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In this episode of The Long-Term Investor, I’m joined by Ally Jane Ayers, co-founder of Brooklyn FI and GEM, as well as host of The Liquidity Event podcast.
Ally Jane is a leading expert in the complex world of equity compensation. Whether you’re a private company employee holding stock options or someone navigating RSUs at a public company, her practical insights are a game-changer for maximizing your wealth and minimizing stress.
We start with a deep dive into critical tax considerations for year-end planning and expand into strategies for creating long-term equity compensation plans that align with your financial goals.
Here are my notes from our conversation…
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Key Tax Considerations for Year-End Stock Compensation Planning [00:37]
As the calendar year winds down, individuals with equity compensation need to act quickly to avoid costly tax surprises. Ally Jane highlights why a tax projection is one of the most important steps to take before December 31st. This involves gathering your pay stubs, investment income, and any other sources of revenue to get a clear picture of your taxable income.
She points out a common pitfall: under-withholding on RSUs. Even if your employer withholds taxes when shares vest, it’s often insufficient, especially for employees in high-tax states like New York and California. For example, federal under-withholding can be as high as 20%, leaving you with an unexpected and significant tax bill if you’ve sold six- or seven-figure amounts of stock. Ally Jane emphasizes the importance of proactive planning, which can include charitable giving, additional retirement contributions, and even setting up 529 college savings plans before year-end.
The Importance of Multiyear Equity Planning [03:54]
Equity compensation isn’t just about making decisions for the current tax year. Ally Jane stresses the need for a long-term, multiyear approach. One of her first questions for clients is whether they would invest a large amount of cash in their company if they weren’t already holding its stock. This question helps clients assess their true confidence in their company’s future and determine how much of their compensation they want to keep versus diversify.
We also discuss the risks of over-concentration. Holding a significant portion of your net worth in a single company’s stock—especially if that company is your employer—means your income, investments, and financial future are overly tied to one entity. Ally Jane explains how she works with clients to systematically reduce this concentration while keeping tax consequences in mind. Diversification isn’t just about protecting your wealth; it’s about safeguarding your mental health, as obsessively checking stock prices or feeling overly tied to their performance can create enormous stress.
Exercising Stock Options at Private Companies [09:24]
For employees at private companies, deciding when to exercise stock options can feel like navigating a minefield. Ally Jane shares her journey from a music journalist to a wealth advisor, noting how her first experience with stock options taught her the importance of understanding the basics.
She explains that exercising options early—especially when the company is still private—can be highly advantageous. For incentive stock options (ISOs), early exercise can result in paying little to no income tax if the exercise price equals the stock’s fair market value. This can create a significant tax advantage if the company later goes public or is acquired. Ally Jane outlines the importance of timing and discusses scenarios like leaving a company, where the 90-day window to exercise options can create additional urgency.
Managing Risk with Equity Compensation [14:10]
When it comes to equity compensation, taking on too much risk is a common mistake. Ally Jane explains the importance of balancing potential rewards with practical considerations like your financial goals, liquidity needs, and personal risk tolerance.
She shares a compelling example of an early Spotify employee who sold stock during a downturn to fund a home renovation. While the stock later appreciated significantly, the decision aligned with the client’s life goals, underscoring the importance of managing risk within the context of what truly matters. Ally Jane also discusses strategies for managing the psychological rollercoaster of volatile stock prices, including setting clear diversification plans and focusing on long-term financial independence.
Advanced Strategies for Managing Mixed Equity Packages [22:27]
Clients often come to Ally Jane with a mix of ISOs, RSUs, and non-qualified stock options, creating a complex web of decisions. She explains how advanced planning strategies can minimize taxes and maximize outcomes.
One key strategy involves leveraging the interplay between AMT thresholds and other income sources. For example, exercising non-qualified options to inflate taxable income can create room to exercise ISOs without triggering additional AMT. Ally Jane’s firm has even developed proprietary technology to optimize these decisions for clients, taking the guesswork out of complex equity compensation plans.
Creative Ways to Preserve Gains and Minimize Taxes [25:38]
When it comes to preserving gains from equity compensation, there’s no magic solution. However, Ally Jane highlights actionable strategies like aggressive tax-loss harvesting, which involves generating losses in a diversified investment portfolio to offset future gains. For clients with significant gains, donating appreciated securities can also provide a major tax benefit, allowing them to avoid capital gains taxes while supporting charitable causes.
While these strategies require proactive planning and patience, they can significantly reduce the tax burden associated with large equity compensation payouts.
Leveraging 10b5-1 Plans for Stress-Free Selling [32:49]
For those overwhelmed by frequent decisions about when to sell shares, 10b5-1 plans offer a structured solution. These plans allow employees to predefine the timing, price, and quantity of shares to sell, automating the process and reducing the risk of insider trading violations.
Ally Jane explains how her firm creates customized 10b5-1-style trading plans for clients, ensuring their equity positions are gradually diversified into a broader portfolio. This hands-off approach helps clients avoid decision fatigue and stay aligned with their long-term financial goals.
Final Tips and Closing Thoughts [34:56]
As we wrap up, Ally Jane offers additional advice for anyone managing equity compensation. From maintaining good relationships with HR and accounting teams to understanding insider trading restrictions, she emphasizes the importance of staying informed and proactive.
For executives and rank-and-file employees alike, equity compensation offers incredible opportunities—but also unique challenges. Ally Jane’s approach is about more than just minimizing taxes; it’s about helping clients align their wealth with their life goals, creating a path to financial independence and peace of mind.
Learn more about Ally Jane Ayers and her work by visiting BrooklynFI.com. You can also listen to her podcast, The Liquidity Event, where she covers equity compensation, personal finance, and investing topics every Friday. Ally Jane is also co-creator of GEM, a tool designed to help financial planners and accountants analyze their clients’ equity compensation quickly and easily.
Resources:
- BrooklynFI.com
- GEM (Ally Jane’s equity compensation tool)
- The Liquidity Event
- How Tax Projections Help You Make Better Financial Decisions
- 4 Ways to Diversify Concentrated Stock Positions
- Strategies for Managing the Psychological Rollercoaster of Volatile Stock Prices
The Long Term Investor audio is edited by the team at The Podcast Consultant
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