Lead-Lag Live

Equity Isn’t Ownership: Kaitlyn Walsh on Stock Options, Tax Traps, and the Mistakes Employees Regret

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Kaitlyn Walsh, Wealth Advisor and Equity Analyst, to break down what employees actually own when they receive stock options and why misunderstanding equity compensation can lead to costly mistakes.

From incentive stock options and vesting schedules to fair market value, AMT exposure, and record-keeping errors, Walsh explains the decisions that matter most before, during, and after an equity grant and why timing, taxes, and planning can make or break outcomes.

In this episode:
– Why stock options are not the same as owning shares
– How strike price and fair market value really work
– The biggest vesting and exercise mistakes employees make
– When stock options can trigger unexpected tax bills
– Why poor record keeping can cost real money years later

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#StockOptions #Equity #PersonalFinance #WealthPlanning #TaxPlanning #FinancialEducation #Investing #Money

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SPEAKER_00:

When you vest your options, you do have a decision to make. This is not like you might hear other forms of vesting or things that happen according to a schedule. But when you vest your options, you now get to decide if you want to purchase shares or not. And a couple of considerations that go into this, first of all, you don't have to decide that day. It's not like it has to be on, you know, every month or every year on your anniversary. It just means that you have the ability to. But I like people to be thoughtful about it because it's it's just so easy for time to continue to pass and we forget about it or we get distracted with other things.

SPEAKER_01:

I'm your host, Melanie Schaefer. Welcome to Lead Leg Live. Just recently, the Wall Street Journal reported that OpenAI's stock-based compensation averaged about$1.5 million per employee in 2025. A record for any tech startup as companies compete for AI talent and increasingly rely on equity to attract and keep employees. That underscores how critical equity compensation has become, especially incentive stock options and why understanding how they work matters for so many people before, during, and after a grant. My guest today is Caitlin Walsh. Caitlin has extensive experience helping employees and teams understand incentive stock options, how they work, where the decisions matter most, and what tax and timing pitfalls to avoid. Caitlin, thanks so much for joining me today. Thanks so much for having me, Melanie. So to start off, someone has just been told they've been granted incentive stock options. What's the most important thing they should understand about what they actually own?

SPEAKER_00:

I think the first thing that I want everyone to understand is that you actually don't own stock in your company. You have been given the right to purchase stock in the company. And so there are a lot of decisions that you have to make along the way. The ball is in your court.

SPEAKER_01:

And so wh why then do companies and especially early stage or smaller firms tend to use ISOs instead of higher cash salaries or other forms of equity? I mean, what do you what do you think is the philosophy behind it?

SPEAKER_00:

I love this question because this is so important to understand. And this applies broadly to other forms of equity compensation as well, not just incentive stock options. But if we if we take a step back and we think about where the company is coming from, I see so many employees, they get their grant, they get this exciting job at a startup or a high growth company, and they think this is perfect. I'm set. I can just sit back for a few years and wait for us to go public one day. But that thought process is a little bit backward because the reason the company is giving you this chance to own equity in the company is to incentivize you to come in and do your job really well every day, grow the overall value of the company. And in exchange for that, you're getting the chance to own a piece of the total company. So the more you help grow the overall value, the more your slice of the total pie will be worth one day. That's that's the theory behind it. And then you see a lot of companies early on, they may just not have the cash to be able to pay competitive salaries and bonuses right out of the gate. And so it's easier for them to grant you equity as an early employee.

SPEAKER_01:

That's great. And it's if we take it back to a basic level, what's the difference between the straight price you're granted and the fair market value of theirs?

SPEAKER_00:

This is great. Let's do a quick vocab primer, if we may. A couple of key terms that are really important to understand when we're talking about incentive stock options. You mentioned the FMV, the fair market value. When we're looking at companies that are granting incentive stock options, they tend to be privately held. This is not a company that you can just look up online and see what their stock price is and what it, what it, how it changes day to day. It's illiquid, it's private, it doesn't change day to day, but there is a stock price. And so it is important for employees to understand what that is. And that is known as the FMV. There's also a term you'll hear 409A. This is technically the set of rules that govern the valuation process, how the FMV is determined. Companies are required to update the fair market value at least once a year, but more often if there's a material change to the business. Generally, you see that when they raise a round of funding, but there can be other material changes to how the business operates as well that would warrant that. So if you are negotiating an offer, considering an offer, I would always ask, what is the FMV and when was it last updated? Because if it was last updated 11 months ago, you know that another change is right around the corner. The way the valuation process works, companies will often engage an outside third party. They will come in and do this whole analysis. They'll look at your business, they'll look at your financials, they'll look at comps, and they will determine what the value of the stock is. Um, you asked about exercise price and strike price as well. Those two terms mean the exact same thing. That is essentially the price you will pay when you go to purchase your shares or exercise your options. And that is tied to what the fair market value is at the time of your grant.

SPEAKER_01:

So Caitlin, does the stock price uh fluctuate at all or does it stay constant?

SPEAKER_00:

It it generally will fluctuate. It doesn't change day to day like a publicly traded stock will or minute by minute. Um, but when that FMV gets updated generally once a year, it will it will change. Um it could go up and it could go down.

SPEAKER_01:

So Caitlin, investing schedules vary, but what's one key decision people face once they start to vest their options? And what do you think are some of the major misunderstandings that people have?

SPEAKER_00:

I I thank you for asking this because it is so important for everyone to understand that when you vest your options, you do have a decision to make. This is not like you might hear other forms of vesting where things it happened, it happens according to a schedule. But when you vest your options, you now get to decide if you want to purchase shares or not. And a couple of considerations that go into this, first of all, you don't have to decide that day. It's not like it has to be on, you know, every month or every year on your anniversary. It just means that you have the ability to. But I like people to be thoughtful about it because it's it's just so easy for time to continue to pass and we forget about it or we get distracted with other things. As long as you continue to be employed by the company, generally there's there's not necessarily a rush. Generally, these grants have a 10-year expiration date. If you leave the company, then there is usually a grace period. You'll forfeit anything that hasn't vested. Um, and if and anything that has vested, you might have 30, 60, 90 days to decide whether or not you want to exercise. And so, to your question about what are the things to think through, at the end of the day, you're now becoming a shareholder in the company. It's it's like buying stock in another company. Do I believe in the long-term growth prospects? Do I think there's valuation upside? And so hope, hopefully, that's the case. You're an employee at this company. Um, but assuming that you that you check that box, this is a little different in how it operates. And so you want to think about, and no one has a crystal ball, but do you believe that one day there's going to be a market? Will you be able to sell these shares somewhere? Will there be a buyer on the other side of that trade? It's impossible to predict, but that would look like something like some sort of liquidity event, an exit, an acquisition, an IPO. Um, internally, your company could create a secondary market, but there has to be somewhere for you to sell them in order for you to get that value back. Another thing I think about when exercising, and hopefully we can talk about the tax implications as well, but I look at calendar year because if there is going to be a tax impact to you when you exercise, we're in January right now. If you if you vested in December, you might want to wait until January, or you might want to rush to do it in December that could have a very different tax impact for you.

SPEAKER_01:

Like for our uh listeners, can you walk us through sort of a sample vesting schedule and what that would look like?

SPEAKER_00:

Companies can structure this differently. Many will take a time-based vesting approach. You may see some that are event or performance driven, but let's just keep it simple and let's look at the time-based approach. This is going to be based on how long you are employed by the company. And a standard schedule that I see is four years with a one-year cliff. And what the cliff refers to is that if you leave the company at any time in your first year, you'll walk away with nothing. But once you hit that one year mark, you will then vest, in this case, a quarter of your of your options. And then typically it would be monthly thereafter until you're fully vested at the four-year mark.

SPEAKER_01:

In simple simple terms, where do you where do ISOs trigger tax? And then why, or what is the alternative minimum tax and how does that come into play?

SPEAKER_00:

Great question. Great question. One of the headline features of the ISOs is that they qualify for favorable tax treatment. And that can be true if you meet certain criteria. So it's really important to make sure that you are following and checking all of those boxes along the way. So the big thing where like the taxable event will happen is when you sell your shares one day. Hopefully you're able to, and that's the case, and you realize all of this value. In that scenario, any gain that has accumulated has the potential to be taxed as a long-term capital gain, which is generally better than if the company were to give you a bonus or a higher salary that would be taxed as ordinary income. Generally, your long-term capital gains tax rate is going to be lower than your marginal tax bracket in a lot of these scenarios that we're talking about. So that is usually a good thing. In order to do that, in order to qualify for that treatment, you need to meet the normal capital gains clock that you're thinking of holding the shares for uh for over a year, but you also need to meet a two-year holding date from the grant date. Generally, vesting schedules solve for this. I don't see this commonly being a thing, but I like people to be aware just so that they don't miss that one. You asked about AMT as well. There can be a scenario where when you exercise your options, that becomes a taxable event as well. I think the way ISOs get branded is that they're not, it's not a taxable event when you when you exercise your options, but it can be if you are an AMT taxpayer. The first question I always get is, well, how do I know if I'm an AMT taxpayer? And unfortunately, it's not, it's not super straightforward. It's not just as simple as if you make above or below a certain amount, then that determines it. There are a lot of numbers that go into that calculation. And the exercise of incentive stock options is one of the line items in that calculation. So if you are an AMT taxpayer, you will have to include this in part of that calculation. It's important to understand that just exercising the options can make the difference from can trigger you becoming an AMT taxpayer. Now, I don't want to scare people. That doesn't mean that you shouldn't exercise your options or that it's anything to necessarily be afraid of. I just don't like people to be surprised because I've seen that surprise bill come in where people actually have to take out a loan. Because remember, you can't turn around and sell your shares for cash yet to help you pay that tax bill.

SPEAKER_01:

Yeah. And so one of the last questions that I want to ask you, because you've talked a lot about now vesting schedules and uh tax, but outside of the basic ISO sort of timelines, what's one planning or record-keeping mistake that you see employees make that ends up costing real money uh later or down the line?

SPEAKER_00:

And keep any records that you can. It is so important that to keep track of any transactions when you do exercise. I would keep track of the date that you exercise and the amount that you paid. Those two pieces of information will be so critical when you go to file your return, maybe years from now, potentially, whenever you sell your shares. And because this is a unique instrument, it's a private company, every company manages it a bit differently, and there's multiple platforms and service providers involved, it's so error prone and information just doesn't flow through that whole process as smoothly as you might like. So I see a lot of employees, when they finally sell their shares, they hand their tax form to their accountant. And the tax form almost always either is missing a date, it doesn't have any basis, which means you will end up paying more tax than you actually owe. So keep those two pieces of information.

SPEAKER_01:

Well, great, great Caitlin. And I just want to offer you one last question, but before we do, I want to say that I hope that you're going to come back on this show again. But for anyone who wants to contact you right away and before then, and for anyone who's watching who wants to learn more about uh what you have to offer here, where's the best place for them to go to contact you?

SPEAKER_00:

Please find me, connect with me on LinkedIn. You can also find me on YouTube or Instagram at Caitlin M. Walsh.

SPEAKER_01:

Well, Caitlin, thanks so much for walking us through that. And thanks to everyone for watching. Be sure to like, follow, and subscribe for more episodes of League Leg Live.

SPEAKER_00:

Thanks so much, Melanie.

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Michael A. Gayed, CFA

Host