Tech Workers With Stock Option Gains Should Avoid These Costly Mistakes

Tech workers whose compensation includes a stock award may have seen a net worth boost from the sustained tech stock rally this year. But if they cash out too soon, they may get stuck with unintended tax consequences and lose out on future gains.

The Nasdaq Composite index has gained over 20% this year, led by tech giants such as Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META) and, most notably, AI chipmaker Nvidia (NVDA), which has risen 170% this year and reportedly minted millionaires within its employee ranks.

Investopedia spoke with David Amann—a former tech employee and now a financial advisor at Edwards Jones who works with clients who have stock-based compensation—to find out how workers can navigate market volatility, figure out diversification, and what mistakes to avoid when dealing with stock options.

Here is an edited excerpt from that conversation.

INVESTOPEDIA: Do you know people who are millionaires from the stock compensation they have? What are some of the mistakes they make when earning money that quickly?

Personally, before I was a financial advisor, I worked for Netscape right as it went public in 1995. I got a front row seat to see what can happen when you don’t follow some key guidelines, like diversification and making sure you fully understand your stock compensation. 

When I was at Netscape, the stock compensation kind of felt like a lottery ticket—I didn’t think about it as part of my long-term strategy. I was certain I was going to be retiring on a Greek island somewhere.

INVESTOPEDIA: What were some of the tax mistakes you made?

When dealing with stock-based compensation, I think it’s really important to work with a tax professional, I certainly wish I did. 

Some types of stock compensation—like incentive stock options or an employer stock purchase plan—can give you tax benefits if you hold on to them for certain periods of time. Others, like restricted stock units (RSUs) or non-qualified stock options, don’t necessarily come with the same perks. It can get really complicated. 

That being said, I don’t think people should let the tax tail wag the dog here. I’ve seen too many people focus only on the tax benefits of their stock compensation and forget about those other critical factors, like diversification or how volatile that underlying stock might be. 

INVESTOPEDIA: For clients who have a large portion of their compensation in stock options and there’s market volatility, what type of advice do you give them? 

When I think about employer stock compensation, it’s about using those assets to achieve some meaningful long-term financial goals—like [saving for] your child’s education or paying property taxes.

When we’re thinking about whether to buy or sell stock options, we want to think about that [long-term] strategy first. Whether or not people should buy or sell would be dictated by what [someone’s] goals are [and] what they’re trying to accomplish. 

INVESTOPEDIA: Generally, what portion of people’s portfolios should they have allocated towards their company’s stocks? 

You always need to remember that not only are you invested in your own company stock, [but] you’re also getting your salary from that company as well.

At Edward Jones, we generally have a rule of thumb that nobody should have more than 5% of their investable net worth in any single investment. When you’re considering stock-based compensation, you might even want lower than that. If your company is going through tough times, not only will your stock-based compensation be worth less, there’s also a potential for layoffs, [which] impacts your job situation.