How Equity Compensation Could Be Costing You Thousands | Dan Pascone with Karl Strube | Ep #34

Karl Strube is a CPA and the owner of Strube CPA, where he specializes in the taxation of equity compensation. He started his career in audit at Deloitte, moved into controller roles at agriculture companies, and launched his own firm in 2017. He began as a generalist. One early client with public company equity, and the Forms 3921 and 3922 that came with it, pulled him into the niche. He now works with clients nationwide on stock options, RSUs, and ESPPs.

RSUs are the most common place to start. Karl explains that when RSUs vest, their fair market value is treated as wage income. You'll usually see a separate, bonus-style paystub on that date. Your employer withholds tax, and the net pay on that stub is often $0 because the shares go to your brokerage account instead of your bank account. The value lands on your W-2 as ordinary income. From that point on, any move in the stock price is a capital gain or loss.

Options work differently. Non-qualified stock options (NQSOs) create ordinary income on the spread at exercise. Incentive stock options (ISOs) can qualify for long-term capital gains treatment, but exercising and holding can trigger the alternative minimum tax (AMT), which is why exercises are worth modeling before you place them. We cover the mechanics in our guide to ISO strategy and avoiding AMT. ESPP treatment depends on your holding periods, and the purchase is reported on Form 3922. For a plain-English overview of option taxation, the IRS publishes Topic no. 427, Stock options.

Karl starts with a simple exercise. Lay out your net worth, then split it into cash and diversified investments versus company equity, including unexercised options and unvested shares. Then ask the question that matters: can you sleep at night with this level of exposure? In Karl's view, the right percentage is the one that lets you rest, not the one that maximizes theoretical upside at the cost of constant worry.

Dan's framing is that you're already long your company through your paycheck. When a large share of your net worth sits in the same stock, a bad stretch for the company can hit your income and your portfolio at the same time. Many high earners use a guardrail of roughly 10–20% of net worth in employer stock. We explain why in why smart investors never go all in on one stock. Treat that range as a starting point for a conversation, not a rule.

Diversification and tax efficiency don't always point the same way, so Karl and Dan both start by quantifying the trade-off. A few common tools came up in the conversation:

• Sell vested RSUs: the full value is already taxed as wages at vest, so there's no need to wait for long-term treatment on that amount, and selling near the vest price usually creates little additional gain or loss. Karl calls this the first place to start, because it lowers your company stock percentage and raises your cash percentage.
• Sell to cover on options: sell some shares right away as you exercise so you aren't paying out of pocket. Karl notes it isn't the most tax efficient approach, but it preserves cash.
• Decide where the cash goes: taxable investing, retirement accounts, paying down debt, real estate, or other goals.

For public company insiders, Dan adds the 10b5-1 plan. If you adopt a preset trading plan when you don't have material nonpublic information, sales can run on a schedule, even during blackout windows. Karl's point is that you never know what happens between a vest date and the next open window, and a plan shows you're diversifying, not trading on inside information. We walk through the mechanics in our video on building an RSU selling plan. The plan's terms are set with your company's legal and compliance team.

At a private company, you can't just click sell. Liquidity comes from tender offers, an IPO, or an acquisition. Karl tracks 2 different numbers: the 409A valuation, which matters for AMT when you exercise ISOs, and the tender offer price, which is what shares actually sell for.

He shared a client whose company went public after the client had exercised NQSOs. His net worth moved from low 6 figures to low 7 figures overnight. That's a great outcome, and it also came with a large tax bill and a concentration question to solve. Some argue private company equity is riskier because it's less transparent and less liquid, while others see a bigger upside. Karl's view is that either way, it's a tool to use on purpose, not a bet to make by default.

Karl's first step is access and organization. You need to be able to log into your employee stock plan portal and your brokerage account and find the right forms. He asks for 3 in particular:

• Form 3921: reports ISO exercises.
• Form 3922: reports ESPP share purchases.
• Stock plan supplement: accompanies the 1099 for share sales and shows income already included in your wages, which drives basis adjustments.

He also asks for your year-end paystub alongside your W-2. Karl estimates that roughly 1% of the W-2s he sees contain some kind of error. In one extreme case, a client who moved from the Midwest to California had a relocation bonus double-counted on the W-2, which would have cost about $15,000 in extra tax if they hadn't caught it by checking against the paystub. His other tip: don't stop at the tax documents tab. Equity-related forms often sit in a separate section of the brokerage or plan portal. Karl also has clients sign a tax information authorization so he can see what the IRS has on record, but he's clear that it takes time to populate and isn't a complete safety net, so the document gathering still has to happen.

Holding a vested RSU isn't a way to avoid tax. The tax event already happened at vest. From that point on, holding is a decision to buy more of your employer with after-tax dollars. Karl's version is that you're not avoiding future tax by holding, you're taking on more stock-specific risk.

Most people treat selling as the decision that needs a reason. It's closer to the other way around. Holding shares you could sell is the active choice, and it deserves a written rule. The second thing people miss is where the money is actually lost. It's often the paperwork, not the strategy: a missing basis adjustment, a double-counted bonus, a Form 3922 sitting in a portal nobody checked. Those errors are easy to prevent and expensive to find later.

Here's an illustration, not a client and not Karl's. Say an executive earns a $450,000 base salary and has $250,000 of RSUs vest this year. Her household's company stock is worth $1,200,000 of a $3,000,000 net worth, or 40%.

At vest, $250,000 hits her W-2 as ordinary income. If her employer withholds federal tax at the 22% supplemental rate, that's $55,000. If her household's marginal federal rate is 35%, the actual tax on that income is $87,500, which leaves a $32,500 gap before state tax. Without a plan, that gap shows up as an April surprise. If she sells the shares at vest, there's little additional gain or loss, and the proceeds can cover the gap and start building a diversified portfolio. If she holds every share that vests, her exposure to one company keeps growing. The figures are hypothetical and for illustration only. Withholding rates and brackets vary by situation.

At Tailored Wealth, we treat equity as one input to a bigger plan. Our Equity Compensation Playbook is a written set of rules, set in advance, for what you do at each vest, exercise, and sale: hold, sell, or route the proceeds to a specific goal. That way decisions don't depend on how the stock feels that week.

The proceeds then feed Life Driven Investing (LDI), our approach to building a portfolio backward from your life. LDI sorts money into the Four Liquidity Bands: 0–2 years, 3–5 years, 6–10 years, and 10+ years, so every dollar has a purpose and a timeline. You can read the full breakdown in our Life Driven Investing guide.

This conversation is for corporate executives in their 40s and 50s with household income of $500,000 or more, where part of your pay arrives as RSUs, options, or ESPP shares and a meaningful share of your net worth rides on one employer. If you're juggling multiple grants, a private company with a possible liquidity event, or a vest calendar nobody has mapped to your tax return, this is the kind of situation we help with.

If part of your pay arrives as company stock, it helps to have a second set of eyes on your vest calendar, your tax picture, and how much of your net worth rides on one employer. Book a free Wealth Strategy Call and we'll talk through your equity, your taxes, and your timeline. It's a conversation, not a sales pitch.