Employee Stock Grants

Some companies give outright stock grants rather than option grants. When stock vests, it is taxable as income. Intuitively, this is similarly to being taxed on bonus compensation. This tax applies whether the company is public or private. (Company founders can file a form 83(b) to delay this tax until the sale of the stock.)

If the company is public and its stock is shooting upwards, then you can rack up large tax bills. You can imagine how dot-com bubble employees who were compensated with stock must have been surprised by the large tax bills they owed, particularly if the stock price tanked at the wrong time. This is another way how employees could be left owing lots of tax on paper-profits they never realized.

In fact, some strongly believes in selling company stock once vested to diversify risk away from one’s job. The rationale is that if your company stock price tanks, you will probably be laid off anyway, so rather than putting all the eggs in the same basket, you should sell the company stock and put that money somewhere else. On the other hand, I believe that the VMWare employees who did not sell their stock at $30 are thankful they didn’t. Please use judgment in balancing your belief in your company’s stock against how much downside risk you can stomach.

When you sell your share, the capital gains vs. income distinction applies. Again, the rule is that if you have held the share for one year or more, you need only pay taxes at the capital gains rate of 15% on the profit you made (share price at sale minus share price when you acquired it, if positive). If you have held the share for less than one year, then you pay a full income tax rate on it.

And as with employee stock options, if your company will potentially be acquired while your stock is waiting to vest, you will want to check on whether your shares undergo “accelerated vesting” upon sale of the company.