Avoid the following mistakes to make your Employee Stock Purchase Plan (ESPP) and your Incentive Stock Options (ISO) give you the most in returns. Some might be obvious, but others are not. We mention them here because there’s always someone making one of these mistakes and the losses can be enormous.
Quick tips about ESPP and other Employer Stock Plans
• Do not wait for stock prices to rise before taking advantage of your stock options. This is going to increase taxes.
• Diversify all your investments. Do not have too much money placed into any one single stock. This is particularly true when the stock is from your place of work.
• Have a stock options plan in place before you leave your employer.
Not Understanding Stock Plan Rules While Leaving a Company
The expiration dates go right out the window when you quit, retire or get laid off. Whatever’s urging you to leave, it’s vital not to neglect your stock options throughout the transition period. You’ll have between 60-90 days to exercise any subsisting stock options grants through many company stock option rules.
This is going to limit your tax-saving approaches and you can be hit with a tidal wave of taxation when you need to exercise a career of stocks in a single calendar year. If you are the one making the choice to leave, ensure that you’re aware of vesting schedules before putting in your notice of the last days you plan on working. Leaving a couple days early can be quite expensive.
Not Diversifying Beyond Your Company Stock
ISOs are usually a large part of the compensation package you have overall. This advantage can be extremely lucrative if you’re lucky enough to work in a company with a rising stock price. We know quite a few people who have had almost 100% of their net worth in stock with their company.
Even when you are working with a company such as Google, Tesla or Apple, you should consider if too much of your wealth is tied up in one type of stock. It’s hard to sell your company stock, but it’s usually something you should at consider. There’s substantial risk in focusing all your investments on a single stock. Take Kodak, for instance.