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Welcome to the 55th edition of the Tech Financial Planning (TFP) newsletter.
There’s only 3 ways to approach your company stock:
Sell none of it
Sell some of it
Sell all of it
But wait - you said there’s 9.
You are correct, there can be variations - particularly if you are looking to sell some.
Let’s run through 9 of the most common ways to manage your company stock, and we’ll include an example for each one.
For simplicity’s sake, let’s say you hold 10,000 shares of XYZ company, and XYZ company currently trades at $50 / share.
Which means you currently have $500,000 worth of XYZ stock.
Sell None Of It
1)Inertia
This is simply where you do nothing.
Often this happens when people view their stock as monopoly money, or they aren’t sure what else they should do with it.
While it doesn’t take a whole lot of effort (in fact, almost none), it still leaves you exposed, particularly if your company stock underperforms.
Example: you aren’t sure what to do with your shares of XYZ, so you sit on it and do nothing.
You keep your $500,000 of XYZ stock
2)Let It Ride!
Very similar to inertia, except a bit more intentional in the holding.
This usually stems from a big belief that your company stock is bound to do well.
If your company turns into the next Apple or Nvidia, you have a chance to make a lot of money. However it still leaves you susceptible to big downside risk.
Example: you are convinced that XYZ stock is going to go up to $200 / share or more!
So there’s nothing you need to do right now, and you hold on to your $500,000 of XYZ stock
Sell Some Of It
Candidly, most clients land somewhere here
3)Target selling at a certain price
This is where you have an idea of specific prices you want to sell at.
Once the stock hits that specific price, you will sell a portion (or all) at that price.
The problem is there’s no guarantee that your price target will be hit.
Or you could wait a long time, and that money could have been better invested in something else.
If you aren’t a current employee, you could look at covered calls.
Example: you plan to sell 2,000 shares at $60, 2,000 shares at $75, and the rest (6,000 shares) of it at $100.
4)Sell to fund lifestyle/goals
This approach involves selling enough of your stock to fund certain goals, whether that be a dream trip, a down payment for a house, paying off debt, a kid’s education, or whatever else is a priority for you.
Example: you need $250,000 for a down payment, and you’d like to put $50,000 away into a 529 account for your newborn child.
So you’d sell $300,000 worth of stock to achieve those goals (leaving you with $200,000 in stock)
Note: This can be a great starting point, especially if you have very specific, tangible goals.
Right now we are doing this with clients to pay down higher interest debt, fund a potential sabbatical, and build up funds for a down payment.
5)Replace shares as you acquire them
This basically means that every time you acquire new shares, you either sell the newly acquired shares, or sell an equal amount of shares you already held.
This means your total number of shares will stay the same.
Example: you will receive 1,000 RSUs this year.
You would sell all 1,000 shares as soon as you received them, so instead of having 11,000 shares (10,000 current + 1,000 RSUs), you would stay at 10,000.
6)Sell at predetermined points of the year
Basically it’s a form of dollar cost averaging for selling.
You commit to selling a certain number of shares at specific dates through the year.
I like this because it’s consistent and simple
But depending on how much you are selling and when, this could still leave you susceptible to potential downside risk.
Example: you commit to selling 500 shares a quarter.
Each quarter, no matter the stock price, you will sell 500 shares.
So after the end of the year, you would have sold 2,000 shares, leaving you with 8,000 remaining.
Note: you could get fancy and try to combine this time based approach with a price based kicker, but that is probably more work than it’s worth
7)Sell within a certain amount of taxable gain
Candidly, this has been my strategy for my Procore stock (although by no means a recommendation).
You target an amount of taxes you are willing to pay, and then sell a resulting amount of shares each year.
Example: you don’t want to pay more than $50,000 in capital gains tax each year.
So you can sell as many shares as fills up that bucket.
8)Target x% of net worth
Here, you determine a percentage of your total net worth that you’re comfortable holding in your company stock.
As the value of your company stock and your net worth changes, you would adjust the percentage of your company stock that you hold or sell.
Example: you don’t want your XYZ stock to take up more than 20% of your net worth.
So if your total net worth is $2.5M or more ($2.5M x 20% = $500,000), you can hold all 10,000 shares.
But if your net worth were to decrease, or your value of XYZ were to increase, you would sell enough to keep XYZ at 20% total.
For example, if your net worth were to drop $500,000 (now $2M), your new target amount of XYZ stock would be $400,000 ($2M x 20% = $400,000), so you would sell $100,000 to get your XYZ stock back to the 20% mark.
Note: while plenty of rules of thumb exist, this percentage is different for everyone!
9)Sell All Of It
This one is pretty straightforward - you sell it all!
But by turning your big bucket of company stock into cash, or funding your goals, or diversifying your investments, you no longer have the risk of being heavily concentrated in your company stock.
While this is often the textbook answer, it’s one I probably see the least (for better or worse)
Two things to watch out for here.
Will you owe taxes (capital gains) on the sale, and how much? If you have really low basis stock, you might have a hefty tax bill (although we don’t want to let the tax tail wag the dog)?
Will you be kicking yourself if your company stock goes up after you sell? This is a possibility!
Example: you sell all 10,000 shares of company stock, giving you $500,000 (less any capital gains taxes) to spend, invest, pay down debt, give, or whatever your heart desires.
Putting It All Together
Each approach comes with its own set of risks and considerations.
And what works for you might not work for someone else.
It’s why it’s called personal finance.
But I’ll weigh in with my two cents, and some observations from talking about this hundreds of times now.
It usually makes sense to sell some
As a rule of thumb, but by no means a recommendation, I’d look to sell enough to a) secure near term goals and b) pay any tax liability
For the tax liability piece, one example is if you vest RSUs and your company isn’t withholding enough in taxes
A best practice is to sell RSUs as they vest. And probably your ESPP shares.
“I’ll sell when it’s higher” is not a great strategy. Because a) there’s no guarantee that your company stock will ever go higher and b) you probably won’t want to sell at that point either, because who wants to leave the poker table on a hot streak?
And one last one.
It’s really hard to figure out what to do with your company stock, especially if it turns into really big numbers.
Paralysis by analysis is a real thing.
I can’t tell you the number of people I’ve met who’ve chosen inertia because they are overwhelmed by the myriad of options and things to think about.
What to do with the money
Potential taxes
Is this wise?
What if the stock goes up?
And so much more.
And it can be really helpful to have someone (who’s objective, not friends or family or coworkers) to walk through it.
Do you have a big pile of company stock that you’re trying to figure out what to do with, and you’d like some help, reach out and schedule a free consultation