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Perhaps you’ve been offered a job package with a combination of salary, benefits, and stock options. But you’re trying to decide if you should take those employee stock options and you’re wondering how do options work anyway? Is it worth taking a lower salary offer in exchange for stock options?

The answer depends on a number of things. You certainly want your base salary to cover your expenses, but stock options could give you a sense of ownership (and, to a degree, actual ownership) in the company you work for.

Employee stock options also have the potential to make you some extra money, depending on the market, which might be a nice perk. Before you decide if you want to take the stock options, you might want to understand how options work.

What Are Employee Stock Options?

Employee stock options give an employee the chance to purchase a set number of shares in the company at a set price—often called the exercise price—over a set amount of time. Typically, the exercise price is a way to lock in a lower price for the stock.

This gives you the chance to exercise your options at a point when the exercise price is lower than the market price. You may be able to then make a profit on the shares, but just because you have the stock options doesn’t mean you necessarily want to exercise your options.

When talking about stock options, there are some terms to know in order to understand how options work.

•   Grant price/exercise price/strike price: This is the given set price that you can purchase the stock options for
•   Market price: This is the current price of the stock on the market (which can be lower or higher than the grant price you would pay, though typically you would only choose to exercise and purchase the options if the market price is higher than the grant price)
•   Issue date: The date you’re given the options
•   Vesting date: The date after which you can exercise your options per the original terms
•   Exercise date: This is the date you actually choose to exercise your options
•   Expiration date: You have until this date to exercise your options or they expire

That might seem a little bit complicated, but employee stock options don’t have to be confusing. They’re a way for companies to offer an incentive for employees to help strengthen the company: better company, higher stock prices.

How Do Options Work?

When you’re given stock options, that means you have the option or right to buy stock in the company at the established grant price. You don’t have to exercise options, but you can if it makes sense.

Exercising your options means choosing to actually purchase the stock at the given grant price, after a given waiting period. If you don’t purchase the stock, then the option will eventually expire.

For example, let’s imagine you were issued employee stock options on Jan. 1 of this year with these terms: the option of buying 100 shares of the company at $10/share; you can exercise this option starting on Jan. 1, 2021 (the vesting date) for 10 years, so until Jan. 1, 2031.

If you choose not to exercise these options by Jan. 1, 2031, then they would expire and you would no longer have the chance to buy stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested on Jan. 1, 2021, and you decide at that point to exercise your options.

This means you decide to buy 100 shares at $10/share for $1,000 total, but the market value of those shares is actually $2,000.

There are multiple ways to exercise your options in this scenario. You could just buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company.

Another way is to do a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase. (In this scenario, for example, you would sell off 50 of the shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares.) Most brokerages will do this buying and selling simultaneously.

The third way to exercise options only works if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the grant price.
For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the grant price, known as your options being “in the money,” you may be able to gain value for those shares because they’re worth more than you pay for them.

That doesn’t mean you have to exercise your options or that it necessarily makes sense for you. That depends on your financial situation, the forecasted value of the company, and what you plan to do with the shares after you purchase them.

Typically, employee stock options come with a vesting period, which is basically a waiting period after which you can exercise them. This means you must stay at the company a certain amount of time before you can cash out.

The stock options you’re offered may be fully vested at a certain date or just partially vested over multiple years, meaning some of the options can be exercised at one date and more at a later date.

Why Do Companies Offer Stock Options?

Employee Stock Ownership Plans were established by Congress in 1974, though the idea of profit-sharing has certainly gone back further than that. In many ways, the notion is simple: If employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well and it can increase employee productivity.

From an employee’s point-of-view, stock options offer a way to share in the financial benefit of their own hard work. In theory, if the company is successful, then the market stock price will rise and your stock options will be worth more.

A stock is simply a fractional share of ownership in a company, which can be bought or sold or traded on a market. The financial prospects of the company influence whether people want to buy or sell shares in that company, but there are a number of factors that can affect the price of a stock.

That means there’s no guarantee the stock price will rise if your company is successful. However, one survey from Deloitte found that 69% of people believed employee stock options both increased the ability to attract, recruit, and retain talent, and also more closely aligned the interests of the employees with those of the shareholders.

While stock options were traditionally offered to higher level executives as an incentive, broad-based employee stock options took off during the 1980s and ’90s. According to the Employee Ownership Foundation , at its peak, about 30% of private sector employees have some form of stock options.

The Different Types of Stock Options

There are two main kinds of employee stock options: qualified and non-qualified. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

The main differences center around taxes. When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options—unless you’re subject to an alternative minimum tax.

Taxes are then due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you should only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright, so it would likely behoove you to hold on to the shares for at least one year after exercise and two years after your grant date.

NSOs, on the other hand, do not qualify for preferential tax treatment, so exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so you might want to consult a tax advisor.

Should You Exercise Options?

A good first step might be to determine if and when you can exercise options. Vested options are stock options that have hit their vesting date after a waiting period and you can now choose to exercise them, i.e., purchase the shares at the exercise price.

It can be difficult to know if you should exercise options, because it’s hard to know if the market price of the shares is going to go up or down in the future.

Some people wait until right before the expiration date of the options, but you can choose to exercise your stock options at any point after the vesting date and before the expiration date.

There are a number of things you might want to weigh when deciding if you should exercise options: the tax implications and type of option, the financial prospects of the company, and your own portfolio. You also might want to consider how many shares are being sold in the company.

For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

How many shares are being made available, to whom, and on what timeline are factors you could consider when weighing what stock options are worth as part of a job offer.

To Keep or to Sell?

The other thing you may want to consider once you exercise your stock options is whether to keep or sell the shares you’ve purchased. Some companies also have specifications about when the shares can be sold, because they don’t want you to just exercise your options and then sell off all your stock in the company immediately.

But you also probably want to consider how the stock fits into your overall financial portfolio. If you have a lot of stock in one company, if that stock goes up or down, it could have an impact on your financial well-being.

That might be magnified if the company you work for takes a big hit and has layoffs at the same time—you could find yourself both without a job and with company stock options that aren’t worth as much as they once were.

Diversifying Your Portfolio

Instead of holding onto the stock, another thing you could consider is selling the options at a higher market price than you paid for them and then using the cash to diversify your portfolio.

Diversifying your portfolio across a number of companies and industries could help spread out the profit potential and risk. There could be tax implications, though, if you sell too much stock at once, and you may want to consult a tax accountant.

If you do choose to sell your stock options and are considering investing the money in a diversified portfolio, then SoFi Invest® can help you develop a portfolio strategy that works for your financial goals.

SoFi Invest offers both active and automated investing, letting you build a diversified portfolio based on your risk tolerance and financial goals—with zero transaction or management fees. Get started today!

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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

SOIN19125

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When you get a job offer, your benefits package may include more than just your salary, healthcare, and vacation time. In addition to all that—and maybe some work-from-home allowances—you may also be offered an employee stock plan.

Two of the most common offers, employee stock options (ESOs) and restricted stock units (RSUs), both give you the chance to eventually become a shareholder in your company.

Sometimes, an employee stock plan is offered to everyone as a companywide benefit. Other times, it’s a custom plan that’s baked into an executive job offer as either a recruitment and retention incentive, a way to cover the lack of cash flow in a startup, or both.

And sometimes, you get a choice between ESOs and RSUs. Having the option to own stock in your employer could provide some big financial benefits—especially if you believe in the company and its future.

But it also comes with some risk. Understanding which stock plan is better for you, how it works, and how it could affect your taxes could make you run to a financial advisor for help—or just run away.

A recent survey discovered that around 36% of employees (about 32 million Americans) who work for stock-issuing companies hold shares or options. But ignoring the benefit just because it seems out of reach could equal leaving money on the table. This guide could help you break down your options and decide whether it’s right for you.

First, a Stock Market Appetizer: Alphabet Soup

Navigating your employee stock plans can include a lot of acronyms, words that mean something entirely different anywhere else, or multiple words that mean the same thing.

And one of the keys to confidence could simply be understanding what the heck the document from HR says. In addition, having a grasp of stock-market vocabulary might help you decipher quickly what your employer is offering, the terms and restrictions, and whether it’s a good deal.

What’s a Stock Option, Anyway?

“How do stock options work?” is an easier question to answer once you have a good idea of what a stock option is. The answer is pretty straightforward—it’s an option to buy shares in the future for a price set today. The “option” part means you can buy the stock later if it suits you, but you aren’t obligated.

Unlike an outright stock purchase, an option doesn’t give you actual shares until you decide to buy them, which is called exercising. Another difference from a traditional stock purchase is that options become null and void if you don’t exercise your stock options before the expiration date.

If the company stock has floundered over the years and not produced a return, you can just walk away and the option ceases to exist. But here’s a spoiler alert: If you let your employee stock options expire when the stock price has gone up, you could be leaving thousands of dollars on the table.

The Grant/Strike/Exercise Price

See? Three different words for the same term: the price at which your plan says you can purchase company stock. It’s most often based on the stock’s current market value and is extremely important because it determines whether your options end up winners or losers.

If your strike price is 1,000 shares at $1 per share, for example, that’s what you’ll pay for those shares if you decide to exercise, regardless of their current market price.

When the stock is currently trading above the strike price, it’s called being “in the money” and the profits can be huge.

Conversely, if the stock’s market price falls below the strike price, your options are considered “underwater” or “out of the money” and don’t hold any value. In that situation, it may be cheaper to buy your company’s stock on the open market.

Privately Held, Publicly Traded, and Going Public

If a company is considered public, it’s registered with the Securities and Exchange Commission (SEC) and is approved to offer shares to the public on an exchange. Exercising your options at a public company means you can then trade your shares on the open market.

Many private companies also offer stock options—especially if they’re a startup looking to grow capital. (Check out this interesting case study .)

But because a private company hasn’t gone through the SEC registration process, shares can only be sold privately unless the business “goes public.”

That’s the common term for an initial public offering (IPO), or a private company’s transition to the public market. If you go through an IPO as a private stock options holder, you’ll be allowed to sell your shares on the stock exchange. The rules on pre-IPO stock can be pretty stringent, though.

ESOs: The Grant, the Cliff, the Vest, and the Exercise

Lesson two: How do stock options work? This is where the process, the timeline, and all the rules and regulations that come with options come into play. It’s also where you might start to get a clearer picture of your own situation.

For the most part, ESOs operate via a four-step process.

First, the grant: The grant date is the official start date of an ESO contract. You receive official information on how many shares you’ll be issued, the strike price for those shares, the vesting schedule, and any requirements that must be met along the way.

But typically, all that happens on the grant date is you get some paperwork and the clock starts ticking.

In order to start claiming your stocks, you may first need to survive the cliff.

The cliff: If a compensation package includes ESOs, it doesn’t necessarily mean that they’re available on day one. Contracts often contain a number of requirements that must be met first, such as working full time for at least a year.

Those 12 months, when you’re working but not yet eligible for stock options, is called the cliff.
If you remain an employee past the cliff date (without jumping), you get to level up to the vest.

Next, the vest: It’s not some exclusive company uniform that’s only available to stockholders (although that might be kind of cool.) When you pass your cliff date, your vesting period begins, which means you start to take ownership of your options and the right to exercise them.

Vesting can either be a slow burn over several years or an all-at-once proposition, depending on your company’s plan. One common vesting schedule is a one-year cliff followed by a four-year vest.

On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested. (But still no sweet wardrobe, sadly.)

Finally, the exercise: This is when you pull the financial trigger and actually purchase some or all of your vested shares.

Here are some common exercise options for your options.

•   You can buy the stock outright, but it might require a hefty chunk of change up front. For example, 10,000 shares at $2 each is a cool $20,000. One advantage to this exercise, however, is that you hold all the stock and are free to do with it as you please on the open market.
•   If you don’t have that kind of cash, you can buy and sell all your stock in one breath with something called an exercise-and-sell transaction. In this scenario, your broker essentially lends you the cash to exercise your options, then pays itself back with a portion of the sale profits.
•   Another option is to buy all your shares, sell just enough to cover the cost (according to the example above, $20,000 worth), and hold the rest. This is called an exercise-and-sell-to-cover transaction.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in a contract.

The Pros and Cons of Exercising Employee Stock Options

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could lead to instant, huge gains.

Especially if, for example, your strike price is $30 per share and now the stock is trading at $100 or more per share. On the other hand, if your strike price is $30 per share and the company is tanking, your options are basically worthless.

But perhaps the biggest downside that comes with exercising employee stock options is now much Uncle Sam can take.

How Can Employee Stock Options Affect Taxes?

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs) and incentive stock options (ISOs). NSOs are the most common and often the type offered to the general workforce.

The difference between the strike price and the stock’s value when you exercise your options is considered earned income and added to your W-2, where it’s taxed just like your salary.

Any money you make above and beyond that if you sell your shares later can also be subject to the capital gains tax, which is imposed on profits earned from selling certain types of assets, such as real estate, stocks, or a business.

The capital gains tax doesn’t kick in if you simply own these assets, but it can really bite you if you make money on selling them.

In fact, it could be one reason less than a quarter of workers who were offered equity compensation actually exercised their options or sold their shares.

Here’s how it works: If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

For assets held longer than a year, the long-term rate can be 0%, 15%, or 20%, depending on your taxable income and filing status.

ISOs, the second kind of popular stock options, are usually reserved for high-ranking company executives and come with a big tax advantage: They can be exercised in the money without having to pay income tax on the profit. In fact, employees don’t even have to report it as income.

Hold those shares for a year or longer, and you’ll only be held liable for the long-term capital gains tax. But before you get all excited, we need to discuss the alternative minimum tax (AMT).

While ISOs aren’t taxed as income, they could be subject to AMT, which was created to get at least some taxes out of high-income individuals and corporations that otherwise manage to avoid them.

The AMT can be an extremely complicated subject. There are ways to avoid the AMT, but you should consult a tax professional to help guide you through all the rules and regulations that apply.

What Are Restricted Stock Units (RSUs) and How Do They Work?

Restricted Stock Units are also a form of equity compensation, but they are quite different in how they’re granted, vested, and regulated.

RSUs aren’t stock. They aren’t options. They’re something in between—a promise of stock at a later date. When employees are granted RSUs, the company holds onto them until they’re fully vested.

And what determines vestment is entirely up to the company. It can be a time period of several years, a key revenue milestone, or even personal performance goals. To add another layer of complexity, RSUs can vest gradually or all at once.

Another difference is how they’re valued—instead of a strike price, RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. This means that you don’t have to worry about falling out of the money.

As long as the company’s common stock holds value, so do your RSUs. One final difference between RSUs and ESOs is that you may be able to settle your RSUs in two ways—in actual shares or the cash equivalent.

The Pros and Cons of RSUs

One good thing about RSUs is the incentive they can provide to stay with the company for a longer period of time. If your company grows during your vesting period, you could be very far in the money when your settlement date rolls around.

But even if the stock falls to a penny per share, they’re still awarded to you on your settlement date, and they’re still worth more than the $0 you paid for them.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

An RSU’s lack of a strike price is sometimes referred to as downside protection. But there’s another big downside to this type of compensation that might sound familiar.

Taxes.

How Can RSUs Impact Taxes?

RSU tax rules are quite different from ESO’s, and understanding these differences can be key for not only deciding which type of compensation is better for you, but how to plan your taxes effectively.

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W2.

Another aspect to keep an eye on with taxing RSUs as income is whether the amount will bump you up a tax bracket (or two.) If you’ve only been withholding at your lower tax bracket before your vesting period, you could owe the IRS even more.

And finally, if you accept shares vs. the cash equivalent, you’ll then be subject to capital gains taxes if you sell them for a profit at a later date.

One bit of good news is that, as part of the 2017 Tax Cuts and Jobs Act , some private companies may offer deferment of income taxes on both stock options and RSUs for up to five years.

I’m Fully Vested! Now What?

So you’ve done your time, your company stock offerings have vested, and now they’re making money. What’s next? Do you immediately exercise your options, take the money and run, or let it ride in hopes of even further growth?

One school of thought is to sell your shares on the same day you receive them. If they are RSUs, you’ll still be subject to income tax but may avoid capital gains.

Another approach is to lay out your optimal timeline for cashing out. For example, there are several ways to offset your capital gains tax if you time the sale of your shares with either capital losses or other tax deductions. This is sometimes referred to as tax-loss harvesting.

While RSUs automatically convert to shares on the settlement date, you can hang onto your ESOs for longer if you feel like the company’s stock price is doing well.

And, because you don’t have to pay income taxes on ESOs until they become shares, holding onto them could also delay that payment.

There are several risks with this strategy though, including forgetting the expiration date and forfeiting all your options, or watching the company stock take a turn for the worse and dip below your strike price.

It’s a lot to consider. And for some, it may seem like more trouble than it’s worth. A recent study revealed that, of 1,000 employees who received equity compensation, less than a quarter of them have exercised their options or sold shares.

The driving factor for many of them? Fear of making a mistake, either by selling under the wrong market conditions or ending up with a huge tax bill.

If these fears are rolling around in your mind as well, the best course of action might be to consult a financial professional who might help you get the best return on your equity.

And if you want some guidance without paying exorbitant fees, you could consider opening a SoFi automated investing account. SoFi offers competitive wealth management with low cost funds, no administrative fees, low account minimums, and extensive access to a team of credentialed financial advisors.

Diversification May Bring Confidence

No one can predict the future, and nothing is a sure bet—just ask the folks who worked at Enron. Because of this, many financial advisers recommend that no single stock should represent more than 10% to 15% of your portfolio, and some cap it at only 5%.

Going above that, especially with your company stock, could put you at risk for the double whammy of losing both your salary and your stock if the business goes belly up or gets racked by scandal.

One good way to avoid the pitfalls of putting all your eggs in one basket is to buy more baskets. Portfolio diversification means distributing your money across areas that aren’t likely to respond to financial happenings in the same way. And while it won’t completely erase vulnerability, it can go a long way to reducing it.

Investing in ETFs with SoFi Invest® could potentially help diversify your portfolio by investing online in a variety of stocks for a fraction of the cost.

Start diversifying your portfolio with SoFi Invest today for no fees, the chance to trade actively or automatically, and access to financial advice on the house.

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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

SOIN19122

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If a waitress declared she was thinking about a career change, her friends and family probably wouldn’t raise an eyebrow. But a lawyer?

After years of law school, internships, landing a job at a law firm and climbing the ladder there, a lawyer who wants to call it quits likely would get a few questions.

As in, “Are you crazy?”

Or, “What the heck will you do instead?”

And, of course, “How on earth will you ever be able to pay off your student loan debt?”

But a juris doctorate degree isn’t a ball and chain, and just like workers in other careers, lawyers can sometimes decide to move on to something else.

Fortunately, pivoting after law school may be easier than it used to be, and there are some great alternative careers for lawyers out there—if you know where to look and how to position yourself.

Reasons Lawyers Might Consider Making a Career Switch

It might seem shocking that a lawyer would want to make a career change, after all they’ve spent years studying and preparing for this career, but it’s not all that uncommon. Television and film can make it seem like practicing law is a thrilling blend of opening and closing arguments and life-changing verdicts passed down by the jury, but there are plenty of mundane tasks in the mix.

In some cases, legal work can be relatively dull. Instead of high stakes court cases, it can be a lot of reading, research, and paperwork. Sometimes the work can be isolating as a lot of time is spent thinking of ideas and writing alone.

Beyond that, lawyers can face a ton of pressure at work, which can lead to a stressful day-to-day work environment. Lawyers have a lot on their plates: tracking deadlines, handling client demands, staying on the partner track, keeping up with the changing laws and regulations, and more.

Not only can the stress of the job be exhausting, especially at “big law” firms, getting the job done can require long hours—no matter the firm. Combine that with the fact that oftentimes a lawyer’s schedule is out of their control, dictated by the courts or bosses at a firm, it’s no wonder some lawyers are interested in looking for another career path.

As an editorial from The Young Lawyer Editorial Board for The American Lawyer points out, many employers have expectations for their workers and a method for tracking how they’re doing. It might be a sales goal that’s been set at a car dealer, a punch clock for line workers, or a certain number of clicks for an online content provider.

At most law firms, that measure is billable hours. Not how many hours the lawyers actually work, and not the quality of the work, but how many hours they can bill to a client.

“Used appropriately, billable hour standards can set clear expectations for lawyers and supply a dose of objectivity to measuring their contributions, ensuring that comparable work receives comparable reward,” the editorial board writes. “For instance, a lawyer who has had an extraordinarily busy period of firm or client work should be recognized and compensated accordingly.

“But there can be pitfalls. The legal profession is rife with examples of billable hour requirements gone bad. Too common are the stories of law firms with a published hours ­requirement, and then a de facto set of often much higher hourly expectations to advance or demonstrate commitment.”

In a stressful, highly competitive environment, the editorial continues, “Lawyers burn out, retention suffers, and work quality suffers.”

All worth it if the pay is great, right? Except the U.S. Bureau of Labor Statistics reports the 2018 median pay for a lawyer as $120,910 per year—which means half of the lawyers out there are making less than that.

And some are making far less—including contract lawyers that firms are increasingly hiring to perform the same functions as an associate, but without the expensive commitment.

The truth is, many law school graduates could be making a decent living and enjoying themselves more in a different profession.

So How Can You Prepare Your Exit Strategy?

Leaving a career as a lawyer can be a huge decision. If you’re considering making a career switch you might want to think about preparing an exit strategy. Here are some ideas for planning ahead as you think about making the jump from lawyer to the new career of your choice.

Aggressively Paying Off Student Loan Debt

Having a ton of debt hanging over your head might limit your options. Refinancing student loans could be a good choice for those who have higher interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans. (Federal loans carry some special benefits that are not accessible
if you refinance into a private loan—such as student loan forgiveness and forbearance—so be sure you know what you’ll lose.)

If you have solid credit and a good job (among other factors), you may qualify for a better interest rate and/or terms with a private lender that can help you get out from under that student debt faster. And some private lenders, including SoFi, consolidate and refinance both your federal and private loans into one new loan with one manageable payment.

SoFi also offers other benefits to its members, including career coaching that could help you transition to your next job. There are a few things you can do outside of refinancing to help you be better equipped to move on when and if you wish—or when something better comes along.

Creating a Budget and an Emergency Fund

Lawyers tend to make decent money right out of the gate (the problem comes later when income can start to stagnate), so it may be wise to avoid spending those years letting your lifestyle rise to the level of your income.

If you haven’t already, two ideas for that relatively high-earning time is to start building an emergency fund and putting together a reasonable budget. If you think your salary will take a hit should you leave the law, you can make it a goal to cut some costs now, before you make your move.

Using Your Time as a Lawyer to Make Connections

Building professional relationships and keeping them going could pay off when you start putting out feelers. Be professional, respectful, and if you decide to ask someone for help, be clear about what you want—advice, an introduction, or a job.

Planning Ahead

Try moving your focus from what you don’t like about your current job to how you might transfer your knowledge, skills, and passion to a new career. Lawyers can make good researchers and investigators, compliance professionals, business analysts, executives, and entrepreneurs. Some go into law enforcement. Many end up in the media or communications.

Can You Have a Non-Legal Job With a Law Degree?

Absolutely. Employers typically know that a law degree can speak volumes about intelligence and work ethic. It’s likely assumed you must be analytical, organized, and good at project management. Plus, you’re aware of the potential legal ramifications of business decisions, which can be really helpful to a company.

Probably the biggest hurdle for most people is simply giving up the dream of being an attorney. But if you can open your mind and look at all the other options, you may find something that makes you just as happy—if not more so.

Want to get your student debt under control so you can more easily move on to your dream job? Check out SoFi to see how refinancing your student loans can help.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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