5 Steps for Alphabet Employees to Make the Most of Their GSUs
Table of Contents
- 5 Steps for Alphabet Employees to Make the Most of Their GSUs
- Transcript of Webinar
- 5 Steps for Alphabet Employees to Make the Most of Their GSUs
- Why I’m Here
- Step 1: Understand How Your Alphabet GSUs Work
- Step 2: Avoid a Surprise Tax Bill on Your GSUs
- Step 3: Determine if You Have Too Much in Your GSUs
- Step 4: Decide When to Sell Your GSUs
- Step 5: Plan How to Use Your Proceeds
Transcript of Webinar
5 Steps for Alphabet Employees to Make the Most of Their GSUs
Why I’m Here
So I’m gonna start with a personal story about why I’m here today. Uh, and then we will get into the content, um, about five steps for Alpha employees to make the most of your gsu. Um, so my name’s Tom Lo, and the reason I’m here today is, uh, I wanna take you back to the late nineties. I worked at a uh, dot com, uh, and I remember the day clearly, I was just sitting in my cube and everybody was happy. Everybody was high fiving each other, and champagne corks were popping all over. And that’s because we had gone through what every.com, every tech startup at that time wanted to do. We just had our I p O. Uh, and so it was a very happy day for everybody. And then what happened over the next several months is the stock kept going up and everybody got happier and happier, right?
And at a certain point, I thought to myself, well, if this stock keeps going up, it’s in my late twenties. I go, you know, I, I can, I’m, uh, uh, I’m gonna be able to retire a lot earlier than I thought I would. So for those of you guys who know history, um, what happened was the.com bubble burst. Um, and the company I was at shut down, and all of the stock I held went to zero. Uh, and so I learned, um, a couple of important things came outta that. One was I realized I didn’t really understand how my equity worked. Uh, in that case, I had a bunch of incentives, stock options. I didn’t really understand how they worked, how, how the taxes worked. So I started to educate myself, uh, and I talked to all my colleagues and most of them didn’t really understand how they worked either.
And one important thing that came outta it was that started me down the path, uh, to making a career change into financial planning, which is, uh, what I ended up doing more than a decade ago. And the second thing that happened is it led me to start this firm. And it explains why I’m here today, is because I wanna make sure that you, uh, all the alphabet employees out there are able to make the most of your gsu. You don’t end up in the place where I was, where you worked hard, you got your equity, ended up not getting, uh, anything out of it. Uh, and so that’s why I built this firm, and that’s why we’re here today. So let’s, let me share some slides with you.
Step 1: Understand How Your Alphabet GSUs Work
So we’re here today. Again, five steps for alphabet employees to make the most through gsu. Uh, this is for educational purposes. Of course, you should talk to your professional. Here’s the agenda. I’ll give you a little bit about my background and then walk you through the five steps. And they are, uh, understand how your GSU work. Step two, avoid a surprise tax bill on your gsu. Step three, determine if you have too much in your gsu. Step four, decide when you should sell your gsu. Step five is plan what you do with your proceeds. And then at the end, uh, we’ll talk about next steps. Uh, there will be some live q and a. Uh, so if you have questions now, if you have questions anytime during the um, session, feel free to drop ’em into the chat. And then we, we do the live q I’m not gonna answer ’em in real time, but when we do the live q and a, I’m happy to answer ’em at that time.
Uh, and we keep, I intentionally keep these, uh, webinars, um, small because I wanna make sure that they’re personalized and answer whatever questions you have. Now, having said that, I’ve done a number of these and I know that, uh, some are happy to ask a question in live q and a. Um, and, but others prefer to, um, ask those questions in a more private setting. So what I also want to do is, for everyone who’s attending the webinar, is I wanna offer a free, uh, virtual consultation where you can ask any questions about your specific situation. Uh, cuz the advice I’m gonna give is gonna be general, but let me show you how this works. If you, you should see now a, a red schedule now button. If you click on the button, it’ll just take you to my calendar, put time on my calendar, uh, half hour zoom call, no cost, no obligation, uh, no sales pitch. I’m just there to answer whatever questions you have about your specific situation. Uh, so feel free to click on that anytime. So the content here, the five steps I expect will take around 35, 45 minutes. We’ll have a few minutes for q and a, and then we can go from there. Okay? All right. So let’s get started.
So I already told you a bit about my background. The only thing to add on is that, um, my firm, uh, specialized in working with tech professionals with equity. That’s all we do. Uh, with, with ongoing planning investment management, I have a number of alphabet clients. So I know there’s, there’s a need, um, from the alphabet employee side for this type of help. So step one, understand how your gsu work. Um, all right, so Gs use your Google stock units. Uh, they are simply compensation in the form of alphabet shares that vest over time. And the vesting schedule I see commonly is you vest monthly over four years. You have a one-year cliff, meaning after your first year, you get the first year’s worth. And then the latest version I’ve seen is, uh, year one represents 33% of your initial grant. Year twos 33%, year threes, 22%, year four is 12%.
Prior to that, it was 25% of the year. Uh, uh, so it spread out evenly over the four years. So depending on when you got your grant, your, uh, vesting schedule will look like one of these. Now the tax treatment for these, uh, is when you gr when you’re granted your gsu, you start your employment, your initial grant, there’s no tax implications. But on the day you vest, right? So say after your first year, you vest a year’s worth, um, that day you’re gonna pay ordinary income tax. That means what you pay on your salary on the fair market value of the stock when it’s vested. Okay? So let me walk you through an example. Now, when you think about your gsu, one way clients find helpful to think about is if you think at it, think about it as a cash bonus in the form of alphabet stock. And the reason you can think about it that way is because it’s taxed when it’s vested. So it’s just like salary or cash bonus. Now, that’s different from options. Options have a different tax treatment. So incentive stock options have a different tax treatment, but you don’t want to get it mixed up with that.
So the way to, the way, one thing that’s helpful to understand this, hey, think about it as a cash bonus, is let’s take a look at these two versions. Okay? So first version is, let’s say alphabet gives you a hundred thousand dollars worth of gsu, okay? What they’ll do is they’ll sell 40,000, let’s say, to cover your taxes withholding, and then they’ll leave you with $60,000 in alphabet stock. All right? So that’s the GSU version. Now, let’s take the cash bonus version. Let’s say alphabet gives you a hundred thousand dollars cash bonus, okay? Just like your salary, they’re gonna take 40,000 taxes and withholding outta that. They take 60,000, they put it into your deposit, into your checking account. You turn around, you take the $60,000, you go to the stock market, you buy $60,000 worth of alphabet stock, you then end up owning $60,000 worth of alphabet stock. So in both the GSU version and the cash bonus version, you end up in exactly the same place you have, you own $60,000 worth of alphabet stock. So that’s why you can think of it the same as a cash bonus.
So the reason I, uh, suggest you think about that way is because the question to ask yourself is, if Alphabet gave you a cash bonus today, would the first thing you do with that cash be to go out and buy alphabet stock? Okay? Because if you hold your gsu, then you are, you’re doing, it’s the same as buying the stock at the current price. Okay? So if that’s not the first thing you do with your cash, with a cash bonus, then you should consider selling those gsu. And you know, when to sell. Depends not only on that, but your financial goals, et cetera, some other considerations. So we’ll go through those things to think about. And ideally, you talk to your, your financial planner, tax professional, but in general, I recommend selling as soon as you vest because there’s no tax benefit for holding. Okay?
Um, there’s a misconception out there about if I hold this for a year, then I get long-term capital gains on that, the lower long-term capital gain tax rate on that. Now, again, let’s think about it. If you vest today, you hold more than a year. Let’s say you, you vest today, the stock’s at a hundred, you hold it more than a year, it’s at 110, you sell it for 110. So what happened is you already got taxed in a hundred bucks. You get long-term capital gains treatment on that $10 gain. But that’s the only part. Okay? Let’s take the second version, which is, let’s take your a hundred bucks, you go buy a share today, you hold it more than a year, you sell it for 110. Again, you get the long-term capital gains treatment on that $10 gain. So again, you’re in exactly the same place.
Step 2: Avoid a Surprise Tax Bill on Your GSUs
So there’s no benefit for holding, okay? So step two is you wanna avoid a surprise tax bill on your gsu. Okay? So the question to ask is, have your taxes on your GSU been under withheld? And I’ll, I’ll, as I said, you pay ordinary income tax on the fair market value of gsu, right? So the standard withholding for less than a million is alphabet will withhold typically at 22% federal tax rate. So you vest your gsu, the withhold 22% for federal. They’ll also hold for state. But for example, if you were at the 37% federal tax rate, so the highest tax rate, then in this case, and they withhold at 22%, you’re under withheld, 15% for your gsu. So that means for every a hundred thousand dollars worth of gsu, you actually still owe $15,000 in taxes, okay? Even though Alphabet didn’t take it out.
And what usually happens is, um, clients will come to me and say, oh, but Alphabet took out the taxes they did, but they didn’t take out the full amount that they needed to take out. Okay? So the, and you’ve ended up with a surprise tax bill. So the way to avoid this is he can work, work with a tax professional, uh, this is what I do with my clients, and we make quarterly estimated taxes. So we know here’s what you’re gonna really owe. So let’s go ahead and pay that every quarter so you don’t get to April or the next year and get a big tax surprise that you weren’t expecting. And this happens all the time. Clients come in and they’ll say, Hey, owe a bunch of taxes. I don’t know what happened. Well, you were likely under withheld on your gsu. So, and then alternatively, you can just, you would just sell your GSU so you can make sure your taxes are covered.
Uh, and you can just set it aside in a tax reserve. So you can figure it out on your own. You work with a tax person, but you wanna make sure that you understand what your taxes are gonna be because they’re often under withheld. Okay? Again, um, to remind you general advice, uh, about your taxes, your specific tax situation may differ. But if you have questions about your specific, um, situation and your tax situation, then again, you just, uh, you can schedule, click on the schedule now button, put time on my calendar, chat with me about your specific situation, okay? This is general advice, okay? So step three is determine if you have too much in your gsu.
Step 3: Determine if You Have Too Much in Your GSUs
Concentrated Stock Position
So I talk with clients all the time about this concept of concentrated stock. Uh, so concentrated stock position just means you’re holding too much of a single company stock, okay? And my general guideline, if it’s more than 20% of your total investible assets, that’s too much, okay? And that’s just because it has a ton more risk and volatility than a diversified portfolio. And let me give you a picture. This captures the real risk of being too concentrated. So this stock chart is Enron. So Enron, you may not have heard, is a, was a, um, energy company in the late nineties that Wall Street. Loved everybody, loved it. And so the stock went all the way up to 90 bucks a share, and then some bad news came out. And within um, months it had dropped to zero, okay? Now, if you’re an Enron employee, there were Enron employees.
So within the 401k you contribute to that, you could actually invest in Enron stock company match made in Enron stock. Uh, there was also a way for employees to purchase Enron. So there were employees who had almost all of their retirement in, in Enron stock. And so there were employees who had hundreds of thousands of dollars, millions of dollars who overnight lost almost all of their retirement. So that is the real risk of having too much concentration in single company stock. This stock chart, actually just for a, a more current version, um, Silicon Valley Bank, first Republic, if there were employees who had highly concentrated stock, and then now that’s gone. Okay? So that’s what, that’s the position. You don’t want to be something happening outside of your control, uh, that, uh, makes most of your net worth go away. So here, I’m gonna walk you through the steps, um, about how to calculate.
How to Calculate if You Have Too Much in Your GSUs
1. Step one is you just calculate the total value of your vested, uh, alphabet equity, right? So you just take, here’s what’s vested. Here’s current price, um, here’s how much you got, okay?
2. Step two is calculate the total value of your investible assets. So that’s, um, things like your savings and investment accounts, your retirement accounts, your 401k. You add that up, you add the value of your, your alphabet.
3. And then you just step three, divide the total value of your GSU or your alphabet divided by your total investment assets. That’s gonna give you a percentage.
4. So step four is if your concentration is more than 20%, then your highly concentrated and you should think about how do you want to diversify your concentration? Okay?
So quick example here is, let’s say you got 4,000 invested GSU a hundred bucks to share $400,000 of equity, you add up everything else, um, you got 600,000, right?
So you add the 400 plus 600, you got a million dollars of total investible assets. So you divide your 400,000 of alphabet equity by a million, you’re 40% concentrated. That 40% is above the 20% threshold. So you’re highly concentrated, uh, and you should think about diversifying. Now, having said all that, as I said, all my clients work in Silicon Valley, if you’re highly concentrated, you’re not alone. Um, so I have clients who come to me every day with 50% concentration, 80% concentration, 95% concentration. Cuz if you’re say, uh, somebody successful startup, it’s your first job. Everything is in your company stock. So the key thing is you should calculate it, figure out if you are highly concentrated, and if so, think about what, what to do about it. Okay?
Step 4: Decide When to Sell Your GSUs
Alright. So step four is decide when you should sell your gsu. So for example, you said, I’m highly concentrated. Yeah, great. So now what do I do?
Framework for Deciding When You Should Sell Your GSUs
All right, so here’s a framework for thinking about, um, how to decide when you should sell your gsu.
1. So the first step would be, I think it’s reasonable to sell immediately. This is a, this process. Take my client through, sell immediately to cover any valid near-term cash needs. So when I say valid near-term cash needs, what does that mean? Um, so examples would be taxes on your equity. So if you know you’ve been under withheld, go ahead and sell the stock so that you have the cash so that you can pay your taxes, cuz you’re gonna have to pay it either this quarter or in April. Okay? Uh, other examples would be an emergency fund. If you don’t have an emergency emergency fund, so three to six months of living expenses in case of a job loss, um, big medical bill, that would be good down payment.
So if you say I’m gonna buy a house in the next year or two, um, I need a down payment, uh, it’s all in, it’s all in gsu, then I’d say take the money off the table, get it into cash, cuz you don’t wanna mess around with having the stock drop a lot. And then you don’t have your down payment, okay? So that’s the first step, any near term cash needs.
2. So the next step would be decide if you wanna keep a certain percent, um, of your GSU for the long term. Okay? So I have plenty employee, plenty of people come to me and say, clients say to me, okay, I I I believe in the long-term, um, s long-term future of alphabet, right? And so I wanna hold onto it cuz I want to take part in that. That’s fine. What I would suggest is you, uh, limit that to some reasonable part of your, um, overall portfolio.
So I, for most clients, I’ll say, Hey, that’s probably five to 10% long term, but let’s say it’s 10%, that’s fine. Take 10% of your GSU set aside, I’m not gonna touch these, okay? I’m gonna hold them forever. And then the remaining shares, now that you’ve taken care of your near term cash needs, now that you’ve taken care of your long-term holding, there are three ways to think about selling. Okay? The first way is sell immediately. Okay? So the, the window opens, sell everything, okay? Um, there’s data. Looking at tech companies in general, the sooner you sell the better good. Uh, you know, alphabet of course is an exception, but, um, that is a reasonable approach. Now, most clients that I talked through that option with, they’re like, uh, I can’t get comfortable with that. So the, the other two ways to think about it are sell over time on a schedule, sell over time on a schedule.
3. Uh, another version of that. So let me tell you what that means. That just means you set a schedule. So you could say, for example, okay, whatever remaining GSU I have, I’m gonna sell 25% a quarter over the next four quarters or 10% a quarter over the next 10 quarters, okay? And the benefit, there are a couple of key benefits. One is you, you, um, know you won’t pick the wrong single day to sell, right? Where it happens to be at a low point because you’re gonna sell it over time. It’s gonna go up and down, so should even out. The second thing is you’ll spread your taxes out over multiple years. Uh, so tax hit doesn’t come in a single year. So first version is, uh, straight up, you say 25% a quarter. Next four quarters, every time the window opens, I’ll sell it.
And the idea, part of what you’re trying to do is minimize the emotion. You’re putting this on autopilot so that you say, okay, I’m not going to try to decide is the stock high enough or is it too low? Should I sell it? You’re just gonna sell it every quarter when the window opens, you’re 25%, okay? Um, so that’s, that’s the, the first version is sell over time on a schedule. The next version is sell over time on schedule, but more when it’s higher, less when it’s lower. So you could say the same thing. Uh, I’m gonna set price bands, and those price bands will have a certain percent that, that I’m gonna sell. So for example, you could say, all right, if this, the price is less than a hundred bucks, I’m gonna sell 15% of those remaining shares. If it’s between a hundred and 120, I’m gonna sell 25%. And if it’s more than 125, I’m gonna sell 50%. And then every quarter, quarter o window opens. You say, what’s the price? Okay, what band is it? And then here’s the percent I’m gonna sell. Okay? That way, let’s say the price is one 50, you sell 50%, but it drops to 80, you only sell 15%. So that’s another way of thinking about selling it.
But those are the three primary ways is sell immediately, sell overtime on a schedule, sell overtime, on a schedule more when the price is higher, less when it’s lower.
Step 5: Plan How to Use Your Proceeds
Okay? So step five, let’s say you sell your gsu. Now what do I do? So here’s plan what you should do with your GSU proceeds. All right? So ideally what I suggest is you develop a plan, financial plan, you have both your near term and your long-term goals. And you understand, okay, how can I use these proceeds to help me reach those goals? Okay? The first step would be you wanna understand what the time horizon for that goal is. Is it near term or is it, so for me, near term is less than a year or two. Long term is more than that. And examples would be near term, uh, I got taxes, I’m gonna have to pay ’em in April, or I’m gonna buy a house in the next year. So I need a down payment. Long term is retirement, you know, it’s gonna be decorated away or college, it’s gonna be 18 years away. Um, so that’s the first thing you wanna understand. The the next thing you wanna understand is your risk tolerance.
So this is how comfortable are you, um, with your portfolio going down mostly. Um, so one helpful thing was if you go back to, uh, when Covid hit March, April, 2020, the market dropped. Stock market dropped 30, 35% in a month. Um, if you were paying attention and you said, oh my, oh my, that’s a lot. I’m gonna sell everything cuz I think it’s gonna keep going down and I can’t sleep at night, then you probably have low risk tolerance if you sell that happen. You said, oh, now stocks are, um, uh, a bargain, I’m gonna buy more than you probably have high risk tolerance. Okay? But you wanna understand because you want to, it’s going to depend on both your time horizon and your risk tolerance. So depending on your time horizon and your risk tolerance, you wanna decide on what we call financial planner call asset allocation.
That’s just some mix between stocks, bonds, and cash. Okay? Now, starting with the time horizon, if you have near term goals in general, you wanna hold those in low risk, um, uh, low risk assets, like you wanna hold it in cash or something like that, that’s low risk like bonds because you need that soon. And if it goes down a lot, you don’t have time for it to recover. So for example, if you have a down payment, um, and you say, okay, I’ve got $400,000 for my down payment, okay, I’m gonna keep it in cash, okay, that means you know, it’s gonna be there when you buy in a year, let’s say you keep it in your gsu and for some some reason stock drops by a third. Now you gotta come up with another, you know, couple hundred thousand, uh, to be able to ha to get your house because you’ve held in stocks.
So time horizon, long-term goals, you can have some mix between stocks and bonds, okay? And in general, the longer your time horizon and the higher your risk tolerance, the more risk you can take, you’re comfortable taking and the higher percent in stocks. So as a simple rule of thumb for retirement, which is a long time horizon, typically a much longer time horizon. A a simple rule of thumb would be you take 120, you subtract your age and that’s the percent you want to put into stocks, and the rest would be in bonds. So for example, if you’re 120, let’s say you’re four years old, so 120 minus 40 is 80, that says 80% in stocks, 20% in bonds, okay? Um, if you have higher risk tolerance, maybe you say 90% stocks, 10% in bonds. If you have a lower risk tolerance, maybe you say 70% in stocks, 30% in bonds. So that’s how the time horizon and the risk tolerance affects your decision. And in general, for longer time horizons like, um, retirement, you wanna invest in a broadly diversified, uh, globally allocated portfolio, um, that is cost effective. Okay? Some mix of stocks and bonds.
Okay, let’s see here. So, so about next steps. Um, so as I mentioned before, this was the five steps for you to make the most, your GSU general advice. If you have, if you want to schedule a consultation with me, answer your specific questions about your GSU or your specific situation, then click on the schedule now button, uh, or go to this URL https://vestedfinancialplanning.com/start-here/#schedule_form and I’d be happy to chat with you. So before we, uh, get into the q and a, I want to tell you, um, one other quick story. Okay? This is my yellow jacket story.
So, uh, a few years ago, uh, my wife came to me and she said, Hey, uh, we got yellow jackets in the back. Uh, can you call an exterminator to take care of him? And I said to my wife, I said, oh, honey, I’ll take care of it. So I went back in our backyard, I had my bug spray, um, and I started spraying. And then the next thing I know, I had a, uh, a a ton of, um, of yellow jackets all over my head, but stinging me. And I was like, oh my God. So I got so, so, uh, flabbergasted that I ended up running into our house to find my wife to help me, but we had our screen door up. So I actually ran through our screen door, that’s how, uh, flustered I was, ended up hosing my head down and got all the yellow jackets off, and I called the exterminator, came out, took care of the yellow jackets. And the the reason I tell you that story is that, um, things that you, uh, think that you may want to do yourself, you, you can try it yourself, but sometimes it is helpful to have a professional who does whatever you’re trying to do every day. Um, if it’s important enough to you. Otherwise you may end up like me and have a bunch of, uh, stings on your head. So hopefully that’s not the case.
Okay? So let’s take, um, a moment here. Uh, that is, those are the steps. Hope that was helpful. If you guys have any questions, then feel free to drop them into the chat. Um, so want to take a minute here. I don’t see any questions right now, but if you guys have any questions and let’s take a moment, feel free to drop ’em into the chat. Any questions? Okay. Alright, so if there are any questions, then, uh, thank you all for coming. Um, I hope that was helpful. Again, if you want to chat with me, um, about your situation, feel free to put time in my calendar. Uh, and also, I, you should all, you will all receive a recording of this. Um, so you can, uh, go back if you want to and then feel free if, uh, feel free to share with any of your coworkers at Alphabet, uh, if that, if you think that’ll be helpful for him. Okay? All right, great. So thank you everybody for joining and hopefully I’ll, I’ll, uh, get a chance to meet some of you, uh, by Zoom. Thanks. Uh,