You've got so much equity compensation vesting over the next several years and your income has never been better. There's just one problem: You're not happy at work, and your discontentment is growing. You'd leave, but how would you ever find a job that pays this well?

The Golden Handcuffs Problem

Golden handcuffs are financial incentives given to key employees as a way of retaining talent. These incentives come in many forms, such as an above-market salary, a generous retirement plan, good benefits, or equity-based compensation.

Equity-based compensation in particular can offer tremendous upside for employees. Rewards like Incentive Stock Options (ISOs), Restricted Stock (RSUs), and Employee Stock Purchase Plans (ESPPs) can multiply overall compensation. And if the company hits a home run, it could result in a life-changing sum of money for the fortunate recipient.

However, equity-based compensation is also a form of golden handcuffs because employers use vesting and forfeiture provisions to limit ownership to those who stay employed. So what should you do if you’re considering leaving the company?

Start moving towards your desired future

It's a lot harder to take a financial risk if you don't have a concrete vision for what your life could be otherwise. Sure, the pain of a miserable job situation can be a catalyst. However, if you're going to be leaving 5, 6, or even 7 figures worth of equity on the table, you better have conviction about the upside of doing something different.

You can build conviction by taking tangible steps towards your desired life. If your goal is to find a better job or make a career transition, start doing informational interviews with people in your intended roles to get you excited (and to remind you that fulfilling jobs are not unicorns, they do actually exist). If your plan is to take a sabbatical, start to research travel destinations or create a bucket list of experiences for your time off. If your dream is to become an entrepreneur, develop your business plan and conduct market research.

The point is this: Instead of focusing on the money you’re giving up, focus on the benefit you're going to experience by having meaningful work and start taking action to make it happen. The more real this alternative vision feels, the less any financial fears will have a hold over you.

How much money do you really need?

Unfortunately, a common reaction by people who stay in jobs they don't like is that they reward themselves by consumption. When you first started this job, you may have thought you'd be able to save all the "extra" money from the equity compensation. But now you've got payments for the fancy car you bought to make your commute more bearable, you're taking more expensive vacations, and your household expenses have doubled.

So while it may feel like you need your current income to fund your life, it might not actually be the case. To find out, go through your expenses in detail and ask yourself: How much of this spending is actually important for my quality of life? When I went through this exercise with a client who was considering leaving her job at a successful startup, she was surprised to find that 20% of her spending could go away without much consequence.

On the flip side, it’s important to look at the value of the equity at stake and ask yourself: What goals could this money afford me, and am I willing to give that up for the freedom to change my work? If staying at your job for one more year could afford you the ability to pay off your mortgage or fund your children’s college education, you may decide that it may well be worth holding on a bit longer. A financial advisor can help you run financial planning projection models to understand the impact of different scenarios.

Put a stake in the ground

The challenge to any decision around equity compensation is that the value is always changing. Stock prices and company valuations move up and down (sometimes wildly), and you’re likely getting awarded with more equity the longer you stay employed. So when is enough, enough?

When I was going back and forth about whether to stay at my job as a director at a Fortune 500 tech company, what really helped was deciding on a dollar figure that would cover our family’s expenses for several years while I made my career transition into financial planning. That figure was my stake in the ground, and it gave me the confidence to make the decision. You might also set parameters based on how long you’re willing to stay at the company, what price the stock hits, or how many shares get vested.

Understand your equity compensation and plan strategically

Once you’ve got a clearer perspective on what this job and compensation means to you, the next step is to get strategic about your equity so you can maximize what you have.

If you have Incentive Stock Options (ISO)

Incentive stock options give you the right (but not obligation) to purchase your company's stock at a given price with potential tax advantages on the profit. If you’re considering leaving the company, you’ll have to make some decisions quickly. Here’s what to do:

Determine how much you've vested. Many companies have a four-year vesting schedule with a one-year cliff, which means you have to stay for at least a year to vest any equity. If you leave your company, only your vested equity matters. It may make sense to time when you leave to increase your vested equity especially if it means just waiting a month or quarter more.
Determine how long you have to exercise your vested options. Importantly, most stock options expire within 90 days after separation. You don't want to let valuable options expire unused. There are some circumstances that may allow you to exercise the options beyond the 90 days, but note that the ISO would then be treated as a non-qualified stock option and taxed at less preferential ordinary income rates.
Decide when you want to exercise. The advantage of the ISO is that you're not subject to ordinary income tax at exercise, and your gains when you sell the exercised shares will be subject to preferential capital gains rates as long as it is a qualifying sale. However, the difference between the price you paid to exercise and the market value when you exercised (e.g. bargain element) could be subject to the alternative minimum tax (AMT). It is important to note that any AMT paid isn't entirely lost. You're generally entitled to go back and get some (and possibly all) of the AMT paid due to exercise in the form of the Minimum Tax Credit (MTC). A tax professional or financial planner can run pro-forma tax projections so that you know what to expect.
Decide what to do with stocks held after exercising ISOs. Given the difference between capital gains versus ordinary income tax rates, there's a clear tax advantage to holding onto your shares long enough to make it a qualifying sale (1 year after exercise, 2 years after grant). That said, by holding onto a lot of concentrated stock you may be overexposed. Hence, you need to consider the role of these shares in the context of your overall investment plan and whether it's worth selling earlier to diversify.

A note on clawback provisions:

If you work for a startup and you leave before an exit event like an IPO or acquisition, it's possible that the company can take back vested stock options even if you've already exercised them. If your contract contains a clawback clause, the company may force you to sell back your discounted shares and cause you to lose out on all the upside. How would you know? Review your employment agreement contract and consider engaging an attorney if anything is questionable.

If you have restricted stock (RSU):

RSUs are a way for employers to grant you company stock as a form of compensation. Restricted stocks are taxed as ordinary income at vesting. This makes decisions easier, as your only consideration is whether to keep or sell the shares upon vesting. If you consider RSUs as part of your compensation, similar to cash salary, then it makes sense to sell immediately and take the money. Doing so results in negligible tax impact since the sale price should equal market price at vesting.

If you consider RSUs as part of your investment portfolio, then you may want to hold onto the shares. If you are serious about leaving and consider this to be your last batch of RSUs, keeping the shares can be a good way to keep participating in the growth of the company. When you do eventually sell, you'll have to pay capital gains tax on any gains. Therefore, make sure to consider the cost basis and holding period of each RSU lot to optimize which RSUs to sell. And of course, selling doesn’t have to be all or nothing. You can sell over time in order to balance for risk and tax efficiency. The important thing is to have a plan.

If you have stock from employee stock purchase plans (ESPP):

ESPPs allow you the opportunity to purchase company stock at a discount of up to 15%. If you leave the company, you will continue to own stock you've already purchased. However, any funds that were withheld from your salary but not yet used to purchase shares will commonly be returned to you at the end of your employment. Since the value you lose by forgoing ESPPs is limited to the discount, ESPPs should not be a major factor when debating whether to stay or leave a job. Nonetheless, it can be worth planning around the purchase date to capture one last ESPP window before separating since it's an easy win.

Diversify to protect the value of the equity you already own

You've likely heard of employees from successful tech firms who held onto their company stock and ended up with millions of dollars. While you may believe in your company, the returns of a publicly-traded stock are dependent on so many factors, many of which have nothing to do with the company's results.

When it comes to dealing with positions in your own company, we're prone to fall prey to psychological biases such as overconfidence (“I’m an insider, and I just know this company is so undervalued”) and target fixation (“I’m not selling until the stock goes back up to X”). The best antidote is to think through this list of questions and decide on a systematic approach for managing your equity position.

How much should you sell? You might have heard that you should never hold more than 10% in a single stock. However, the decision of how much to hold in any position is very much dependent on your goals and financial situation. Instead of choosing an arbitrary number, a better approach may be to consider what funds are required to support your important financial goals (e.g. your primary residence, kids' education) versus your aspirational financial goals (e.g. early retirement, second home).

With the important money, you may reduce your risk by selling some of the stock and reinvesting in a diversified portfolio. Meanwhile, your aspirational money is left as a bet on the company. But if the home run you're hoping for doesn't materialize, you'll still have funded what's most important. Ask yourself these four questions to determine what the right investment strategy is for you.

Decide what will make you happiest

Sometimes we need a fresh perspective to see our situation clearly. That's why one of the best things to do if you're feeling trapped is to take a break and get out of your normal routine. Take a vacation. Go on a retreat. Travel to somewhere new, even if it's just across town.

There’s a lot to consider about a job when a large amount of valuable equity is at stake. An experienced financial advisor can help you run through the implications of different scenarios and guide you on how to best use your equity compensation to achieve your financial goals.

The reality is that no matter how much equity compensation is sitting unvested in your account, you're not really trapped. You have a choice. By taking the steps to financially plan, you will be able to make a decision about your job from a place of confidence instead of fear.

How to Optimize for Equity Compensation Without Getting Trapped in Your Job