Concentrated Stock Positions with Matt Benson

Concentrated stock positions can be great for building wealth. Matt Benson talks about the important planning considerations to keep in mind!

Jan 17, 2024 | Blogs, Podcast

About the Episode

We focused on concentrated stock options, the important planning considerations that go along with them, being mindful of taxes, and how to create a plan for the long-term, with Matt Benson, CFP, and Owner of Sonmore Financial.       

Listen to hear a difference-making tip on the importance of reviewing and rebalancing your investments!

You can learn more about Matt at SonmoreFinancial.com, Facebook, YouTube, X, and LinkedIn.

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George Grombacher

George Grombacher

Host

Matt Benson

Matt Benson

Guest

Episode Transcript

george grombacher 0:02
Math to get us started give us two truths and a lie.

Matt Benson 0:07
So I went to school in Nebraska at the University of Nebraska studied finance. I’ve had lunch with Warren Buffett on two different occasions, not not not a large group, small group. One, two, I sold books door to door and college, paid my whole way through school, and most importantly, maxed out my Roth IRA each year while in college. And number three here, my wife and I have been to all 50 states.

george grombacher 0:40
Oh, my goodness, there’s a lot there. I feel like there were more than three things there. You You went to college in Nebraska, you had lunch?

Matt Benson 0:48
So the first one was the Preface. And I’ve had I’ve had lunch with Warren Buffett on two different occasions. Okay, that’s the first one, number one and then the second set of books door to door. I was in college paid my whole way through school maxed out my Roth IRA each year, second, and then third wife, Nipe. And all 50 states

george grombacher 1:08
of those are excellent. I’ve got some inside knowledge on you. I know that you sold books. I don’t know about the IRA thing believe that. It’s very possibly had lunch with Warren Buffett. It’s also very possible you’ve been to all 50 states. I don’t think you’ve had lunch with Warren Buffett two times.

Matt Benson 1:27
You got it. Lunch with Warren Buffett even once I but I have been to the Berkshire shareholder meeting. Okay. A meal in the presence of Warren Buffett.

george grombacher 1:38
Okay, yeah. All right. I got it. People that sold books with Southwest are very proud of their experience. They are. And are you in fact,

Matt Benson 1:49
I that’s yeah, that’s a good. Yeah. Southwestern is the group I sold books with? Yeah, yes, absolutely.

george grombacher 1:54
I mean, for those who aren’t familiar, it given given 10 sec. Give them 15 seconds or 30 seconds on that or whatever?

Matt Benson 2:01
Yeah. Holy smokes. Yeah. I mean, it’s probably the best if you want to be an entrepreneur or sales training. My goodness, it’s the best training program, but it ain’t. I mean, it’s it’s stinking work. I mean, I’ll give like the really, the really hard phrasing of it. I mean, we’re working 80 hours a week straight commission, but so you find out you can separate the wheat from the chaff very quickly, very quickly,

george grombacher 2:26
and they’ll drop you in some strange community and you live with some kind of a sponsor family.

Matt Benson 2:30
Yeah. So we, we live in the same area, you know, all summer. So I grew up in Nebraska, but worked in like upstate New York and Pennsylvania, Massachusetts. We live in the same area all summer, and live with the host family and the host team has always lived with were fantastic. But yeah, then you just you work in that area all summer long. So it’s a little different than just like the perception of being just dropped off in the neighborhood. Like, if you have good PR people get to know who you are in a good way. Where people are like, oh, yeah, I heard about you, you know, talking about a baseball game. So it’s when I when I was when I was at my best, it was super enjoyable. But there is for sure, like, The nerve of knocking on a door.

george grombacher 3:13
Yeah, talk about just Ultimate Sales Training. And you said it perfectly separates the wheat from the chaff. So incredible experience. So you did that for three years.

Matt Benson 3:23
Yeah, actually, four years, four years, that each year after I was each year five freshmen through my senior year. Yeah.

george grombacher 3:29
That’s awesome. All right. Very cool. Well, beautiful. Well, it’s good to talk with you again, what is top of mind for you.

Matt Benson 3:39
thing that’s top of mind for me, lately is the challenge that many investors have as it relates to a concentrated stock position. common scenario that we see in today’s market, just you know, employers trying to be competitive, you know, have have different compensation arrangements where they’ll have will, they’ll offer RSUs for certificates, restricted stock units, employee stock purchase plan, or espp, non qualified stock options, incentive stock options, that that’s that’s kind of the scope of, you know, we wouldn’t written a white paper on it. It can be a potentially lucrative, you know, thing for people, but it also carries a substantial amount of risk. And so we’ve just been focusing and developing strategies that help mitigate some of those risks, but also identify are also aligned with the broader financial goals and risk tolerance for each client. So it’s just about helping to find the sweet spot where diversification meets personal financial objectives.

george grombacher 4:52
And when I think about stock options, things like that, it strikes me that there is a lot of complexity.

Matt Benson 5:00
Oh, yeah. Oh, yeah. Yeah. I mean, the non qualified stock options and incentive stock options are probably a little less frequent to see. But yeah, the there’s there’s a lot of complexity in those, you know, when, when, when to exercise? What’s your tax consequence? Are you subject to the alternative? Minimum Tax AMT? If you are, you can, you know, on some of those there, you could, you could have, you could end up owing a tax liability on something you don’t even have money for yet. Right. So they call that phantom tax. And that might be your best strategy. But just like anything as it relates to planning, you don’t want that to be on accident, right? Oh, whoops. Yet, April, I own it, I have a five, six figure tack light tax liability, because I, because of what I did with my, my stock option, right, you just want to you know, you want to be proactive in those things. And, and make sure that, you know, if in that’s kind of the a lot of what we’ve developed is, is developing a plan that, hey, if we know we’re going to have a big liquidity event, or a big, big tax, you know, a big tax peak in one certain year. What other things can we do to try and offset that so that we’re not being ultra patriotic? if you will?

george grombacher 6:31
Appreciate that? You do not. I do not want to pay any more to Uncle Sam than I need to know. No tipping from from my perspective. That’s right. So I think when people think about, you know, equity in a company as an employee, if I’m not an owner, stock options, these are opportunities. And I think we think a lot about tech companies in Silicon Valley. Have these always been a pretty a common tool outside of Silicon Valley? And or are they becoming more popular all across the country?

Matt Benson 7:09
No, I think you’re I think you’re right. I mean, the most common space we’ll we’ll see him is is technology and biotech. But it’s not, it’s not. You know, it’s not those alone, I would say for sure, different sectors, you see it more prominently, like I said, technology and biotech. And you’ll see the legacy of the incentive stock options and the non qualified stock options. And a lot of times you see those, before a company goes public, or just like very early on in the company. Kind of like the name sounds like an incentive stock option, you know, you’re giving this you know, the company’s incentive, and giving us is good to give it to somebody who’s influential in the company. When it’s when it’s granted to you, there’s no money, there’s no money, there’s nothing to be had for it unless the stock price goes up. So you’re incentivized that the stock price goes up so that you’ll that you have kind of a have some skin in the game, have some skin in the game as it relates to, to the company. For more mature companies, we’re certainly I would say, We’re less likely to see, you know, the ISOs and the non qualified stock options, but you know, companies that and I’m in I’m in Arizona here with, you know, Intel and, and Honeywell, and Northrop Grumman and things like that, like we’re far more likely to see RSUs or employee stock purchase plans. Those are very common, and those are, you know, a lot more mature companies.

george grombacher 8:45
So that was that was what I was curious about is, I know that I’m pretty sure there’s lots of different ways to do this from your startups that want to bring on great talent with a promise of a big exit or a big liquidity event. You can get rich working at this company, even though it doesn’t seem like a right now. Versus I’m going to work at a fortune 100 company, and I’m getting some kind of, of equity in the process. How much does it cost a company to do why? Why wouldn’t a company do this kind of a thing?

Matt Benson 9:19
Why wouldn’t a company have have have stock options?

george grombacher 9:25
Like for some of these companies, small startups, they’re they’re publicly traded or they’re private companies that an offering some kind of option. And so when they do eventually go public, that’s when it happens. And then for a company like Honeywell, obviously, it’s a publicly traded company, so they’re offering discounted opportunities to buy shares. Yep.

Matt Benson 9:46
Yeah, yeah. So I think the you know, what does it cost the company? I think the the cost on the actual program is probably pretty negligible. You know, when when you’re talking about like an employee stock purchase plan, you know, they can they can discount the shares and the incentive of why someone would be a part of that is because you can buy your company stock up to a 15% discount. That seems kind of compelling. Right? Now there’s a couple hold periods you have to satisfy, and even more if you want it to be a tax favored distribution. But you know, the discount, I think, for the from the company’s perspective is like, whatever. And on, like the RSUs, RSUs, like those are, effectively it’s a bonus, it’s taxed, like a bonus, that’s tied to the company’s stock price, right? So you might say, Hey, I get 100, you know, 100 shares of 100, RSUs, that vest over five years, you know, 20, a year, over five years would be kind of a common common vesting schedule, and company’s stock price goes up the date, it vests, just it’s it looks, it looks the same as if you got a bonus on on that day, that at best, that’s and it’s taxed the same way. So from the company’s perspective, it’s, I think the real cost is losing talent, losing talent, right? So if their competitors are offering programs like this, and you’re not, then you’re going to lose talent, right? And again, I’m in Phoenix here. So there’s a lot of aerospace. There’s a lot of semiconductor. And supporters have that with Intel and Taiwan Semiconductor. So if you’re not offering that and your competitor is, then yeah, you’re probably gonna lose some of your top talent.

george grombacher 11:43
Which makes sense, it’s very, it’s it’s pretty common sense, right? I have the opportunity, I have the degree the experience of a gifted engineer, if I can go to Company A, and get a piece of the action, so to speak, or company B and just get the salary, which is awesome. I’m probably going to go to a company where I have the potential upside.

Matt Benson 12:00
No, that’s, that’s absolutely. Yeah. And I think there’s a you know, there and all of us. There kind of there can there can exist, this kind of greediness. It exists. It still exists for the bigger, the bigger, more mature companies. But you know, we’re talking as it relates to like startups. I mean, people hear the word startup, and they think, oh, man, Amazon was a startup at some point, man, or Apple was a startup at some point, like, what if I, what if I work for this company, and then the stock price goes, you know, from $1, to $5,000? A share? I can become a millionaire? And just by the Salone, right? You know, in? Sure that’s possible. But you have to, you know, when when we’re thinking about how you develop a plan around us, you have to take a step back and really think, what are your financial objectives? I know that sounds like totally Ken to them, like financial planner jargon. But seriously, what, like, having money just to have money does nothing, right? If you just have money in your bank account, have money in your bank account? That’s not what that’s not why you that’s not why you would go do this, right? Because you want to give generously. It’s because you want to have a second home because you want to buy a new car, it’s because you want to send your kids to a private college to private school, like you have these objectives. Right? How does how do all of these components of your compensation, or the components of your investment plan? How can those things solve this? And if you ask those questions, and that starts to, that starts to get into how you how you develop a plan around this, because I think kind of the first question you want to ask yourself is how much are you comfortable? How much exposure you comfortable have that having to to your company stock? And then from there, you know, if you answer, you know, I’m comfortable with, you know, five to 15% or something like that? Well, if the number gets in excess of that, then you start to go, Okay, this is awesome, this has been a great run, maybe we should start to take some chips off the table. And then you can kind of get into strategy of hey, how do we do this without getting absolutely blasted on taxes?

george grombacher 14:28
Because that is a very, very realistic thing of getting blasted on taxes, if you do not have a plan, and all of a sudden you get this tax bill that is due, that’s not a happy place to be. And Enron taught us that it’s not good to have our career and the majority of our investments or our retirement plan tied up with the same company. And it’s awesome to be rich but what’s the point of it if we haven’t really thought all the way through of what am I going to do with all this money and what’s what’s what’s what’s the point of all but so does somebody need to become an expert? Probably not. Right? That’s why there’s folks like you who are who are out there talking about it. So what? Like, like, what is typical engagement look like? Yeah. How do you help you plan?

Matt Benson 15:18
Yeah, so I think, yeah, it depends on the complexity of what someone’s looking at, you know, you don’t, you know, like, like, you often say, no one’s gonna care more about your money than then than you are. Right. And that, you know, that’s, that’s true. Like I say that kind of, to my clients, too, right. So when you’re engaging, you know, if you decide to engage with a financial planner, or someone else, just to give you counsel, bear in mind that whoever you’re engaging is not going to care more than you care about this about your situation, right? So you need to, you need to still be educated on the matter. Like, when we engage, when we have a client engagement, we’re not asking for someone to toss us the keys and say, Matt, just tell me what to do. Right? We’re trying to walk through them and say, Hey, so you’ve got like, like, actual real example, here, I have a client whose significant portion of their their annual compensation about almost half is from RSUs, from RSUs. And there’s the company he works for stock price has gone up, it has done well. So he’s had these, these RSUs, that were, that were granted, over the last several years, stock price has gone up his compensation, as a result, has has gone up as well. And he’s gonna have when we look over the next three years here, this is 2324, and 25. And we’re able to project out, we see, hey, 24, we’re going to have an abnormal amount of RSUs, investing in that year. And if the stock price of the company stays just where it is, today, we’re going to end up in a different tax bracket than what we are right? This this, you know, again, coming back to, to planning topics here, this person is is charitably inclined, and, you know, gives you generously to his church. And he, you know, is looking and saying, if I look at 2320 420-520-2324 25, is there one year, that’s better than the other as far as, as far as gifting? And the answer is, yeah, there it is. So for him, it’s, it’s a we, you know, we can give them more if we give more in 24, we’re able to get a tax deduction at 35%. Whereas if in 25, and 2025, or in 2023, we’re looking to get a tax deduction at 32%. Right? This is kindergarten level math, when we look at it that way, which would you rather have a deduction at 35% or deduction? 32. Right. And we’re able to, we’re able to come to that end conclusion there. But by knowing what you know, what our objectives are, like, what are we actually trying to do with this money? And then by making a plan out and and seeing, Hey, when are these things going to hit?

george grombacher 18:09
Yeah, that makes a ton of sense. Not rocket science, but rocket science at the same time. So

Matt Benson 18:17
totally, it is there’s there’s a lot of moving parts to it. And I think most people aren’t, you know, they’re not intuitively going to think through it. You know, necessarily through that way. I think a lot of people as it relates to their equity compensation, they kind of look and go Well, it is what it is like, you know, it’s it’s just going to hit? Well, yes. And there are a lot of components to your plan that are outside of your control. So I can in this example here, when these RSUs VAs are these within our control, now they’re not that’s kind of dictated to us by the company. But what can we do as a result of knowing that those RSUs are going to invest? Right? And yeah, we can do something about that we can do something about that, that that has a positive impact for that household for that family.

george grombacher 19:10
Love it. Well, now, we’re ready for your difference making tip. What do you have for us?

Matt Benson 19:15
Well, I think, a good tip to leave for the audience. Again, kind of boring here, but regularly review and rebalance your investment portfolio. I know it seems cliche, but it’s especially true if you have concentrated, concentrated stock positions, markets change and sort of personal circumstances. So it’s just important to ensure that your investment strategy continues to align with your financial goals and your risk tolerance. Well, I

george grombacher 19:44
think that that is great stuff that definitely gets come up. Sometimes the most important stuff is the most basic stuff and the ease the stuff that’s easiest to just not do, kind of like sitting down and doing strategic planning for our businesses or our lives. Man, that was great talking with you again. And I know I believe that you have a workshop or some kind of a seminar coming up on on concentrated stock positions.

Matt Benson 20:13
That’s right, yeah, and 2024 here, we’re gonna do three different webinars here. So if you want to learn more about that, you can go to Sun more financial.com/aligned. So that’s s o n, n o r e financial.com/aligned. You can register for our upcoming webinar, or watch a recorded webinar. And then in addition, when you register for the webinar, you’ll get access to our white paper which delves into great detail on concentrated stock positions. Excellent.

george grombacher 20:48
Well, if you enjoyed as much as I did, show your appreciation and share today’s show. The video also appreciates good ideas, go to some more. So n m o r e financial.com/aligned. And get registered for one of those upcoming webinars. Take advantage of that white paper. Because I bet I just bet if you’ve got some kind of stock option, bonus something or other that is part of your employee compensation package. It is sitting the information is sitting in a pile on your desk or the kitchen counter and you’ve been knowing and thinking about doing something about it. So this is your opportunity to actually take action. Thanksgiving. Thanks for watching. And finally, as Matt mentioned a minute ago, Randy reminded us not gonna be anybody who’s more interested in your financial success than you are, so act accordingly.

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