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Disruption cuts both ways. Just as tech companies have reshaped industries and daily life over the past several decades, the Federal Reserve’s aggressive interest rate hikes have altered the tech economy over the past year. We’ve gone from a war for talent to a “Year of Efficiency,” resulting in more than 100,000 layoffs by tech companies and a changing landscape that’s hard to predict.
But there may be opportunities in the new reality, both financially and from a career standpoint. This could be the ideal time to consider other possibilities like starting your own venture, or applying your skills in a different way with another company or for different role. The implications of these decision on your finances and financial plan should go hand-in-hand in evaluating your options. It’ll ultimately be your call in regards to what’s best for you and your priorities, but it’s important to understand the financial consequences of any potential move you may make.
Here are five questions to ask yourself if you’re thinking about a change.
Before you leave the relationships, institutional knowledge, and equity you’ve built at your current company, be sure to explore your options closer to home. Is there a position in another business unit or region that might be a good fit? Is there a team exploring a cutting-edge area that piques your interest? If you can find a place to be more challenged and energized at your current company, that could be the best of both worlds. If you’re burnt out, are there ways that you can cut back hours/responsibilities instead of quitting altogether (and perhaps forfeiting any unvested equity)?
Often a new role means your compensation, both amount and structure, will change — so you should know what that means for both your immediate finances and beyond.
If you do decide to pursue other pastures elsewhere, be sure to know exactly what that means for your equity awards, access to cash/liquidity, and taxes.
You’ll likely forfeit any unvested awards when you leave. If you want to exercise your available options while you can, can you “sell to cover”, or will you need to come up with the cash to exercise? If so, where will it come from? And what’s the right mix in terms of risk on how much to exercise while also looking to diversify your wealth beyond your equity position in your current company?
In many cases, lower 409(a) valuations due to the economic environment have made exercising your options cheaper from a tax perspective, but you still need to be aware of how exercising all/or a portion of your options will affect both your income and alternative minimum tax (AMT).
Luckily, you’ve got choices. The expertise, vision, and relationships you’ve developed in your career have made you extremely valuable across industries and company types. You may already have a new role lined up at another tech firm or are getting heavily recruited to join an innovative company outside of tech. If you’re joining another company, explore the growth opportunities and compensation plan they’re offering. It sounds obvious, but this is often the only time to negotiate exactly what you want and structure your compensation in a way that works best for you. Leverage the moment.
Are you okay with going all-in on a small start-up with huge growth potential, or are you looking for a different type of opportunity that gives you a better mix of current cash-flow and potential gain through equity comp?
You could also be considering starting your own venture, which brings a whole other set of questions. In the most immediate, it’s important to examine how starting a company will impact your personal finances, as well as determine what type of corporate structure (LLC, partnership, etc.) and funding model makes the most sense.
If you’re considering a small or early-stage start-up, a good portion of your compensation will likely be in equity ownership that could come in a variety of different forms. Are your awards eligible for an early-exercise 83(b) election? Do they qualify as qualified small business stock (QSBS), which has the potential to save you a ton of money in taxes when sold in the future. What will be the mix of equity between restricted stock, incentive stock options (ISOs), non-qualified stock options, and/or restricted stock units (RSUs) in terms of the hiring grant, or as a part of any retention or performance award in the future? You should understand the implications of how vesting is structured, both from a liquidity, risk and tax perspective. Since equity compensation is paid over a number of years, it’s important to consider expected income and taxes in future years when evaluating an equity compensation plan today.
While you can diligently plan for your future, there are always those pesky “unknown unknowns” once you take any leap. There’s no crystal ball to anticipate every scenario, especially in a shifting economy and tax landscape, so it’s important to first clarify what’s important to you.
At Cerity Partners, we specialize in helping leaders and entrepreneurs capitalize on the inflection points in their careers to accelerate their financial and professional journeys. While venturing into the unknown can be scary, choosing the right partner to navigate this next stage can make a huge difference.
Myles is a Partner based in the San Francisco office. He provides investment and financial planning advice to help clients achieve their short- and...Read more
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