ESOP Academy 12: 9 Equity Management Mistakes to Avoid as an Employee

Written By:
Amit Majumder, CFA
February 27, 2023

9 mistakes employees make when managing their ESOPs

Managing your employee equity is tricky. ESOP Academy so far has covered areas and concepts you should be aware of and pay close attention to. This week we change gears and instead explore 9 things you should try to avoid doing.

Having been involved in managing share plans for hundreds of companies and their employees all over the world over the past decade, I have witnessed everything – from silly mistakes to outright horror stories. Here are some of the common mistakes that employees make.

1. Not reading the plan rules and offer letters 📃

This is the 12th edition of ESOP Academy. If you want a TLDR version of the previous 11 editions, it’s “read the plan rules”. I get it – not many people get excited about reading dozens of pages of terms and conditions governing ESOP you are getting into (well, I do, but I’m probably an exception). But the plan documentation is crucial. Plan rules and your offer letter explain everything you need to know about your equity – how it’s structured and what you can expect to occur during the key events through the whole equity lifecycle. The earlier article gives you tips of key words and clauses to look out for in plan documents.

Be sure to set aside some time when you receive your next equity offer to understand the rules that govern your award. Haven’t done this before and already hold ESOPs? Revisit the documents you received at the time of the grant to avoid any surprises.

2. Not accepting your offer ✅

Do people really not accept their equity offers? The answer is yes. They may not appreciate the importance and urgency, be away on holidays, or simply miss the invitation emails. And sure, a lot of companies are quite lenient and don’t impose strict deadlines for you to accept your ESOP grant. And those that do, often only set a soft deadline, and still allow employees to accept the offer late. However, you cannot assume that this will be the case for you. At times, companies must abide by strict deadlines for various administrative, regulatory, legal and/or tax reasons. In some cases, depending on the plan design, if you don’t accept an offer to participate in ESOP, you may not end up receiving your allocation all together. Don’t miss the boat and regret it afterwards – stay on top of your action items in relation to equity.

3. Not actively monitoring your holding 👀

Speaking of staying on top of your equity matters, once you accept your grant, likely in an online portal, don’t completely forget about it. Be sure to check in on your account from time to time. Your employer often uses an online portal to provide you with important updates on the progress of your equity stake, including information about upcoming vesting events and trading windows. You can expect to find statements (including for tax purposes), equity valuation updates and more online.

Staying up to date with your ESOPs is the best way to be in position to make informed decisions in managing them.

Ignoring your holding throughout its lifecycle increases the risk of you making the mistakes we touch on later in this article.

4. Not considering ESOPs when changing jobs 💼

ESOPs form part of your total compensation. Just as you consider your salary and bonus when seeking a new opportunity and changing jobs, you should assess the equity compensation component when making important career decisions. Understanding the value and structure of the equity offering by the prospective employer is key in being able to compare offers you may be evaluating. The earlier article outlines the questions you should be asking to get a good understanding of the ESOP you may be getting into.

At the same time, as you start considering what your equity position may look like in the new place of employment, don’t forget about the implications of leaving your current employer on your current holding. Will you be classified as a ‘bad’ or ‘good’ leaver? What will happen with your unvested and vested ESOPs? Is it worth waiting a little bit longer to ensure you don’t resign before a major vesting event and forfeit your awards? If you don’t evaluate your current situation, you are potentially risking missing out on significant value creation opportunity.

5. Failing to negotiate your equity compensation 🤝

Continuing on the above topic, discussing and negotiating your ESOPs is something you should be doing with both your current and any prospective employer. Again, just like your salary increases or annual cash bonus, equity compensation should not be forgotten. Get a good understanding of how your company’s ESOP work to be in the best position to discuss any changes to your compensation with your employer.

Leaving your company for a new opportunity and forfeiting your current ESOPs as a result? Let your new employer know to ensure you are compensated with a sign-on award. ESOPs can be a powerful wealth generation tool. Don’t overlook the importance of equity.

6. Not considering rules, fees and tax implications when transacting💲

As you get closer to vesting and transacting on your ESOPs, do your homework to understand the intricacies of potential tax implications.

Blindly entering into ESOP transactions without considering the tax implications is sure-fire way to expose yourself to potentially unpleasant surprises.

Will income tax liability be triggered for you? You may wish to plan ahead and ensure you will be in position to settle the tax bill at the end of the relevant tax year.

What about capital gains tax? You would want to know whether you will be subject to CGT and if so, if you’ve made a gain or a loss, and what rate and potential CGT discounts will be applied to your reportable transaction(s).

Does your employer have withholding tax obligations? The proceeds you actually receive may be a lot lower than what you may have expected. If you are transacting on ESOPs to fund a significant purchase – don’t overlook calculating the amounts that may be subtracted from your proceeds for cost of exercise, withholding tax and/or fees.

Speaking of fees, are there any imposed for you when you transact? Fees could include administrative fees for entering transactions, or money movement fees to transfer proceeds to your bank account. If your awards vest monthly, is it wise to sell small batches of your shares every single month and keep incurring fees each time, or would combining several lots in a single transaction may work better for you?

You should also be mindful of the rules attached to your awards. If you participate in Employee Share Purchase Plans (ESPPs), you may be able to transact on your purchased shares immediately, but if your employer offers you matching shares, they will likely be under restriction for a period of time. Transacting on your purchased shares during this period may result in forfeiture of your matching shares. We will explore ESPPs in more detail next week, but as always, be familiar with the rules of your plan.

And finally, what if you have you moved across borders? Things will likely be complicated for you – be sure to seek professional advice for your circumstances.

7. Letting your vested options expire unexercised ⌛

What could be worse than rushing into transacting? Maybe doing nothing at all and allowing your vested options expire. Expiry date is set upfront and cannot be pushed back – it is the last possible day for you to exercise.

If you hold vested options, you should be aware of how far away the expiry date might be. And don’t forget – if you cease employment, the expiry date for your vested options may be brought forward as per the plan rules. It’s common for companies to give you only 3 months after your last day with the company to exercise any vested options you hold.

Going back to point 3 in this list – checking in on your ESOP portfolio on a regular basis is key. Don’t let an opportunity to realise the benefit of equity slip away after waiting for all this time to have ESOPs vest in the first place.

8. Not considering your ESOPs as part of your overall investment portfolio 📊

Many employees look at ESOPs in isolation and fail to make appropriate decisions. They fail to consider the risk profile - and not just willingness to take on risk, but also their ability to do so. It is also easy to know not know how much your equity stake is worth if you don't pay close attention to ESOPs. And whilst knowing and understanding the value is important, it is equally as important to consider employee equity as part of the bigger picture.

Your regular income (salary and wages) is linked to your employer, so does your equity stake. This likely means that a significant portion of your wealth depends on success of a single business or a certain industry. How should you think about such a concentrated exposure to a small number of risk factors? You don’t want to be in the dark about potential risks you are exposed to and the negative impacts subpar performance of your ESOPs can have on your financial health.

Employing a portfolio view in a great way to look at equity compensation from a lens of your entire personal balance sheet. Have a look at the earlier article introducing some of the portfolio, risk, and wealth management concepts to reconsider your approach to managing your ESOPs and take ownership of your personal finances.

9. Not asking for help 🆘

Your employer doesn’t expect you to become an ESOP expert. And neither do I (despite how amazing this series of articles is!). The worst thing you can do (other than ignoring ESOPs all together) is to assume you know it all and not ask questions.

Not sure how to access your online account to accept your award? Your vesting schedule and performance conditions seem confusing? Unsure when you will be able to cash out your ESOPs? Equity treatment when you leave the company appears vague? If you can’t find the straightforward answers to your questions, ask for help. You don't want to make assumptions and misinterpret key ESOP rules.

Your employer (HR, payroll, reward, company secretary and/or finance teams) will be able to help you out. Leverage other resources and materials online, talk to your peers, seek professional tax and legal advice. You don’t need to work it all out on your own.

Amit Majumder, CFA

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