The 3 Biggest, Most Common Mistakes We See With Equity Compensation
Over the past year, we've seen a noticeable increase in people coming to us with questions about equity compensation.
Some are approaching major liquidity events. Others are navigating RSU vesting for the first time. A few are realizing, a little too late, that taxes and concentrated stock positions can create real problems.
The same mistakes show up again and again — across industries, job titles, and company sizes. The good news is that many of the most common issues are preventable.
A Tale of Two Clients
Before we dive into the biggest mistakes, it's worth looking at two real examples of how different outcomes can unfold. We worked with two clients who both held significant incentive stock options (ISOs) and restricted stock units (RSUs) at the same fast-growing tech company. That company eventually went public, but the financial outcome for each client was dramatically different—simply based on when they engaged with our firm.
Client A: Proactive Planning, Pre-IPO
Client A approached us several months before the company’s IPO. He had a large equity stake—millions of dollars’ worth of ISOs and RSUs—and knew an IPO was likely on the horizon, though the timeline wasn’t yet official. Working together, we developed an equity compensation strategy that balanced long-term upside, liquidity needs, and tax exposure.
One of the key decisions was to begin exercising ISOs before the company went public. Because the valuation was still relatively low, we were able to minimize the Alternative Minimum Tax (AMT) impact on that year’s return. More importantly, by exercising early and starting the holding clock, we positioned him to qualify for long-term capital gains treatment when the shares were eventually sold after the IPO.
The result? When the company went public, he was able to sell shares and realize approximately $5 million in value, while keeping a significant portion of the gain taxed at long-term capital gains rates—saving over $1 million in federal taxes versus ordinary income treatment.
Client B: Missed Opportunity
Client B was in a nearly identical financial and professional situation—same company, same types of equity grants, same IPO. We spoke with him before the IPO as well, but at the time, he wasn’t ready to move forward with planning.
He ended up hiring us after the IPO, when his company shares were already publicly traded. By that point, the opportunity for proactive planning had passed. Because he hadn’t exercised his ISOs pre-IPO, and didn’t want to wait another year to access the funds, he exercised and sold immediately—triggering ordinary income taxes on the full spread.
While he still walked away with approximately $4 million after taxes, we estimate that his total tax bill was at least $1 million higher than it would have been with pre-IPO planning.
Mistake #1: Not Understanding How Your Equity Works
It sounds obvious, but it happens all the time: people receive RSUs, options, or other forms of equity compensation without truly understanding what they own, when they own it, and what it could mean for their taxes and cash flow.
Each type of equity has different rules:
RSUs are taxed when they vest — not when you sell them later.
Stock options may require you to exercise them (buy the shares) — and exercising can trigger tax consequences even if you don’t sell the shares.
Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) have very different tax treatments.
If you don’t know the basics — vesting schedules, expiration dates, strike prices, tax rules — you’re flying blind.
Avoid it:
Take the time to understand exactly what you’ve been granted. Read your grant documents carefully. Get clear on key dates and tax triggers. A little education upfront can prevent costly mistakes later.
Mistake #2: Letting Taxes Take You by Surprise
Taxes and equity compensation go hand in hand — but most employees don’t realize how big the bill can be until it’s too late.
Common pitfalls include:
RSUs vesting into a large chunk of taxable income without enough withheld.
Stock options being exercised without a plan for the Alternative Minimum Tax (AMT).
Selling shares immediately after an IPO or liquidity event and realizing the full proceeds are taxed at short-term rates, not lower long-term rates.
Equity can move you into higher tax brackets, trigger additional Medicare taxes, and create complex filing requirements. If you're not planning for it, the IRS will still expect its share.
Avoid it:
Work with a financial planner and a tax advisor to build a proactive tax strategy. Understand your expected tax liability ahead of major events like vesting, exercising, or selling. Don’t let taxes be an unpleasant surprise — make them a manageable part of the plan.
Mistake #3: Holding Too Much Company Stock for Too Long
When you work at a company you believe in, it’s easy to let loyalty turn into overexposure. Many employees accumulate large positions in their employer’s stock without realizing how much risk they’re taking on.
The problem is simple: your salary, your career prospects, and your investments are now all tied to the same company. If something happens to the business, you could take a triple hit.
It’s not just about extreme cases like Enron or Lehman Brothers. Companies miss earnings targets, stock prices fall, industries change. Concentration risk is real, and it’s often underestimated.
Avoid it:
Have a clear plan for diversifying out of concentrated positions over time. Set rules for when and how much you’ll sell, and stick to them. Selling doesn’t mean you’re disloyal — it means you’re taking care of your financial future.
The Bottom Line
Equity compensation is complicated — but it doesn’t have to be overwhelming. Avoiding a few common mistakes can make the difference between simply having equity on paper and actually turning it into lasting wealth.
As more employees and executives come to us for help navigating stock grants, options, and liquidity events, one thing has become clear: the earlier you put a plan in place, the better your outcomes tend to be.
We work with clients to design smart, personalized strategies for managing equity. We believe your equity should work for you — not the other way around.
