cases, employers sometimes put a process in place for buying unvested shares back from the former employee.
Why are stock options (and RSUs — more on those soon) such a popular element of compensation today?
Because many businesses, especially startups, can't afford to pay the high wages that skilled workers demand. So, they incorporate stock options into salary packages to make their offers competitive and to give hires more “skin in the game” via partial ownership of the company.
Diving Deeper: What Exactly is Vesting?
Before we get much further, let’s talk about the concept of vesting.
Vesting is a process employees must go through to earn ownership of their stock options.
Typically, the vesting period is based on time. Usually, the timeline for all of your stock options to vest — aka become available to exercise — is four years. Most vesting programs make it so that if you’re at a company for less than four years, at least some percentage of your stock options still vest. Some companies also require workers to hit key milestones on their vesting journey.
So that means unvested stock options are just stock options that have been set aside for an employee that they do not yet own because they have not vested.
It’s probably becoming clear why vesting came to be a popular practice. Making employees wait until all their options vest naturally leads to retention.
So together, stock options/RSUs + a vesting schedule create a powerful strategy for attracting, motivating, and holding onto top talent.
Have RSUs Instead? Here’s What That Means
RSUs — remember those are restricted stock units — are another common non-cash compensation element.
RSUs and stock options are overall pretty similar, but there are some important distinctions of which to be aware.
Like stock options, RSUs are usually granted on a time-based or milestone-based vesting schedule.
However, RSUs are not stocks. Each RSU is a unit that corresponds with a specific amount of stock. So a unit may be one share of stock, five shares, or whatever the employer chooses. When your RSUs vest, you’ll receive the amount of stocks associated with the number of RSUs you hold. No exercise process needed — they’re yours.
There are some other differences between stock options and RSUs, such as when they’re valued (at grant date or at vest), when they’re taxed (at exercise or at vest), and expiration details.
For a super-detailed breakdown of stock options and RSUs, we like this guide from Harvard Business Review.
How to (Approximately) Find the Value of Unvested Stock Options
If you hold non-cash compensation assets, you’re going to have to be OK with a little uncertainty — because it’s basically impossible to determine their true monetary value between market volatility, change in company value, and several other elements we’ll discuss in this section.
However, there is a formula to find what Robert Heaton calls the “TechCrunch Value” of stock options.
First, take your company value, which you can often find via a TechCrunch announcement about its most recent round of funding. Then, divide that number by the total number of outstanding shares. Finally, take that number and multiply it by the number of shares you hold.
What you have now is a rough estimation of the value of your unvested stock options.
This is just a starting point, because there are a lot of intricacies to stocks as well as some other factors that will impact this valuation, such as:
The type of stock you hold: Common stock, preferred stock, nonqualified stock options (NQSOs), incentive stock options (ISOs), and so on — there are a lot of types of stocks. All have differing benefits when it comes to liquidation, voting rights, and taxation, which of course impacts their true value.
Tax: Speaking of taxation, your type of stock will determine what type of tax (long-term capital gains tax vs. ordinary income tax) you’ll pay and when you’ll pay the bill. Understanding the value of stock options requires understanding tax rates and how much value they could eat up.
Strike price: You have to pay the strike price to exercise your stock options. If the value of your shares never grows beyond the strike price you paid to purchase them, you may be able to break even in a sale but you won’t make a profit. So not only is the strike price a detractor from a stock’s total value, so is the uncertainty of how stock value changes so unpredictably over time.
Lack of liquidity: If you need cash fast for any reason, stocks can pretty much never give you that. Stocks are a long-term investment that, unless you conduct a successful private sale or your company goes public, may never actually be worth anything.
Loss of mobility: Because of vesting, if you want to get the full value out of your stock options, you’re locked in with a company for a while. This loss of mobility may cost you opportunities, the ability to increase your salary, and in really bad cases your mental or physical health.
When taking all of these considerations into mind, Heaton says some people suggest that options are only worth about 20% of that initial TechCrunch Value. While he finds this estimation a bit low, he admits it’s probably not that far off.
Manage Stocks, RSUs, and the Rest of Your Portfolio with Kubera
At the end of the day, stock options, RSUs, and similar alternative payment methods are just types of financial assets.
As such, it’s important that you’re not just able to calculate but to monitor their value over time. This insight is necessary in knowing their impact on your net worth, how they’re pulling their weight in your portfolio, and if you need to make any tweaks to your holdings to maximize returns.
We developed Kubera to be a singular source of truth when it comes to the value and movement of every asset in your diversified portfolio.
On that note, let’s dive into Kubera’s key features.
Kubera is the ultimate personal balance sheet software for DIY investors with modern, diversified portfolios.
Kubera works with all the major stock exchanges. Simply add your brokerage accounts to the easy-to-use interface and the dashboard will update in real-time as the value of your shares shifts. In addition, our integrated stock ticker can also track almost any stock, ETF, or mutual fund.
For unvested stocks or RSUs, simply manually input and update their value in Kubera’s dashboard to monitor them right alongside the rest of your portfolio.
Beyond stocks, Kubera can help you manage pretty much any asset type.
Our custom-built system relies on various aggregators that enable us to connect with 20,000+ financial institutions. So go ahead and track everything from financial accounts to cash, coins, collectibles, NFTs, crypto assets, real estate, vehicles, and more.
On top of tracking assets, Kubera’s IRR for investments calculator helps you understand the return on those assets. Use our IRR calculator to find the internal rate of return on all holdings — in your choice currency!
For an epic overview of portfolio performance, head over to the Kubera Recap screen, where you can see a comprehensive summary of how the value of your investable assets, net worth, and more is growing.
And we’ve got one final awesome feature up our sleeve: our pricing.
Remember, if the product is “free” — you are the product!
Too many financial management platforms offer their services for “free” just to turn around and use your data for marketing or sell it to advertisers. To avoid doing that and keeping your privacy and data secure, we charge a simple and affordable price.
Work with a financial advisor, portfolio manager, or other wealth pro? Share our white-label solution with them now and empower them to offer you even better portfolio management.
