If you are selling all or a part of your company equity, you’re probably not feeling too great right now. After reporting weaker than expected bookings on Monday, Uber stock is now down about 40% from its May IPO price of $45 per share. Nonetheless, you’re still due for a nice payday and it’s time to make the most of it. Let’s take a look at some strategies on how to best utilize your investment proceeds.
Set aside cash for taxes
Both Uber and Lyft (NASDAQ: LYFT) have a double-trigger vesting schedule with its RSU’s. What this means is that your employee shares are not vested until 2 things occur:
- A certain amount of time has passed.
- A performance event occurs. In this case, the event was the IPO.
When a stock is on a downward trend, the second trigger can have negative tax consequences. Here’s why:
With RSUs, a tax liability occurs when shares are vested and are available to you. Many tech companies offer annual RSU refreshes as an incentive. In most cases, those RSUs are on a phased vesting schedule over multiple years. Therefore, your income is also phased in, not causing a huge bump in any single year. In Uber’s case, most of the RSUs you were granted over the years are vesting at once. As a result, your income will be much higher than normal this year, bumping you up to higher tax brackets.
Here’s more bad news. Uber shareholders are taxed on their IPO price, not the price at the lockup expiration. Instead of being taxed at $27 per share, which is the price it’s going for today, you will be taxed at $45 per share.
Adding fuel to the fire, the federal withholding rate by the employer on RSUs is 22%. Yet because multiple years of RSU’s are all vesting at once, many Uber employees are going to be in the highest tax bracket which is 37%. Someone with $300,000 of RSUs vesting on November 6, will owe $111,000 in federal taxes. However, only $66,000 was withheld by your employer. To make the IRS whole, you’ll need to fork over another $45,000. Underpayment of taxes can also mean you’ll have to pay penalties and interest. To make sure you don’t fork over more than you need to, be sure to consult with your tax or financial advisor before the end of the year.
There’s no telling where Uber shares will be trading come Tax Day. However, you can set aside cash today to avoid a forced sale in the future at potentially lower prices.
Invest in an index fund
The probability of a loss of at least 20% on any one stock over a one-year period is nearly 30%. For a diversified portfolio, it’s 5%. For Uber, the decline has already doubled this level.
Diversification is the single-most-important tool in the investor toolbox to protect wealth. There’s plenty of stories out there about individuals getting rich off one stock. However, Uber may not be that homerun stock. At a market value of nearly $50 billion, the upside on Uber is probably limited.
With a globally diverse portfolio of index funds, you will likely earn a reasonable return while significantly reducing risk. You can then supplement the index funds with an allocation towards a portfolio of high growth stocks.
Invest in non-tech stocks
Your job is in tech and your home is in an area dependent on tech jobs. Your company stock is in tech and because you understand the industry so well, your stock portfolio is likely tech-heavy too. This could be a recipe for disaster. The Bay Area has historically gone through major tech booms and busts. The ramifications of a technology recession can be painful. Unemployment, loss of equity in your home, and stock market losses are risks you have to plan for.
One strategy to become more diversified is to invest in low-cost index funds such as the S&P 500 but even that index has 30% of its value tied to the Information Technology and Communications sectors. To achieve true diversification, you have to look at the sectors of the funds and/or stocks you invest in.
Don’t get me wrong. I love technology as an investment. I believe the era we live in today is the technological equivalent of the industrial revolution in the late 1700s.
However, one should be careful not to have too much of your net worth dependent on a volatile sector.
High-yield online savings account
Are you looking to sock some of your hard-earned money away to buy a home or send your high schooler to college? While the safety of cash is important, there’s little reason to keep your money in a standard checking account.
While the big banks are paying 0.06% or less on savings account, FDIC insured online banks are paying about 2%. Over a five-year time period, the interest earned in an online savings account could be nearly 5 times that of a big bank.
A favorite tool of mine to research the latest rates across the country is from Bankrate. Be sure to read the fine print. Many banks offer a teaser rate which drops significantly after the promotional period.
While an online savings account is better than cash under your mattress, the interest earned may barely be enough to keep up with inflation. For those in a tax bracket with a willingness to take a small amount of risk, municipal bonds may make sense.
Municipal bonds are issued by states, municipalities, and counties to finance capital expenditures such as schools, bridges, high-speed trains, and infrastructure. If you purchase the municipal bond of the state you live in, the income earned from those bonds may be exempt from federal and state taxes.
The after-tax earnings from a municipal bond can be quite large. Below are the pre and post-tax yields for someone in the 37% federal and 10.3% state tax brackets.
|Pre-tax equivalent yield||After-tax yield|
|California municipal bond||4.74%||2.5%|
|Big bank savings||0.5%||A waste of time|
Of course, there’s no free lunch. Albeit small, there is some downside risk, especially if California goes through a liquidity crisis.
As a proxy, during the financial crisis in 2008, the Barclay’s California Municipal Bond Index had a total return of -4.16%. Assuming this is a worst-case scenario, the value at risk on a $100,000 portfolio is about $4,000.
So, are muni bonds right for you? You have to ask yourself if the potential of earning 2.5% after-taxes is worth the downside of 4%.
Speak with a financial advisor that understands you
Lockup expiration day is an exciting time for Uber employees. It’s the payoff for the long hours put in from the startup phase. For those who are cashing out, the payoff doesn’t have to stop. By making a few smart moves, you can reduce risk and get even closer to achieving long-term wealth that can be passed down to generations to come.
If you are an Uber employee or an employee of a company where equity compensation is a large part of your income, you should speak with an advisor that understands your situation. You can schedule a no-obligation consultation with me here. The initial meeting is free. So is the second meeting where Before you pay me a single dollar, I will present to you a plan that shows exactly how I can help.
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