Spotify

Guide to Your Equity Grants & Benefits Election

Several of our earliest financial planning clients were Spotify employees fresh off their direct listing in early 2018. We’ve picked up a few tips and tricks about their benefits and the nuances of their equity compensation plans over the years and compiled them here!

Spotify offers a comprehensive benefits plan to employees - and it’s once again time to make your annual open enrollment elections. Making educated choices this open enrollment can save you money and help you navigate whatever challenges lie ahead next year. We’ve put together this guide to help as you make these choices - feel free to share it with your colleagues and friends who may find it helpful.

While not specifically chosen at the time of your benefits election, we also included information on your unique equity compensation plans as it’s something most Spotify employees must navigate!

Please note that benefits are subject to change at any time.

In this guide:

  • Your Spotify Equity Compensation

  • Health Insurance

  • Dependent Care Benefits

  • Dental

  • Vision

  • Life Insurance

  • Disability Insurance

  • Retirement Planning

  • Legal Plan

Your Spotify Equity Compensation

Spotify offers a flexible approach to equity grants, offering you important choices that can significantly impact your financial situation.

Your Equity Compensation Options

4 Choices to Mix & Match

Choose between a mix of cash, restricted stock units, at-the-money NQSOs, and out-of-the-money NQSOs.

Spotify provides four main options for equity compensation:

  1. Cash

  2. Restricted Stock Units (RSUs)

  3. At-the-money Non-Qualified Stock Options

  4. Out-of-the-money Non-Qualified Stock Options

The Way it Works:

Think of it like a buffet where you get just one plate, and you have four food options. Steak, salad, green beans, and mac&cheese. You can decide how to fill the plate how you want…but what you choose and the amount will have consequences. Whether you want the short-term enjoyment of large portions of steak & mac&cheese or the long-term payoff of salad & green beans is up to you.

1. Cash Considerations

This option allows you to choose a combination of cash and RSUs:

  • You can mix & match cash with the other 3 choices.

  • Cash vests over a four-year period (like RSUs below).

  • Cash provides certainty. But if Spotify’s stock does well, you may be missing out on the potential upside with RSUs or NQSOs.

2. Restricted Stock Units (RSUs)

  • You can mix & match RSUs with the other 3 choices.

  • RSUs are essentially a bonus with extra steps - they have value even if the stock price doesn't increase.

  • Just like cash, RSUs vest over a four-year period.

  • RSUs offer potential upside if Spotify's stock performs well, but may be worth less than cash if Spotify declines from when you get your grant.

3. At the Money Non-Qualified Stock Options (NQSOs)

  • NQSOs give you the right to purchase Spotify stock at a predetermined price.

  • At the Money Options have a price close to Spotify’s share price at the time of your grant.

  • The stock price must appreciate for these options to have value.

  • There's typically a cost associated with exercising NQSOs

    • Paying for the shares

    • Covering the taxes on exercise

  • You can choose options that are at-the-money or out-of-the-money.

  • If Spotify declines in value, these options won’t be worth anything.

  • At the Money Options are riskier than RSUs because there’s a chance they aren’t worth anything if the price declines, while RSUs will be worth something as long as Spotify is trading above $0/sh.

4. Out of the Money Non-Qualified Stock Options (NQSOs)

  • NQSOs give you the right to purchase Spotify stock at a predetermined price.

  • Out of the Money Options have a price higher than Spotify’s share price at the time of your grant.

  • There's typically a cost associated with exercising NQSOs

    • Paying for the shares

    • Covering the taxes on exercise

  • If Spotify stock does not materially appreciate in value, these options won’t be worth anything.

  • Out of the Money Options are riskier than At the Money Options because they require significant increases in Spotify’s share price to be worth anything.

What to do? Our Most Common Strategy:

At BKFi, we often encourage a Cash/RSU mix for most Spotify employees. Here's why:

  1. Higher Likelihood of Value: Unlike NQSOs, RSUs have value even if Spotify's stock price doesn't increase.

  2. Simplicity: RSUs are straightforward - they convert to shares upon vesting.

  3. Lower Risk: The cash component provides more certainty around your cash flow, balancing the potential volatility of RSUs.

  4. Tax Efficiency: Both cash and RSUs are taxed as ordinary income upon vesting, simplifying tax planning.

However, the best choice depends on your individual financial situation, risk tolerance, and career goals. We're here to help you navigate this decision and optimize your equity compensation strategy.

Some important considerations:

  • Your vesting schedule: Both options vest over four years. Consider your long-term plans with Spotify.

  • Market volatility: Whenever RSU’s or NQSO’s are involved, it’s important to expect the normal market fluctuations.

  • Tax implications: Both cash & RSUs are taxed as ordinary income upon vesting, and NQOs are taxed as ordinary income at exercise. We typically recommend selling RSUs immediately upon vesting to manage tax liability.

  • Risk Tolerance: NQSOs can provide more upside potential than RSUs, but are also much more likely to be worthless.

  • Diversification: Consider how this equity fits into your overall investment portfolio.

This decision can be tricky to navigate, whether you're a new hire facing this choice for the first time, or a long-time employee receiving a new grant. Consider reaching out & booking a call with us if you would like some guidance in how to best optimize for your situation.

Health Insurance

Spotify offers 3 different health insurance plans - a PPO (‘High Plan’), an EPO (‘Low Plan’), and an HSA compatible High Deductible Health Plan (HDHP). Learn what these common terms mean here.

The HDHP, like its name, has a higher deductible - $2,000 for individuals and $4,000 for families for in-network coverage. This means that aside from preventative care, the expenses are out-of-pocket until you reach your deductible.

This plan is also compatible with a Health Savings Account (HSA). That’s a special account for medical expenses that you can contribute to on a pre-tax basis (payroll deduction), and withdrawal from tax-free for medical costs. And, Spotify contributes $1000 for individuals and $2,000 for families! There’s no monthly premium for the High Deductible plan.

The PPO plan is different, visits to in-network providers like your physician or a specialist, or a trip to the ER are covered by a co-pay - often $15 for your family doctor or $25 for specialists. And there is no deductible for in-network coverage. Participating in the PPO plan will not allow HSA contributions, but it will allow you to save to Healthcare Flexible Spending Account on a pre-tax basis. The PPO plan has a monthly premium that comes out of your paycheck.

Finally, the EPO plan also boasts no monthly premium. There’s no deductible for in-network care, and co-pays for physician and specialist visits are comparable to the PPO plan. Unlike the PPO, the EPO will not provide out-of-network coverage.

Which plan you choose depends on a variety of factors: how often you anticipate using your insurance, cash flow needs, and tax considerations.

If you rarely go to the doctor aside from an annual physical, and don’t take prescription drugs, the HDHP may make sense - and allow you to stash away savings tax-free for medical costs later in life. Likewise the EPO plan is also quite affordable if you only go to doctor’s in-network.

However, if you want to know that a few trips to a specialist that’s out-of-network the PPO plan will provide you with maximum flexibility.

BKFi Tip: Consider electing the HSA plan, maxing it out every year, and paying for your expenses out of other savings to maximize the tax-free growth of the HSA!

DEPENDENT CARE BENEFITS

Spotify provides a Dependent Care FSA as well. This allows pre-tax funds to be set aside for childcare expenses - up to $5,000/year. If you have kids in daycare, or after-school care, this can save you some money in taxes.

BKFi Tip: Both Dependent Care and Healthcare FSAs are ‘use it or lose it’ meaning the contributions must be spent before December 31st or they’ll be forfeited to your employer.

DENTAL

Spotify pays 100% of the premium cost for their Two Standard Dental Plans - a PPO and a Dental HMO, with an option to upgrade for Buy-up coverage. Consider choosing the Buy-up plan if you anticipate orthodontic care needs for your family, or high out-of-pocket dental expenses in the upcoming year.

VISION

Spotify pays the bulk of the premiums for Vision coverage, which partially covers exams, lenses, and frames once per year.

BKFi Tip: Out of pocket expenses for Vision and Dental are covered by your FSA - keep your receipt and get reimbursed tax-free.

LIFE INSURANCE

As part of your robust benefits plan, Spotify provides 3x your annual salary in life insurance - up to $500,000. You can purchase additional coverage of up-to $500,000 of supplemental life insurance. Spousal and dependent voluntary life insurance is also available.

BKFi Tip: Diversification matters. No, we aren’t talking about investments, we’re talking about life insurance. If you need life insurance, be sure not to link all of it to your employer’s coverage. Consider getting your own policy that you can keep even if you leave your job.

Bonus BKFi Tip: Don’t forget to name a beneficiary when setting up your employer-sponsored life insurance coverage. Make sure the funds go where you want them, should something happen to you.

DISABILITY INSURANCE

Spotify provides both short-term and long-term disability coverage. Short-term coverage starts after a 8-day waiting period, covering 26 weeks at 67% of your weekly salary - up-to $2,000 per week. Long-term disability kicks in after 180 days (when short-term runs out) and pays 60% of your base salary up-to $15,000 per month. Long-term coverage stops paying when you’re no longer disabled, or reach retirement age.

BKFi Tip: When your employer pays the premiums for disability insurance, the benefits are taxable to you when you receive them. Consider what 60% of your pay is, and then imagine income taxes coming out of that - that’s what your take home would be under a long-term disability plan.

RETIREMENT PLANNING

Spotify’s retirement plan is administered by Vanguard and does offer a company match. Spotify matches 50% of the first 6% you contribute - essentially a 3% match. The plan allows for both pre-tax and Roth contributions, up to a maximum of $23,000. Employees age 50 or older can make a catch-up contribution of up-to $7,500 annually.

BKFi Tip: Have you maxed out your 401(k) for this year? If not, there’s still time to go in and update your contributions.

Bonus BKFi Tip: Spotify’s 401(k) plan allows you to make after-tax contributions above the annual limits outlined above. These contributions can then be rolled over to a Roth IRA where they grow tax-free. Boom - the Mega Backdoor Roth!

LEGAL PLAN

By enrolling in the legal plan, you can access a nationwide network of attorneys for a range of legal issues and chat with an attorney on the phone or in-office.

BKFi Tip: Starting a family? Buying a home? You’ll likely need an attorney to draft estate planning documents or review your real estate contract. Legal plans like these often provide this service at little additional cost.

Your Next Steps

As a full-service tax, investment, and financial planning firm, we’re a great fit for many Spotify employees.

As Anna, an NYC Spotify employee puts it, “Going into it, I had no idea if working with BKFi was going to be worth it. My answer to that within 3 months was this is the most worth it thing I’ve done in my entire life.*”

Check out our discovery process & book a call with us here.



*Disclosure: This testimonial was given by a current client of BKFi. No compensation was provided for the testimonial. There is no guarantee another individual’s experience will be representative of the individual providing this testimonial and no guarantees of performance or success are offered.