We all like hearing that we’re good at our jobs. It’s nice when kudos from your employer come bundled with dollar signs. At times, a company may value you so much that it offers you a piece of the pie in the form of equity compensation.

A small slice of equity compensation can give you a meaningful boost in your income. A bigger slice might offer a more significant—maybe even life-changing—financial windfall. Or not. Luck plays an important role. But it’s also important to manage your equity compensation by balancing its potential risks and rewards. Understanding the details of your equity stake and how it fits in with your overall financial plan can help you make the most of this added compensation. Moreover, doing so can help you avoid dangers such as concentration risk—the risk that too much of your wealth is tied up in a single stock.

Equity Compensation Basics

Equity compensation can come in lots of different forms. You might receive stock options, restricted stock units, or the ability to participate in an employee stock purchase plan. Your equity package might come with a vesting schedule, which determines how quickly you can take ownership of your shares. These vesting schedules accomplish an important goal for companies: They help keep you around longer.

Each part of your equity compensation package—from vesting rules to the types of shares you might receive—comes with a slew of caveats and fine print that are important to understand. For instance, your stock options might come with an expiration date for exercising those shares. If you miss that date, you may miss out on the opportunity to acquire company stock at a deep discount. (If the share price fails to rise to the occasion, with no discount available, you may intentionally let them expire unexercised.) There also are tax implications for your equity compensation: Understanding the ins and outs of your agreement can help you manage your tax burden and let you keep more of the equity you’ve worked so hard for.

As the Dow Jones Industrial Average reached 40,000 on May 16, 2024, I found myself reflecting on my career and what I’ve witnessed in the U.S. stock market over the last twenty plus years.

Note: The “Dow” or Dow Jones Industrial Average is an index comprised of 30 of the largest companies in the United States stock market (such as McDonalds, Apple, and 3M).

As one of the oldest market indices, the “Dow” is often used as a proxy for how the stock market is performing.

While we believe broad diversification is prudent for investors (and that’s a whole topic itself), I’ll be focusing on the U.S. stock market here.

I began my career at Piper Jaffray in early 2000. I had just finished an MBA from the University of St. Thomas and the investment world intrigued me. Over the last several years, the markets had gone through an explosive rally, driven by the promise of the internet. Technologies were seeing their stock prices skyrocket and it seemed like everybody was jumping on board. What an exciting time to start a career in the financial world!

In one of my prior blogs entitled “Would you have fired Warren Buffett?” I discussed how Buffett underperformed during this time with some investors questioning if he was too old fashioned. Some went so far as to fire him as their investment manager.

Unfortunately, my hiring coincided with the end of the party. In what’s become known as the “tech bubble,” stocks cratered and the tech-focused NASDAQ index fell 78%. That was my first lesson in the risk of failing to diversify and chasing past returns. When a certain investment or sector gets hot, I’ve seen that play repeat itself over the years in things like individual stocks, real estate, and cryptocurrency.