Seven-point framework for equity compensation choices

Nathan Bidner, chief strategy officer at GrantD Equity, outlined a seven-point framework advisers can use to decide whether employees should exercise, sell or hold company stock and options. The framework covers value, tax, concentration and risk, liquidity and cash flow, personal goals, stock outlook and corporate or plan rules.

Value requires estimating what the equity is worth now and modeling outcomes under different stock-price scenarios. That analysis can show whether the priority is capturing further gains or protecting existing gains.

Tax consequences include the timing and size of any tax bill from an exercise or sale. Bidner says taxes should influence the timing and size of transactions but should not be the only factor guiding a decision.

Concentration and risk call for comparing the position to an employee’s total net worth. A large exposure to one company can reduce overall wealth if the stock falls; option positions can magnify percentage losses.

Liquidity and cash flow considerations address whether exercising or selling will provide cash for spending, taxes or other obligations. Exercises and tax payments can require immediate funds.

Personal goals identify what the employee intends the equity to fund, such as retirement, a home purchase, education or charity, and help determine acceptable retained risk.

Stock outlook evaluates confidence in the company’s future performance while noting that positive expectations do not remove the risk of having most wealth tied to a single employer.

Corporate and plan rules — including blackout periods, insider-trading windows, holding requirements and exercise deadlines — limit when and how strategies can be executed.

Bidner notes that tax consequences are immediate and measurable, which can lead some employees and advisers to avoid selling to sidestep a capital-gains bill even when that leaves a large share of wealth concentrated in one company.

He offers a hypothetical example of an executive holding about $7 million in employer stock and options, representing roughly 70% of his investable assets. After prior unexpected tax bills the executive prefers holding to avoid another taxable event. Applying the framework shows the position has generated substantial gains, that a meaningful price drop could erase much of those gains and that the options could fall more sharply. The executive also has short- and medium-term liquidity needs. The analysis can lead an adviser to recommend a partial reduction in concentration, timing for transactions and steps to manage tax impact.

Bidner developed the framework after senior roles at Charles Schwab, Fidelity and Morgan Stanley. He presents the framework as a method for advisers to turn broad questions such as “Should I sell?” into a plan that specifies how much to sell, when to act and how to manage tax and liquidity constraints.