Hey Reader,

The stock market has created countless millionaires.

Unfortunately, millions (probably billions) of dollars in wealth have been lost due to poor planning around concentrated stock positions.

Today, I'll give you a framework you can use to feel confident when selling or holding your company stock.

What are the facts?

Since 1980, ~10% of all stocks have generated a return that beat the Russell 3000 index by 500% or more.

That’s an investment that changes your family tree.

But it’s not worth risking your livelihood for. Here’s why…

From 1980-2020, a concentrated position in a single stock would have underperformed:

• Cash 42% of the time
• The Russell 3000 index 66% of the time

During the same period, ~44% of companies saw their price fall >70% from its peak and never fully recover.

​Here's the source for all the above data.

To be clear, I'm not saying you need to ignore the upside and sell all your company stock ASAP, but you owe it to yourself and those who depend on you to do it responsibly.

What's your tax situation?

There are different tax events at vesting, exercise, and sale, depending on the source of your company stock.

If you want to avoid an unpleasant tax surprise, it's crucial to know how your withholding compares to your expected liability.

If your tax bracket is higher than 22%, there's a good chance you'll have a liability to pay the following year.

Before deciding how many shares to hold long-term, confirm you have cash on hand to pay the IRS for any shortfall or consider selling the shares to cover it.

What are your upcoming cash needs?

The golden rule of investing is to avoid selling stocks at a loss.

So, if you’re close to withdrawing from your investments, you need stable assets to avoid being forced to sell stocks when they’re down.

A quick framework:

• Determine your withdrawal needs.
• Compare your needs with what you already have set aside.
• If there’s a gap, consider covering it by converting recently vested/exercised equity to cash and removing market risk from the equation.

The same logic applies when preparing for major purchases like a home, car, or investment.

Will you receive future equity grants?

If you were granted equity in the past, you'll likely be granted equity in the future.

So, you can sell shares today without having FOMO because you can still participate in the company’s upside through future grants.

How sensitive is your financial situation to changes in the stock price?

Let’s say you have a $5,000,000 portfolio.

$1,000,000 (20%) is in company stock and $4,000,000 is in liquid diversified investments.

If you can live comfortably and achieve your goals with $4,000,000 or less, you can afford to take more risk because you'd still be fine in the worst-case scenario.

If you need every bit of $5,000,000 or more, the performance of a single company dictates your financial future and well-being.

What's the risk/reward tradeoff of holding the stock?

For instance, if the $1,000,000 in company stock doubled to $2,000,000 in 6 months and your portfolio was worth $6,000,000 instead of $5,000,000, how much would your life change?

Is the low probability reward of doubling your investment worth the potential risk and consequences of losing $500,000 or more?

Conclusion

You’ll never know the exact right time to sell your equity.

But these questions will help you create a personalized plan instead of relying on unknown variables you can’t control.

If you've put off planning for your company stock, now is the time to act.

Have a great rest of your week!

PS - If you...

• Want practical advice on how to reach your financial goals
• Don't have time to properly manage your financial situation
• Need help navigating the financial ramifications of a significant life event

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Disclaimer:

This is for general educational and illustration purposes only. This should not be taken as individual investment, tax, or legal advice.

Consult your legal, tax, and financial team before implementing any financial strategies for your specific circumstances.