3 Steps for Nvidia Employees to Go from Selling Low to Getting the Most Cash Out of Their NSUs
Table of Contents
- 3 Steps for Nvidia Employees to Go from Selling Low to Getting the Most Cash Out of Their NSUs
- 3 Steps for Nvidia Employees to Go from Selling Low to Getting the Most Cash Out of Their NSUs
- Step 1: Understand How Your NVIDIA NSUs work and How to Avoid a Surprise Tax Bill
- Step 2: Determine If You Have Too Much in Your NSUs.
- Step 3: Decide when you should sell your NSUs.
Transcript of Webinar
3 Steps for Nvidia Employees to Go from Selling Low to Getting the Most Cash Out of Their NSUs
My Journey from a Dot.com Employee to a Financial Planner
I’m gonna start with just a brief story about why I am here today. And then we’ll get into the heart of the presentation about your NSUs. So, my name’s Tom Lowe. I want to take you back a financial plan.
I wanna take you back to the late nineties. I was working at a tech startup at a.com. And I was just sitting in my cube and I could hear the sound of champagne corks popping people, high fiving each other, and a lot of very happy people. And that’s ’cause we’d done what every startup employee wanted to do. And that is, we had just had our IPO. And so it was a very happy day for everybody. And people just kept getting happier. ’cause Of stock kept going higher and higher.
At a certain point after several months of that happening, I said to myself, well, you know, if this keeps happening I may be able to stop working my late twenties.
But those of you who know history know that what happened was the dotcom bubble burst my company was in dotcom, it shut down and all the stock I held went to zero.
And I realized important lesson from that. And that was, I really didn’t understand how my employee equity worked in this case. I had incentive stock options. Actually ended up owning some taxes on those, even though I didn’t get any value out of them. And then that also though, started me educating myself about how my equity worked. ’cause I talked to my colleagues, they didn’t really understand it. So I took a class and that started me down the path of making a career change into financial planning which I did about a decade later.
But the reason I started this firm today is because I wanna make sure that I specialize in working only with tech professionals with equity. ’cause I wanna make sure that that equity, that you’ve worked hard for those NSUs that you’re able to get the most value out of them. And that’s what we’re gonna talk about today.
All right, so let’s get started here. Let me share some slides with you.
Okay. So, as I said, we’re gonna cover three steps for Nvidia employees to go from selling low to getting the most cash outta your NSUs. So let’s, this of course, is for educational purposes. You should always talk to your own professional.
Here’s an agenda. What we’re gonna cover, I’ll give you a bit back, a bit more about my background, and then I’ll take you through the three steps, which are understand:
- how your NSUs work, how to avoid surprise tax bill.
- determine if you have too much in your NSUs.
- decide when you should sell your NSUs.
And at the end we will talk about next steps.
One thing to point out here is that, going back to my original story, the thing you should recognize as an Nvidia employee is that you have an opportunity to get to your financial goals much faster than employees of normal corporations or of o other tech companies are, are not as successful as Nvidia.
So this is gonna help you understand how can you get to that goal maybe in four years instead of 10 or 15 years.
So at the end, we’re gonna have live q and a. So if you guys have questions, then I’m not gonna be answering ’em in real time, but if you can, feel free to drop ’em into the chat as we go. And at the end, I’ll address those. And then if you have any questions you wanna ask me live, we can also do that.
Now, I’ve done a number of these presentations and when I’ve realized that some people perfectly happy to ask me questions in a live q and a. But I also want to, to give the chance to people out there to ask their own questions about their own specific situation. And so what I’m offering to everybody who’s attending the webinar is a chance to do what I call our optimize your NSU plan. So I’m gonna put up let me share this right now.
Hang on just a second here. Okay, so you should have on your screen now a button which says schedule now. So this is a way that to sit down with me. We hop on a Zoom call and I help you put together a optimize your NSU plan, okay? So we can talk about your specific situation, answer any questions you have. You click on the schedule now, and you’ll just go to my calendar. You can put time on my calendar and we can have the zoom. Okay? so let’s get started here. This is my background. The only thing I really want to highlight here is, again, I only work with tech people. And the reason why is because there’s specific expertise and experience that you wanna have because your, as you know, as an NVIDIA employee, your equity can be such a large party compensation. You want somebody who has expertise in understanding how that works how you can minimize taxes how to develop a selling plan around that. So that’s all the only people I work with are our tech people.
Step 1: Understand How Your NVIDIA NSUs work and How to Avoid a Surprise Tax Bill
So let’s start with step one. This is understand how your NSUs work and how to avoid a surprise tax bill. Okay? So let’s see here.
So how do your NVIDIA stock units or NSUs work?
So really NSUs are just compensation in the form of Nvidia shares that vest over time. The vesting schedule, typically for most Nvidia employees, that vest quarterly over four years with a one year cliff.
So you start, one year later, you vest 25% of whatever, whatever your original grant was.
And then years two through four, you’re investing quarterly at 6.25%. So at the end of your four years, your full initial grant should be fully vested.
How are NSUs Taxed?
Okay? Now, it’s important to understand how taxes work for your NSUs. Okay? So when you start, you get your initial grant you don’t owe any taxes. So $0 ordinary income, no tax implications.
Now, on the day you vest you get taxed at ordinary income rates on the fair market value of those nsu on the day you vest. Okay? So we’ll walk through an example to help you understand that it’s important to understand you, you’re getting taxed right away when you vest.
Now, it’s helpful with my clients to tell ’em, Hey, you should think about your your NSUs as a cash bonus just in the form of Nvidia stock. And that again, is because of the way it’s taxed. It’s taxed immediately on the day you’ve asked.
And that’s different from stock options which have a different tax treatment. But people sometimes get those mixed up. And I’ll give you an example to help you understand why you can think of it as a cash bonus. So I’m gonna talk you through two versions, okay?
NSUs vs Cash Bonus
1. First version is the NSU version. Okay?
So let’s say Nvidia gives you a hundred thousand dollars in NSUs, right? So you’ve vested a hundred thousand in your NSUs. What they do is they’ll sell roughly 40,000 or so those nssu to cover taxes, any, any withholdings, and then they’ll take the remaining 60,000, and that’s what they put into your account. Okay? So you’re left with $60,000 of Nvidia stock.
2. Okay, let’s take the cash bonus version.
So let’s say NVIDIA gives you a hundred thousand dollars cash bonus, okay? Just like your paycheck, they’ll take out taxes withholding. So they’re gonna withhold 40,000 and they deposit $60,000 into your checking account. You can take this $60,000 in your checking account, you go to the stock market and you can buy $60,000 worth of Nvidia stock. So now you own $60,000 worth of Nvidia stock.
So in both the NSU version and in the cash bonus version, you end up owning $60,000 worth of Nvidia stock. So that’s why you can view it as a cash bonus in the form of stock, same place. All right?
Now, the reason I say recommend you think about that way is you want to ask yourself, Kwan asked my questions is if Nvidia gave you a cash bonus today, okay, would the first thing you do with that cash be to go buy Nvidia stock?
So most of my clients ask that. They’ll say, no, not really. That’s probably not the first thing I would do with it. Well, if you decide to hold your NSUs, then is the same as buying the stock at the current price, right? Because you’re getting taxed on it. And we just walked the example, it’s just the same as cash bonus.
Now, if you wouldn’t, if the first thing you would do, we do cash motives would not be to buy Nvidia stock, then you should consider selling your NSUs.
Now, when specifically sales going to depend on your specific situation, but your goals taxes, et cetera, you should talk to a professional. But in general, I recommend selling as soon as you vest because there’s really no tax benefit for holding it. You’ve already paid your taxes the day you vest. Okay? So again, this is general advice. If you want to understand your specific situation, then feel free again to, to schedule, to optimize your NSU plan. Just click on the schedule now. Okay? All right.
How to Avoid a Surprise Tax Bill
So clients will often come to me saying, Hey, I got taxed a lot more than I thought I was. I dunno what, what happened. So the question you wanna ask yourself is that’s fairly common is have taxes on your NSUs been under withheld?
Okay, let me explain this. What happens is you’re, as I said, you pay ordinary income tax on the fair market value of your NSUs on the day you vest. Now, the default withholding for Nvidia employees is at 22% federal tax rate. Okay? That’s up to a million. But let’s say you get, so let’s say you have a big income TA income year, you’re actually in the 37%, the highest federal tax rate. Then in this case, if they withheld at 22%, you’re really in the 37% bracket, you’re being under withheld, 15% on your NSUs.
So let’s say you had a hundred thousand dollars of vested in issues, then you actually still owe $15,000 in taxes on those. And if you don’t pay it now, come April, you’re gonna have a surprise tax bill. Okay?
Now, the way to avoid this is a couple of ways. So with my clients, we usually work with a tax professional. We’ll make quarterly estimated tax payments. So we know each quarter, okay, I, I was under withheld, so I need to pay this. I’ll pay it every quarter. And another way to do it is you simply, if you work, you do your own taxes, you go into TurboTax or whatever software you use, you can look at what, based on what you expect how much you will owe. I would then sell your NSUs set aside as a tax reserve, or you can go ahead and pay a, a quarterly estimated tax.
But the point is, recognize, first of all, you’re under withheld. Figure out how much that is, make sure you have a way to pay it, okay? So that you don’t get a surprise tax bill come April, okay?
Step 2: Determine If You Have Too Much in Your NSUs.
So what’s that mean? Well, I talk with clients all the time about this concept of concentrated stock, okay?
Concentrated Stock Position
That means you just own too much of a single company stock, okay? And too much, I’m defining, the guideline I use is more than 20% of your investible assets, okay? And that’s because when you compare it to a diversified portfolio, there’s this ton more risk and volatility when you have it in a single company stock.
And an example that captures that some of you may remember this happened in the late nineties. There was a company called Enron and the stock went from 20 bucks all the way up to 90 bucks a share by the early two thousands.
And then some bad news came out, there was some accounting irregularities. And then within a matter of months, stock dropped to nothing. And what happened was Enron, there were Enron employees who had their retirement, their 4 0 1 k all invested in Enron stock. The company match was Enron stock. They’d purchased Enron stock. And so they had almost all of their net worth, all of their retirement in a single company stock Enron. And when this happened, their retirement vanished. So you had employees who had hundreds of thousands of dollars that went away overnight. And if this Enron doesn’t mean anything to you, you could for example, take, if you were a Silicon Valley Bank employee, this is what, and you had everything in Silicon Valley Bank, this is what would happen.
Okay? So that’s the risk of being too concentrated. So how do you figure out, how do you determine if you have too much in your NSU?
How to Determine if You are Over Concentrated
So I’m gonna walk you through the steps.
- So step one is you wanna calculate what’s the total value, your vested NVIDIA equity, right? So you just add up your NSUs times current stock price, any Nvidia stock you own.
- Step two would be calculate the total value of your investible assets, right? So that’s all your savings investments and your retirement. 4 0 1 K, add all that up, add on your vested equity.
- And then you, step three is you divide the total value of vested NVIDIA equity, divide it by your total investible assets. You get a percentage of concentration.
- Step four is if your concentration is greater than 20%, you’re highly concentrated. You, you should consider diversifying.
Okay? So quick example. Let’s say you got a thousand invested in shoes, 400 bucks a share. That’s $400,000 worth of NVIDIA equity. You add up, everything else saves investments.
4 0 1 k, it’s $600,000. So you add those two, you have a million dollars of total investible assets. You take your 400,000 of Nvidia equity divided by a million, that gives you 40% concentration in nvidia, 40% is more than 20%. So you’re highly concentrated, okay? You ought to think about diversifying. And just to give you some context I have clients who come to me who are at 50% concentration, 70, 90, 90 5%, just because in Silicon Valley, you know, know you can have a big windfall through your equity. So if your concentration is high, then that’s not shocking. But you should do something about it if you are highly concentrated.
Step 3: Decide when you should sell your NSUs.
All right? So here’s a framework for thinking about when you should sell your NSUs.
The first step is really when the next time your window’s open, sell immediately to cover any valid near term cash needs.
So when I say valid near term cash needs, that means cash, you know, you’re gonna need in the next near term, so less than say a year or two. So examples would be if you have RSUs, sorry, u have been under withheld, you know, you’re gonna owe taxes, go ahead and sell. So you have the cash. ’cause You’re gonna have to pay those taxes either this quarter or by April of next year, okay?
If you don’t have an emergency fund. So usually I, I recommend clients have six months of living expenses.
If you don’t have that for some emergency job loss, medical costs, then you should sell, get that taken care of.
Or if you say, Hey, I’m gonna buy a house, I want the down payment I wanna buy in the next year, go ahead, get your money out so that your down payment is covered, right? So that you know you have it, something happens.
You don’t keep it Nvidia stock, your NSU go down a lot, you don’t have your down payment. So that’s step one. You may not have anything, but if you do, make sure it’s covered.
Step two, okay? Decide if you want to keep a certain percent of your equity for the long term. All right? So most clients say, Hey, I believe in the long-term vision of the company. I wanna, hold on, I wanna make sure I have some stake in the company.
So I think that’s fine as long as you limit your exposure.
So I usually say, Hey, most you wanna do is five 10% of your investible assets. You’ve gotta figure out what percent you’re comfortable with. But figure that out and then set that aside.
So for example, let’s say you say, okay, 10%, I’m gonna hold long term. Long term, to me means, could mean forever. Then just take your current NSUs, carve out 10%, okay, let’s look at what’s left, the remaining your remaining equity.
So then there are three ways to think about selling three high level ways. Think about selling your, your shares.
- First is just sell everything, right? So the window opens, sell everything you have. It’s simple. And you know that you have the cash that you have, okay? Set aside taxes and you’ll be good to go. Now, most, having said that, most clients I work with say, nah, that’s, that’s a lot. I’m not ready to do that.
- Sell over time on a schedule. So sell over, sell over time on a schedule. So this is simply saying you sell a certain portion every quarter over the next X quarter. So you can say, I’m gonna sell 25% a quarter over the next four quarters. Okay? So you take your remaining nsu, you say 25% a quarter, next four quarters or whatever you’re comfortable with, you know, 10% a quarter over the next 10 quarters, okay? And the benefits are one you’re not gonna pick the wrong single day to sell it. ‘Cause Price is gonna go up and down. You won’t happen to pick the wrong single day. Second benefit is you get to spread your taxes over multiple years, okay? The reason this is helpful is because by setting a schedule you minimize the emotion in the decision. You’re kind of putting it on autopilot so that you, when it comes time to sell the windows open, you don’t say to yourself I think it’s gonna go a little bit higher, I’m just hold onto it. Or I don’t know if I should sell it. Now it may go down, or yeah, I should sell more. ’cause It, I think the price may go down. You’re trying to remove that emotion, come up with some reasonable rational plan for selling. So that’s what sell overtime on a schedule looks like.
- Sell over time on a schedule more when it’s more, when the price is higher, less when it’s lower. Now, sell overtime on a schedule more when the price is higher, less when it’s lower is a different version of this. So what you can do here is you just set price targets. So, and then percentages related though. So you could say, all right, if the stock is over $400, I’m gonna sell 50% of what’s remaining. Okay? If it’s between three 50 and 400, I’m gonna sell 25%. If it’s less than three 50, I’m gonna sell 15%. Okay? Again, price span, here’s the percent I’m gonna sell. Again, autopilot, except the differences. You’re gonna sell more when it’s higher and less when it’s lower, okay? But you’re not trying to figure that out in the moment because you’re trying to remove that emotion. So these are high level ways of thinking about selling your NSUs.
All right, so let’s talk about next steps here. So again, as I mentioned before if you want to have a you know, no cost, no obligation one-on-one with me to get your optimize your NSU plan and then click on the schedule now button, or you can go to this URL. So I’m gonna tell you one last story to wrap up and then we’ll do q and a.
So I want to tell you about a client who came to me. He works in big tech. He is a couple, a young family, had about $5 million worth of RSUs and said to me, Hey, I really am overwhelmed, don’t know how to get to our goals. Don’t know when to sell this, don’t know how to come up with a plan, don’t know how to minimize taxes. So, started working me with me.
We put together a plan, a financial plan. We identified the key goals they had and then we figured out a plan for selling so we could diversify out of their big tech RSUs and minimize taxes.
So one of the first goals was buy a house. So sold some of the stock, figured out how to get the down payment. They bought a house, so now they’re happily living in their house in, in the valley.
And then secondly, they had young kids. They said, we wanna make sure the kids are taken care of. So we also put together a plan for college. So now they have college saved at four that’s taken care of. And then they also wanna make sure the kids are taken care of in case something happened to them. So we got life insurance in place because the kids are depending on their income, we got estate planning in place so that they have a will if something happens to both of ’em, they can name a guardian.
And then the last big goal was how do we make sure they’re on track to get to financial independence early? Okay? So we put together a plan and they have their funds invested. They’re saving enough to be on track to get to financial independence early. So they can make work optional when they’re younger and they can work if they want to, but they don’t have to to pay the bills.
But that’s an example of what the opportunity you have as an Nvidia employee is if you have enough NSUs, there’s a way to put together a plan to make sure you get to the goals you wanna get to. Could be buy, house, pay for college, should the kids are taken care of, get to financial independence. And you get there a lot faster because you have this your NSUs. Okay? So I want to take a moment here to see if anyone has any questions.