If you have worked for a tech startup, you have probably earned incentive stock options (ISOs) as part of your compensation. ISOs are notoriously difficult to understand, let alone to strategize. In most cases, it frankly doesn’t matter, because most startups will not become spectacularly successful, and therefore, the options will never become a dominant part of the money you made during your stint. But, if you are lucky enough to hitch a ride on a unicorn 🦄, it can get very complicated, indeed.

The tax treatment of ISOs encourages employees to take financial risks, in return for potential tax advantages. If there were no tax advantages to be gained, it would be advantageous in all cases to exercise options as late as possible—either just before expiration or when you want to sell the stock—because you would have maximal certainty of the value of the shares. But because there are holding periods for tax advantages and triggers for taxable events, there is pressure to exercise earlier. This means locking up cash for years, before knowing when, or even if, the shares can be sold for profit.

The one thing you must understand about ISOs is the concept of a qualifying disposition. I’m going to first explain what that means, and then present a brief case study from my own situation.

Continue reading “Employee Equity: Understanding “qualifying disposition” is a must” →

I have no financial training or credentials. This article represents my understanding from synthesizing many sources of information, but I am likely misusing terminology, and I may be factually incorrect on some points. Apply this information at your own risk.

Don’t invest in anything you don’t understand.

This is the first rule of investing. In a world where people want your money, it’s a good way to avoid becoming mark, swindled out of your life savings. In other words, it’s important to understand:

• What your money will be used for
• Where the new money to pay your return-on-investment will come from
• What the risks are

If investing for building personal wealth has a second commandment, it is to continually pump excess income into low-cost index funds that track a large chunk of the US stock market. It’s not the purpose of this piece to justify this, but mountains of research indicates that this almost absurdly simple strategy—when executed with discipline and an iron stomach—has historically outperformed pretty much every complex investment strategy implemented by active traders, especially once fees are accounted for ¹.

I have found these two pieces of advice to be in conflict. This piece is my attempt to sort this out.

Continue reading “Why does the world want index investors?” →