Most of the time, tech employees think it’s a good idea to keep “some, but not all” of their company stock.
And as long as they believe in the company, we agree with them 110%.
The only problem is, “some but not all” is not a specific number. If you don’t know what that specific number should be, it can be difficult to decide exactly how to use your stock options for this “some but not all” plan.
For example: How are you supposed to take all your options, RSU, ESPP (employee stock purchase plan), and shares and figure out not only which ones, but how many of each one to sell and to keep?
There needs to be some smart planning involved, and we’ll walk you through how to do that in this article.
A Common Question: “What if My Company is the Next Big Thing?”
This comes from the fear that if you go ahead and sell your company’s stock, it’ll become the next “big thing,” and you’ll have missed out on massive riches by selling too soon.
If you wholeheartedly believe your company is the next Apple, Netflix, or Facebook and will outperform the rest of the stock market, then don’t sell.
Deciding not to sell here is a BIG investment decision though, and I can’t stress how important it is to fully grasp this.
If you DO NOT believe your company will out-perform the stock market, then you should make a plan to start selling your company stock options and shares. (And skip to the next section of this article.)
BUT, if your company truly is the next big thing, there are two major things I want you to remember:
1) If your company is a huge success, it will be a completely different company than the one you work for now. Remember when Netflix used to send out DVDs in the mail? Netflix only became such a successful stock from online streaming; not from mailing DVDs.
Remember when Apple was a company based on Macintosh computers? Apple became a “big thing” not because of those computers, but because of the iPhone.
2) Because of these major changes that happen for a company’s stock to be mega-successful, you probably won’t work there anymore when the stock hits it big.
You’ll have to wait a long time, and you’ll probably be on your 2nd or 3rd company after the company you’re working for right now. Yes, there are exceptions, but very few. Most of these massive successes don’t happen within the span of only a few years.
Step One: Identify a Percentage of Company Stock to Keep
There are no hard and fast rules about what percentages to sell and keep, especially since every person, every company, and every person’s equity amounts are so different.
But for example’s sake, let’s say that we talk about your situation and determine that keeping 25% of your net worth in your company’s stock is a good target.
First, we evaluate how that 25% target matches up with your current situation.
If you’ve got more than 25% of your net worth tied up in company stock options and shares, we make a plan to sell to get you down to that 25% without going crazy on your tax bill.
If you’ve got less than 25%, we make a plan to help you acquire more. This could include buying more options, contributing more to your ESPP, or coaching our clients on how to acquire and hold stock in the most tax-efficient way. (More on that below, because it’s not as straightforward as it seems.)
Second, we monitor your situation and implement your financial plan as time goes on.
In a perfect world, the price of the stock keeps going up, so we dollar-cost-average out of the stock over time to manage your target net worth. This doesn’t always happen though, so we keep an eye on stock prices, your growing net worth, taxes, and trading windows to help you make the smartest moves possible.
Step Two: Choose a Price to Sell Your Shares At
When you’re holding onto that 25% of your net worth in company stock, the second part of the “hold” plan is deciding a price you’d be happy to sell at.
Even if you think your company is going to be the next big thing, it’s not going to actually pay you anything to hold onto that stock forever, no matter how high the price goes. You need to sell it at some point so you can cash out and use the money towards financial goals.
To do this, you have to choose a price you’d be happy to sell at, and working with a financial planner can help you find a price you’d be happy with, without experiencing FOMO.(And without sacrificing future tax savings for a current stock price, or vice versa.
Step Three: Learn to Hold Effectively
Let’s say that your shares and vested stock options are less than your 25% net worth target.
What you need to do now is acquire more stock and hold; not sell. This is how we get you to your target.
To do this, I’ve got three steps for you:
1) Make the maximum allowed contributions to your ESPP.
Your ESPP plan is the best way to acquire more shares. You get them at a discounted price, which means you’re in a positive financial position with them from day one.
2) Exercise and hold ISO (incentive stock options) as they vest.
As your incentive stock options become available, exercise them. These options vesting is another opportunity for you to gain more equity in your company to achieve your net worth target.
3) Don’t hold onto newly-vested RSU (restricted stock units) or NSO (nonqualified stock options). Sell them anyway.
I know it sounds counterintuitive, but there is absolutely no tax advantage to holding onto RSU or NSO past the moment they vest or you exercise them.
In fact, this isn’t something I’d necessarily recommend, but if you believe in your company and if you want to hold onto your RSU and NQSO… then… Why wait? Buy shares in the stock market now and then sell all RSU and NQSO as they vest. This way you are getting the share ownership instead of waiting for RSU or NSO to vest, and starting the one-year holding period for long-term capital gains. Again, I’m not recommending it, I’m just making my point about RSU and NSO. If you want more information on why they’re a bad idea to hold onto, read this article.
Keeping Company Stock: Your Next Steps
The most important thing is to come up with a net worth percentage and a plan that works for you.
I find a lot of clients first decide they want to hold onto some company stock, but change their mind later. (Maybe they realize their company is good, but it’s not quite an Apple or a Netflix.)
Working with a financial advisor who knows the ins and outs of net worth, taxes, and selling all kinds of shares and options types will help you think through your financial model and make the best possible choices.
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