Smart Money Tips

Six Financial Planning Rules That Everyone With Stock Options Needs To Know

If you work for a company that offers Employee Stock Options (ESOs), you may be wondering how you should take advantage of them and whether they can help you reach your financial goals. In a previous article, we walked you through an overview of Employee Stock Options, but even if you understand how they work, you might not know how to maximize their value and how they fit into your financial plan. Here are six financial planning principles that may help you make the best decisions for your financial situation.


Before you dig into the investments in your portfolio, take the time to set realistic goals for your overall financial plan. If you don’t have goals to aim for, it’s like you’re shooting at a target blindfolded. Without clear and personal goals, you could be easily swayed by unexpected circumstances and the market ups and downs. When it comes to ESOs, they are just one means to achieving your goals.

One ESO detail to keep in mind is that you will eventually want to sell the stock after exercising your options. If you have a clear financial plan and work to minimize taxes, you may be able to move significantly closer to your goals with the proceeds received from the sale of your stock.


Once you have your goals in place, your next step is to create a strategy for how you will handle your stock options over time. Map out a plan for when to sell your options, making sure you that your actions are not only tax efficient, but they also line up with your goals. For example, selling a significant portion of your stock all at once could dramatically increase your tax burden.

Along those same lines, it’s important that you accurately value your stock options. The last thing you want to do is sell, thinking that you will receive a certain amount, only to learn that your net earnings are much lower. If you were trying to reach a goal with the sale, overvaluing your stock options could hurt your long-term plans.


Because stocks historically increase in value over time, it may be wise to hold your options for a a long time. This is especially the case if you believe that your company is doing well and will continue to do so for a long time. Of course, if part of your financial plan involves selling some of your options for short-term to intermediate-term goals, that is also fine.

However, if a majority of your net worth comes from your ESOs, it may be a better idea to consider diversification. This is akin to putting all your eggs in one basket. Do you really want so much of your financial well-being tied up in one company? The general rule of thumb is to hold

no more than 10% of your portfolio in your company’s stocks and options. Your income is already tied to your company, and now a majority of your net worth could also locked in to your employer. If the company performs poorly, it will depress the stock price and you may be laid off at the same time. There goes your portfolio, your income, and your health insurance all at once. Consider selling some of your ESOs and diversifying the proceeds in something else.


Depending on the type of ESO that your company offers you and the overall company option plan policies, there will be specific rules that you should be aware of. These rules may cover the rights that you have if you are fired, quit, work for a competitor, retire, become disabled, or die. In addition, the rules will explain any vesting policies, which will help you plan ahead and maximize your stock option benefits.


It is critical that you look at your current income tax bracket and calculate how a sale of stocks will affect your current taxable income. If the sale puts you into a new bracket, you may have to pay more on the proceeds than if you had smoothed your income over time.

In addition, if you have Incentive Stock Options (ISOs), you must familiarize yourself with the Alternative Minimum Tax (AMT). Read more here for a brief description on the different tax treatment of ISOs and Nonqualified Stock Options (NSOs). If you ignore the Alternative Minimum Tax, you may have to pay tax on your gains before you even have the money in hand. (1) This could be an unfortunate situation to find yourself in, so make sure to do your homework on the AMT as it relates to your options.


Stock options are a complicated asset and it can be overwhelming to determine how they fit within your overall financial plan. Because of that, it is important to seek professional advice when making ESO decisions. Make sure the professional you rely on has experience with employee stock options and can help you strategize your best moves.

At Archer Investment Management, we understand employee stock options and have experience helping clients maximize this benefit, minimize taxes, and diversify their portfolios. We’d love to help you with your employee stock options. Book an appointment online today

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than twenty years of industry experience. He specializes in providing comprehensive Financial planning and investment guidance and personalized care and attention to executives with complex compensation and families pursuing financial freedom. Along with holding a Wharton Bachelor of Science in Economics and a Texas MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit