In this episode of Left Brain’s Fundamentals of Investing series, research director Brian Dress interviews CEO and CIO Nolan Langford to demystify employee equity compensation. They define employee stock plans, focusing on three common types—Employee Stock Purchase Plans (ESPPs), Restricted Stock Units (RSUs), and stock options—explaining who typically receives each, how they work, vesting schedules, discount mechanisms, and the tax implications of each. ESPPs allow employees to buy company stock, often at a 10% discount, using after‑tax payroll deductions on a quarterly or monthly basis. RSUs are grant‑based awards that vest over time (commonly three years) and become taxable ordinary‑income upon vesting, giving employees immediate access to the shares. Stock options provide a strike price and vesting schedule; non‑qualified options generate no tax at grant but become taxable ordinary‑income when exercised, with potential long‑term capital‑gain treatment on subsequent appreciation. The hosts stress that these plans can significantly boost net worth when used wisely, but they also carry complex tax considerations that require professional guidance. Finally, they describe Left Brain’s proprietary modeling software and advisory services that help employees evaluate and optimize their equity compensation alongside other retirement strategies.
Chapters
Hello and welcome again to our Fundamentals of Investing series. These videos are designed to explain important concepts you need to know as you work to grow your retirement nest egg and build your personal wealth. I'm Brian Dress, director of research here at Left Brain, joined by our CEO and Chief Investment Officer, Nolan Langford. Nolan, thanks for joining us.
Thank you, Brian. This is an exciting topic and I'm really looking forward to it.
Same here. Well, many clients we work with here at Left Brainerd have access to employee stock plans at their current employers. And one of the questions we hear most from investors is how best can they take advantage of employee stock purchase plans at their work to build a retirement and achieve other financial goals. So a few questions, Nolan, and hopefully we can help the investors at home learn a little bit more how they can optimize their employee stock purchase plans. So first question, Nolan, is what is an employee stock plan? And how should employees be taking advantage of these plans?
Yeah, it's a really good question. So employees who are employees of a publicly traded employer, that is, the employer stock trades on an exchange, these are the targets of this discussion. I think we do think that they have a huge advantage versus somebody that works maybe for a state or for a private employer. And so there's some advantages here. And there's some more bells and whistles with these plans that if used wisely, employees can either give themselves a turbo boost as it relates to building their net worth and possibly retiring.
Well, there are a number of different type of employee stock plans out there. You know, of course, we've got employee stock purchase plans. There are restricted stock units, or so-called RSUs, and then there's just straight stock options. Can you help the viewers at home learn a little bit more about the differences between the two and the nuances there?
[Speaker:CLINTON_ROSS] Yeah, so let's talk about the benefits of all of them. I think if you're an employee and you work for a company that, you know, you believe in, they have good products, good services, and the business has done well over time, and you have a belief that they're going to continue to do well in the future, then getting exposure to that company's stock could do well for you and your family from a building your net worth standpoint. So that's the first thing. The second thing is usually you can get exposure to this company's stock on very favorable terms. Brian's right, there's 3 types that most employees will have access to. The first type is the employee stock purchase plan. In an employee stock purchase plan, the employer allows you to buy their stock. It's usually— you can take the money out of your paycheck, and it's usually at a set time per year. So you'll usually do it quarterly or monthly. And as an incentive, an employer will often, but not always, offer the stock at a discount, the most common one being 10%. So I have an opportunity to put $10,000 a year in my company plan, but it may only cost me $9,000 to buy that $10,000 in stock. And best of all, this is after tax. So it comes out of my paycheck before I see it, and it goes into an after-tax account that I can actually use and access at some point in the not too distant future.
Okay, Nolan, how about RSUs and stock options? Where do they fit in?
Usually the employee stock purchase plan is going to be available to all full-time employees after a certain amount of time on the job. The other two, the restricted stock units and stock options, are usually once you rise up the rank or you've attained a certain title at the corporation. So it's more of their senior and at least mid-level leaders that they'll allow to participate in these other two plans. But let's start with the restricted stock units. They're the most simple to understand. In that case, as an example, my employer gives me $10,000 worth of stock and I get it during annual bonus time, usually sometime between January and March these things are awarded. There's usually a vesting schedule. And so the most common one is like a 3-year vest. So they give me $10,000 in stock. And then after year number 1, I own 1/3 of it or 33, 33. After year number 2, I own 2/3 of it. And after the 3rd year, I own all $10,000 worth of that stock in my example. The benefit is, well, there's a couple benefits. But one, the stock doesn't need to go up. So if they issued the stock and the stock was 50, by the time I get to my third vesting, as an example, even if the stock's only 40, it's still worth something. And it vests, and then I actually get to use that money right away. I don't have to wait. It's not in my 401(k) plan. So I have access to it right away. Now, I don't necessarily control this. I don't have any decisions to make. I can't buy more. I can't add to it. Really my only decision is, do I want to sell it at the end or do I want to hold it? But that's the simple, that's the most simple form of stock ownership, restricted stock units. And a lot of mid-level and higher-level managers will have these as part of their compensation plan. So stock options, we haven't seen as many of these. Actually, there've been fewer of these since the accounting rules changed for big corporations. Used to be companies could issue stock options, but they didn't have to expense them on their income statement. But FASB, the Financial Accounting Standards Board, changed the rules. And so now companies do have to account for them. So you see fewer of them. But the way that they work, they're issued, and then they'll have a strike price. So say my company stock today is $10. And they also have a vesting schedule. So the stock option could say, at $15 or higher, The owner of this stock option can convert this stock option to stock. You know, you'll have a maturity schedule. It's usually a 10-year life that they're good for from the time of issuance. And they'll also usually have a vesting schedule along with those as well. So it's not at the current price. It's usually at some future higher strike price. And then there's tax implications too if I decide to exercise, whether I exercise and hold or exercise and sell. So if you're an employee and you have exposure to stock options, you should be working with a financial professional or a tax professional to help you make the decision because they're sort of complicated, but they can also be very, very lucrative.
Okay, Noel, that just leads us into a quick question is what are some of the complications, tax and otherwise, that come along with these employee stock plans?
So there are tax ramifications for all of them. Let's start with the two most complicated. For the restricted stock units, generally when these things vest, they're going to be taxable to me. So in my example, it's $10,000. It's a 3-year vest, a third, a third, a third. And let's say after my first year, $3,333 in dollar amount vests to me. That generally is going to hit me on my 1040. As compensation. So it may increase the taxes. Normally employers will do a withholding when they vest, but it's generally going to be some tax implication where you're going to have to pay taxes at ordinary rates. It's just compensation. The other type, these stock options are a little bit more, they're quite a bit more complicated. There are two types of stock options. There's a non-qualified stock option and an incentive-based. Incentive-based are very rarely seen. More often than not, you're going to see a non-qualified stock option. But typically when they're issued to me, there is no tax ramification at all. But then I have to decide if my stock's in the— if my option's in the money, i.e., the strike price is $15, but now the stock is $20, and it's year number 3. What do I do? Do I just wait to 10 years? Do I exercise it? Do I exercise and sell, or do I exercise and hold? Depending on the action you take will have a different tax ramification. But once I exercise, then that amount is taxable as ordinary income. And then if I do that and then I hold it, and I hold it for at least 12 months, then I can get taxable, I can get long-term capital gains. On the appreciation. So you'll need to work with a financial professional. We're here to help work with an accountant who can run the numbers for you and help you. They can be very, very lucrative, but you need to be careful so you understand the tax situation that you're going to be in.
And finally, Nolan, as you said, it does seem a bit complicated. How can we help here at Left Brain? I know this is a specialty of ours here.
Absolutely. We've sort of built the firm on working with long-tenured employees at publicly traded companies throughout the country. So we're versed in this. We're happy to help. We have software that we use that can do the modeling for the stock purchase plan, for the stock options, and for the restricted stock units. So anybody that has exposure to these, we definitely welcome you to reach out to us or your— any financial institution that you're using. But you should take advantage of these. Do not ignore these. These, along with deferred compensation plans, can really help accelerate wealth building.
Thank you, Nolan. We thank all the viewers for being with us. We're going to put all our information down below so that if you do need some help with your employee stock purchase plan, you can get in touch with us. Join us on the next Fundamentals of Investing. Until then, we'll see you next time.
