How much of my net worth should be concentrated in my employer’s stock?
There is no one-size-fits-all answer to this question, as the amount of stock you should hold in your employer depends on a variety of factors, including your age, investment goals, and risk tolerance.
Remember, your income and future career prospects are already tied to your employer’s performance. If your employer or the industry your company competes in experiences financial troubles, your income could be at risk. Building a concentration in your employer’s stock only increases your financial exposure to the success of your company and industry. However, it is generally a good idea to have at least some of your net worth invested in your employer's stock.
There are three building blocks to make a decision about setting an employer stock concentration target:
1. If my employer paid me cash instead, would I choose to purchase company stock with it? If the answer is ‘yes, to a degree’ the next two steps would help you determine how much stock to keep.
2. What financial goals am I working toward? Saving for near-term goals in the next 0-2 years should be held in cash. Goals 3-5 years away should be held in a diversified portfolio to reduce the risk of holding one stock. Company stock comes into play for longer-term goals.
3. With my near-term goals taken care of, what percentage of my invested net worth am I comfortable holding in employer stock? The answer to this question will vary based upon your risk tolerance and your belief in your company’s prospects for outperforming its competition for the long-term.
Once you’ve defined your concentration target, build to that level over a 5 years by keeping selling a portion of your vested stock or options and keeping the rest.
Should I keep or sell my vesting restricted stock units (RSUs)?
To determine whether to keep or sell your vesting restricted stock units, it’s important to set a target for how much of your wealth should be concentrated in employer stock (see the previous section). Some factors that are important to consider when making this decision:
Taxes
When RSUs vest, they create taxable income. Check to see if your employer is selling shares on your behalf to withhold for taxes, and if you should supplement your employer’s withholdings with additional withholdings of your own. Often, employer withholdings are fixed at a certain percentage that is below your marginal tax rate on that income. This”under-withholding” may create an unwanted surprise at tax time.
If you hold your RSUs after they vest, you will be subject to capital gains tax treatment on the difference between the price at vesting and the price at sale. This will generate either short-term (<1 year) or long-term (>1 year) gains or losses. Work with a financial or tax advisor to help you analyze the impact of your sale decisions. Watch for tax-loss harvesting opportunities and be sure to avoid triggering short-term capital gains tax rates on sales.
Benefits of Ownership
If you keep your RSUs, you'll continue to receive dividends, voting rights, and potential future appreciation. Take a clear-eyed look at your company’s position within its industry, and your industry’s position within the economy to assess the potential for growth and dividends.
Goals
Ultimately, your financial goals and risk tolerance will determine whether you keep or sell your company stock. Be mindful of your need for cash to fund short-term goals, your concentration target in your company stock, and stick to your plan. Re-evaluate your financial goals and concentration target in light of recent developments in your company and industry.
Be Mindful of Trading Windows
If you keep your RSUs, you may be subject to restrictions related to when you can sell your shares. Know your company’s policy and be sure you don’t sell outside of approved trading windows.
If you’re not sure where to start with your RSU decisions, or if you’re on the right track, consult an advisor that specializes in company stock compensation.
When should I exercise my incentive stock options (ISOs)?
The decision to exercise your incentive stock options (ISOs) or non-qualified stock options (NQSOs) can be complicated and involve a little bit of art and science. There are many factors that influence this decision. An option’s value is composed of the time value and the “in the money” value. Essentially, an option becomes a better candidate for exercise as time until expiration gets shorter, and the stock price gets substantially higher than the option exercise price. The interchange between these two variables can be used to craft a decision model to take the guesswork out of your options expirations decisions.
It is important to consult with a financial and tax advisor that is well-versed in options to determine the best time to exercise your ISOs, as there are many factors that need to be taken into account.
Should I participate in my employer stock purchase plan (ESPP)?
When deciding whether to participate in your employer stock purchase plan (ESPP), there are many factors to consider. Some of the key things to think about include your age, investment goals, savings rate, and risk tolerance.
ESPP participation can provide an opportunity to load up on company stock at a discount. However, stocks don’t always go straight up. Consider your company’s competitive position, the economy as a whole, and the future prospects of your industry.
If the discounted shares seem like a good deal to you, be sure to tick off the higher-order financial objectives, such as retirement plan contributions, debt reduction, and other financial goals before deciding to put more away in the ESPP.
Lastly, spend time to understand the mechanics of the ESPP by reading the plan documents. Understand any trading restrictions that may apply, and your opportunity to sell the shares and diversify later, and the tax implications of those sale decisions.
What strategies should I consider to reduce taxes and diversify my investments when selling my employer stock?
When selling employer stock, there are a few tax strategies to consider in order to reduce your tax liability and diversify your investment portfolio.
One option is to sell the stock over time so that the taxable event is spread out over several years. Knowing your current and expected future taxable income, tax bracket, and where your marginal tax rate increases in the next highest bracket should inform this strategy.
For highly appreciated stock positions, another option is to donate the stock to a charity, which can provide you with a tax deduction. This can be done via a direct donation, or with a more sophisticated strategy, such as a charitable remainder trust.
Consider tax-loss harvesting by selling shares with a higher cost basis when the stock price dips below that cost basis. Booking a tax loss can provide great flexibility to sell other shares at a gain and offset the income.
