Employee stock options can be a powerful way to build long-term wealth. But without a clear strategy, they can also lead to missed opportunities—or costly mistakes.

Whether you work for a public company, a startup, or something in between, it’s essential to understand how stock options work and how to make informed decisions. This article outlines some of the most common stock option pitfalls and how to avoid them.

Understand Your Stock Compensation

One of the first—and most important—steps is to understand what type of equity compensation you’ve been granted. Many employees skim over the details of their stock plan agreements, but these documents hold essential information about how your options work.

Before you act on your equity, make sure you understand:

• What type of stock options you’ve been granted (Incentive Stock Options [ISOs], Non-Qualified Stock Options [NSOs], or Restricted Stock Units [RSUs])
• Your vesting schedule
• Your expiration timeline
• Any company-specific restrictions, such as blackout periods or post-termination deadlines

If you’re unsure about the specifics, reach out to your HR or benefits team—or consult with a financial advisor who has experience with equity compensation.

Don’t Let Your Stock Options Expire

Stock options have a defined expiration date—typically 10 years from the grant date or much sooner if you leave the company. Once that date passes, unexercised options are worthless.

It’s critical to track your expiration dates and understand how they might change if you:

• Leave the company voluntarily
• Are terminated
• Retire
• Become disabled

Setting calendar reminders and developing an exercise strategy in advance can help you avoid scrambling at the last minute or losing out on valuable equity.

Prepare for the Tax Impact

Stock options come with tax consequences that can affect your overall return. The type of option you hold will influence when and how you’re taxed.

• ISOs: May qualify for favorable tax treatment if holding period requirements are met, but can trigger the Alternative Minimum Tax (AMT) when exercised.
• NSOs: Taxed as ordinary income at the time of exercise on the spread between the grant price and the fair market value.
• RSUs: Taxed as ordinary income upon vesting, not when sold.

In many cases, employers withhold taxes at the statutory minimum rate, which may not be enough to cover your actual liability. Consider modeling different tax scenarios and setting aside additional funds to avoid surprises at tax time.

If your company offers multiple types of equity or if you’re planning a major exercise event, working with a tax advisor or financial planner can help you develop a tax-aware strategy that aligns with your broader financial goals.

Avoid Overconcentration in Employer Stock

It’s common to feel a strong sense of loyalty to your employer—and optimism about the company’s future performance. But holding too much of your net worth in a single stock, especially one tied to your employment, increases your financial risk.

Even large, stable companies can face sudden setbacks. Concentrated stock positions expose you to:

• Market volatility
• Company-specific downturns
• Job and investment risk overlapping

Diversifying your portfolio across different sectors and asset classes helps reduce the impact of any one company’s performance on your financial well-being. Periodically evaluating your stock exposure and developing a diversification plan can support more consistent, long-term results.

Know What Happens in a Company Acquisition

If your company is acquired, your stock options may be affected. Outcomes vary based on how the deal is structured and what’s negotiated between the two companies.

Possible scenarios include:

• Accelerated vesting and a shortened window to exercise options
• Exchange of current options for shares of the acquiring company
• Cash payouts for vested or unvested shares
• New vesting schedule under the acquiring company
• Elimination of unvested options

Understanding your options ahead of time—especially if you work for a company that’s preparing for a sale—can help you make timely decisions. It’s often beneficial to consult a financial advisor during acquisition negotiations to determine how best to maximize your benefits.

Final Thoughts: Create a Clear Plan

Employee stock options can be a valuable part of your compensation, but the details matter. The most common pitfalls—missing deadlines, underestimating taxes, overconcentrating in one stock, and not planning for corporate changes—can be avoided with thoughtful planning.

Key takeaways:

• Know what type of stock you own and how it works
• Keep track of vesting and expiration timelines
• Understand the tax impact before you exercise
• Avoid putting too much of your net worth in one company
• Be prepared for what could happen in a company sale or merger

Need Help Navigating Your Stock Options?

At Navalign Wealth Partners, we help professionals and executives make informed, personalized decisions around equity compensation. Whether you’re looking to exercise options, reduce taxes, or build a more balanced portfolio, we’re here to support your planning process.

Contact us today to learn how we can help you make confident decisions about your stock options and long-term financial goals.