What Should I Do With my Company Stock?
Large company stock positions are usually very volatile, carry significant risk, and can potentially jeopardize your financial plan. In addition, these stocks can come with emotional ties. For example your CEO is telling you that the stock is going to the moon and you don’t want to miss out. You are also probably worried about the optics - you want to be a team player and show your support for the company.
Despite these fears diversifying out of concentrated stock positions is the best move for 95% of employees. We’ve seen many hopes and dreams destroyed by over concentration in a portfolio. The odds of your company being a unicorn are not good. Below are some common strategies for dealing with concentrated stock positions and de-risking your portfolio.
1. Sell
This can be the “easiest” solution which has the least limitations, but it can also result in the highest tax bill. Additionally, you may need / want to utilize a 10b5-1 trading plan to stay compliant, especially if you have insider information at your company. With a 10b5-1, you can customize your selling strategy by amounts, prices, and sell dates.
2. Donate to Charity
If you’re already donating significantly to charity (or wanting to), utilizing a charitable strategy such as a Donor Advised Fund (DAF) can provide tremendous distribution flexibility and maximize your tax savings. DAFs are ideal if you want to prioritize charitable giving, but don't know when / who you want to donate to. You can donate the concentrated stock to the DAF, sell it in the DAF, and reallocate to a diversified portfolio (all with no negative tax consequences). Additionally, as your investments grow, you can donate more over time. However, you lose ownership as soon as it goes to your DAF.
3. Gift it to Family
If you're already gifting money (or planning to) to family, you could consider gifting them stock instead of cash. The recipient could be in a lower marginal tax bracket, which could be a win for both of you. You divest and meet your family gifting goals, and the recipient can sell at a potentially lower tax rate. However, with this strategy, you're limited by the annual gifting limits before you start eating into your lifetime exemption. It may take years or even decades to fully divest out of your position, which represents more risk and potential volatility exposure.
4. Hedge it
Options have the potential to control downside risk. There are several possible strategies using options, but they can be expensive to implement and get complex very quickly, especially as a long-term strategy. Companies will also likely disallow transacting company options if you're still an employee.
5. Exchange it
Exchange funds allow you to swap your concentrated stock for shares in a pooled fund. This strategy allows for more diversification (but you’re still likely to be over concentrated in US large cap stocks), and tax deferment. However, there is a 7 year holding period. Exchange fund sponsors may also often be picky about positions they will accept to their fund; they may already have too much or won't receive enough. This strategy is also limited to Qualified Purchasers ($5M+ investable assets), so that may exclude many candidates.
An Individualized Approach
These solutions can be very complex. A combination of these strategies might be appropriate. It's highly recommended to work with a professional who understands the characteristics of each strategy in relation to your goals and financial situation.