I recently attended a great conference that focused on maximizing the benefits of employee stock ownership. Among the many takeaways, one that stood out for me was that I was possibly the only attendee at the conference who had personal experience on the other side — as an employee managing significant compensation that came from employer stock.  

Due to my (ahem) many years in high-tech, I remember well the stress, elation, fear, excitement, and agony of making decisions around managing the various types of employer stock. If you are in this position now, just know that I feel your pain, excitement, fear, joy, and stress. All of it. I get it.

A concentrated stock position (defined as a single stock that represents 10% or more of your total portfolio), can be a great way to build wealth. However, it’s also important to consider the potential downside. The more assets you have in a concentrated position, and the longer it grows and stays in the market, the more you are exposed to risk – i.e. the chance that something will happen to negatively impact that position. And that fear of the downside causes stress.

So many questions

When dealing with a complex issue, there are often lots of questions and very few clear answers. And since nobody has a crystal ball that indicates the best possible timing, it’s easy to get paralyzed while trying to decide. Sometimes people simply wait; sometimes it is to their detriment. Here are some of the questions and concerns I hear from my clients when we talk about employer stock:

  • “I have no idea know what to do with it if I sell it.”
  • “It’s not my salary. It’s ‘funny money’… I don’t need it for my day-to-day expenses.”
  • “If I sell it, how much will I owe in taxes?”
  • “I believe in my company. The stock has gone up by X% in the last 3 years. Why wouldn’t I continue to be concentrated?”
  • “Will my employer think I’m not loyal to the company?”
  • “I never expected to have this kind of money. I don’t know when the right time is to sell it.”
  • “I’m losing sleep over this.”

How to decide when it’s time to sell

Don’t lose sleep! Start by trying to remove the anxiety and emotion from the decision and focus on the facts. When you have a large concentration in employer stock, it’s a good idea to come up with a framework for managing it. Like any other important financial decision, the best approach depends very much on your personal situation and your specific goals. How do you know what the right approach is for you? Here are some guidelines to help you decide:

  1. Define your primary objective for these assets. Do you have a specific goal for this money (for example to buy a house or pay for college)? If you have met the goal, it might be a good time to lock in the gains, especially for short-term goals (3-5 years).
  2. Consider how a significant negative change in your concentrated position could impact other aspects of your finances. A reversal of your employer’s fortunes can negatively impact future raises, bonuses, stock grants, and even your employment. If a large percentage of your net worth is tied to the fortunes of your employer, a sharp decline in the stock can cause your entire financial house to collapse. No matter how well your company is currently doing, it is important to ask yourself if you want to take on that much risk.
  3. To the best of your ability, determine if your current role in the company is secure (or, pretend you are leaving your job this year). Then determine how much of your employer stock you would continue to hold long term. Are you holding this stock only because you work at the company or because you believe in the long-term value? It’s not always possible to know what will happen with jobs these days, but it’s generally a good idea to remember that companies and jobs are constantly changing, and you need to be aware of what that means for your career and your finances. 
  4. Consider which scenario would make you feel worse: holding the position and seeing the stock decline by 30% or selling the position now and seeing the stock rise by 30%. Your answer to this question can help you clarify your goals and priorities.
  5. Pretend your future stock grants will be dispersed in cash rather than stock, then decide what percentage you would allocate to buying your company stock. It feels very different to use a cash bonus to buy company stock, doesn’t it? But it’s really the same in the end.
  6. Evaluate your investment philosophy and determine whether your current holdings reflect that philosophy. This is something that often trips people up, causing them to postpone implementing a diversification plan. Reinvesting the proceeds can be pretty straightforward, but if it’s not in your wheelhouse, get someone to help you.
  7. Plan for the impact to your overall tax liability. It’s always a good idea to consider the impact on your taxes before you sell your employer stock, but it’s generally not a good idea to let the “tax tail” wag the dog.
  8. Keep track of sales blackout dates. This is an important part of having a solid plan in place, since it’s painful to wait for the blackout to end just when you’re ready to sell. Know the blackout dates and plan around them.
  9. Don’t look back. Regardless of what your company stock does after you sell, remember that you are making the best decision for your particular needs based on your goals and the information available at that time.

How I can help

When working with clients that hold a concentrated stock position, my goal is to understand how selling or holding will impact your overall financial picture. By learning about your unique situation, your goals, and your attitude towards diversifying, I can help determine the best approach for systematic diversification while creating a comprehensive financial plan to build and protect your overall financial picture. 

Here’s my general approach:

  1. Evaluate your concentrated position and potential risk relative to your goals and overall financial picture.
  2. Define how much of the concentrated position you should keep versus sell, and over what time period.
  3. Put together a plan to help you sell (diversify) the concentration in the most tax-efficient way.
  4. Reinvest the proceeds to align with your long-term goals and risk tolerance.

There is no one solution for everybody. Note that it’s usually not necessary to sell everything at one time, but never selling any of your employer stock can expose you to excessive and unnecessary risk. The message I like to emphasize is that stock concentration is not necessarily a problem – there can be great upsides. But keep in mind that stock concentration can help you build wealth, but diversification is how you protect wealth. 

After a successful career in high-tech, Sheila McGinn, CFP® followed her passion and became a fee-only Financial Planner, where she helps clients navigate complex financial decisions and reach their financial goals.

Disclaimer: This content is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. For advice specific to your situation, consult a financial planner, accountant, and/or legal counsel. Reproduction of this material is prohibited without written permission from Brightview Financial Solutions, LLC, and all rights are reserved.