Why Is Financial Planning Essential For Tech Professionals?


Professionals employed in the tech industry face unique financial planning challenges. High earnings and stock-based compensation plans can be a real boon, but also come with specific risks and considerations that must be managed and mitigated. Between these and the career volatility inherent to the tech sector, professional advice and planning are a necessity to manage their equity compensation, grow their wealth, and reduce their tax burdens.

Most of our clients at large companies are granted company stock as part of their compensation programs. They have the opportunity to really soar if they get all their ducks in a row, and our role is to help them fly as high as they can and avoid a ‘crash and burn’ scenario.

Before we get onto the eleven reasons why financial planning is crucial for tech professionals, let’s get a few definitions and explanations out of the way:

What is equity in compensation management?

Tech professionals often receive stock-based compensation (also sometimes called share-based compensation) as part of their employment contract. These forms of compensation have detailed rules and important income tax consequences that are more complicated than simple salary and bonus compensation programs in other industries.

What types of equity compensation are available to tech professionals?

– Stock Options: Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs)
– Restricted Stock Units (RSUs)
– Performance Shares
– Employee Stock Purchase Plans (ESPPs)
– Stock Appreciation Rights (SARs) & Phantom stock

What are the risks of equity compensation?

While there are many benefits that come with equity compensation, there are also real risks. Firstly, the value of company stock can plunge, and that means that equity compensation might cost employees money. While you may think your company is going to do well and grow forever, you don’t know that for sure! Just ask  Enron employees that have seen their stock prices plummet recently.

Any company can go belly-up or lose 80% of its value in a year. This probably hasn’t happened to your company in the past, but that doesn’t mean it can’t happen in the future.

Exercising your equity compensation might incur income taxes even though you aren’t selling your shares.

Some high-level executives may receive stock options as part of their compensation package, even though business success might be mediocre. This can have a diluting effect, which may reduce the value of the stock in the long run.

How is financial planning different for tech professionals?

Here are 11 ways in which financial planning may differ for tech professionals:

1. Variable Income: Tech professionals – especially those working in the startup or freelance space – often experience variable income. Their earnings may fluctuate significantly due to project-based work, stock options, bonuses, or commissions. This variability requires careful budgeting and cash flow management. Failing to plan for lean periods during lucrative periods could lead to a white knuckle rollercoaster ride that is entirely avoidable.

2. Complexity: Understanding your equity holdings’ value, taxation, vesting schedules, and diversification strategies is crucial. Deciding whether to hold or sell shouldn’t be based on short-term price fluctuations but on personal financial goals, concentration risk, and company prospects. Many people are unsure what to do with their vested stock, and end up making costly mistakes that are entirely avoidable.

3. Industry-Specific Benefits: The tech industry often provides unique benefits such as 401(k) matching, flexible work arrangements, and generous health insurance packages. Taking full advantage of these benefits and aligning them with personal financial goals should be part of a tech professional’s financial plan.

4. High Earning Potential: Tech professionals, particularly those in senior or specialized roles, may have higher earning potential compared to other fields. While this can be advantageous, it also means making strategic decisions about saving, investing, tax planning, and wealth management to maximize long-term financial success.

5. Entrepreneurial Ventures: Tech professionals frequently venture into entrepreneurship, founding startups or launching side businesses. Financial planning for entrepreneurs involves additional considerations like securing startup capital, managing cash flow, protecting personal assets, and planning for exit strategies.

6. Rapid Technological Changes: The tech industry evolves at a rapid pace, and professionals need to stay current with the latest trends and skills.  Allocating resources for continuous education, certifications, or attending conferences becomes essential for long-term career growth and financial planning.

7. Tax Planning: RSUs and stock options have different tax implications, and it’s crucial to understand how exercising or selling them may affect your tax liability. Depending on your specific circumstances, it may be beneficial to consider tax planning strategies such as holding periods, tax-loss harvesting, or utilizing tax-advantaged accounts.
If you’re offered a qualified ESPP, the tax implications could be complicated as there are two classifications of sales for qualified ESPPs: qualifying and disqualifying dispositions. Returns are not guaranteed and the share price may fall as well as increase.

8. Retirement Planning: Tech pros often have access to retirement plans like 401(k)s, IRAs, or SEP IRAs, which provide tax advantages for retirement savings. Maximizing contributions to these accounts and selecting appropriate investment options require careful consideration based on individual circumstances and retirement goals.

9. Exits: Exits are another obvious and related difference. In no other industry do employees outside of top management need to be so keenly aware of the financial status of their company and how that translates to their personal finances, from venture capital financing rounds to initial public offerings to likely acquirers.

Even employees in public tech companies need to follow the organization’s prospects closely. The strength of the management team, company culture, growth in revenue and cash flow, and the strength of its balance sheet also play a part. One quarter’s earnings miss can set your financial plan back years if the company’s stock price drops sharply.

10. Stock Concentration Risk: Tech pros need to avoid becoming overly concentrated in the tech sector with their investments. They typically have salary, bonus, and company stock all from a tech industry source, and it’s the same company! That can represent significant upside and also significant risk. The situation is even riskier for households where both earners are working in tech.

In our experience, tech pros tend to weight their investments toward the tech sector. Tech stocks are growth stocks, and a well-diversified investment portfolio should ideally contain a balance of growth and value stocks. For those in tech, it can be beneficial to weight their retirement portfolio away from growth stocks and toward value stocks to mitigate tech sector risk in their overall financial situation. Essentially, we’re taking some risk off the table.

11. Time Management: Tech pros are busy people doing high-demand jobs, and many find managing what they’re earning difficult and frustrating. They fear making poor decisions, and not making the most of what they’re offered.

Just because you’re tech-savvy doesn’t mean you have the time to gain the knowledge and skills required to plan for your financial future. After all, technology and finance are two different worlds.

With more volatility and complexity in your finances, you have to think differently, plan differently, and behave differently. If you do, you can set yourself up for a strong financial future.  Financial planning is essential because it provides a roadmap for achieving your financial goals and ensures long-term financial security.

Given these unique aspects, it’s recommended for tech professionals to work with a financial planner who understands their industry-specific challenges and can develop a tailored financial plan to address their goals and aspirations effectively.

At WestStar we always start with what you want out of life because the answer tells us what to pack into a financial plan that works as hard as you do to meet your goals.  Without clarity, it’s impossible to take focused action.

Through understanding your program, your goals, and your mindset, we can help you make and implement decisions with a successful long-term financial plan in mind.

If you have questions about your specific circumstances, or want to talk further about getting your equity compensation ducks in a row, please get in touch.

We welcome the opportunity to chat with you, and wish you every success in the future.

Sam Gullette & Erik Alexander

Sam Gullette, CFP®, CLU®
Certified Financial Planner™

‘My mission in life is to help people take control of their money and avoid financial stresses. My clients are successful professionals and executives, many of whom are compensated heavily with company stock. Together we maximize their wealth-building opportunities, minimize taxes, and make sure their family is protected if life throws them a curveball.’

Erik Alexander
Financial Consultant

‘I work with professionals and executives who are compensated through various forms of company stock.  They have more money than time and struggle to balance the key aspects of their lives. Their decisions affect others, and they feel a huge responsibility towards making them wisely. I enjoy helping them solve their complex problems, and being counted on for their and their families’ financial wellbeing.’