3 Tips for Assessing Employee Stock and Options

Investing heavily in your employer doesn’t always make financial sense.

Man with a pen assessing charts on a financial report
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You're working hard to make your company successful, and it's sharing the rewards: You've just been awarded stock or options. It's a double win, right? You can actually get paid for working to lift the value of the stock. Not so fast, says Laura Tanner, a certified financial planner and principal with SAS Advisors, a San Francisco advisory that works with tech entrepreneurs. "It's a very emotional issue," she says. "People think, 'It's my company, so it's a great investment."

And it's easy to assume that investing heavily in your employer's stock will signal that you are a good corporate soldier, aligning your best interests with that of the company's.

The truth is that most other soldiers march to the diversification drummer by rebalancing their portfolios as they gain employer stock. According to the Employee Benefit Research Institute, only 8 percent of shares in 401(k) accounts are invested in the companies employees work for, and that number has been steadily declining for years.

As counterintuitive as it might seem, the best thing you can do with company stock is use it to rebalance your portfolio. These three steps will help you make the most of the options and stock you receive from your employer. Then you can achieve your ultimate goal, which is to diversify those holdings as soon as you can so you aren't relying on the same company for both a paycheck and your retirement.

[See: 6 Ways Retiring Can Be More Affordable.]

1. Get a firm grip on exactly what you have been given. Companies attach lots of strings to the ownership they dole out. For example, the stock might not be yours until you are fully vested, which could take seven or more years. Or, you might be able to sell the stock only through certain channels or at certain times. (Read up on the latest company strategies at the National Center for Employee Ownership at www.nceo.org.) NCEO suggests that you request a copy of your employee stock ownership plan's summary plan description from your company's administrator.

Often, the company's goal is as much to keep you employed as it is to reward you for work already done. That is why stock options usually vest over time. If you leave the company, you might lose some or all of your vesting and thus those potential holdings.

But the most important implications to understand, Tanner says, are the tax implications. A devil truly lurks in those details, as many a startup employee has discovered when he focused more on trying to sell at the best possible moment, for maximum value, only to see that windfall wiped out by unexpected tax rules. A tax professional can help you understand the moving parts of the holdings so you can detect how long to hold, under what conditions you should sell and how to execute the sale.

[Read: 5 Things You Should Ask Your Financial Advisor.]

You'll also need to consider how many steps it might take to diversify your holdings and the associated cost. If you are given stock or options in a private company, you can't sell the stock on an exchange. Instead, you must sell it to another shareholder or perhaps to an investor. Chances are, you will need approvals, and navigating the sale will be tedious at best. The harder it is to convert the holding to cash, the less liquid it is, and that lack of liquidity undermines its value.

2. Understand the factors that affect the company's growth so you can adjust your expectations and potential action accordingly. Follow your company as though you were an outside investor, reviewing public filings, earnings announcements, analyst reports and annual statements. Listen in on the calls that executives make to institutional investors. Usually these calls are posted as podcasts, and transcripts are available in the investor relations section of your company's website. You'll hear the official truth from executives whose jobs rely on keeping investors happy. You'll also be in the know about the company's growth plans and achievements, gathering knowledge well beyond your own department and internal network.