Deborah Adeyanju, CFA, Planner & Impact Strategist
Your stock options just vested. Or maybe it’s your RSUs. In either case, congrats! You stuck it out and now your equity compensation is worth something. You’re likely considering what your next step should be. Before you decide whether to hold ‘em or fold ‘em though, you should take a step back. It pays to be thoughtful when deciding what to do with your newly valuable stock position, especially if it represents a large part of your overall assets.
Beyond the obvious, cash at stake and taxes, there are a number of other considerations to take into account when deciding what to do next. Here are five of them.
#1. For now, your gains only exist on paper
Until you exercise your options and sell the stock, or actually cash in your RSUs, your profit exists on paper only. That can be a problem for a couple of reasons. One, you can’t rely on it. Until you have actual cash in hand, aka realize your profits, anything can happen. Your company could see its value plummet suddenly. Or financial markets in general could fall for any number of reasons. If that seems unlikely, think again. Stock market corrections, the technical term for this, happen pretty often.
#2. You might be taking on too much concentration
The second potential problem has to do with the value of your paper profit compared to the size of your overall portfolio. If the amount of your paper profit is large in comparison to the value of your overall wealth (including retirement accounts, self-directed brokerage accounts, property, and cash savings), you have some thinking to do. That’s because you always want to avoid unnecessary investment concentration. Having a big proportion of your investments in a single company’s stock creates risk that could reduce your overall returns. Being diversified, or holding several different types of investments, reduces the chance that the value of your entire portfolio could fall at once.
If you plan to stay with your current company for a while, you’re looking at another source of concentration. Being employed at a company while holding a large amount of its stock raises the chance you could be out of a job and see your stock value fall if the company stumbles for any reason.
#3. Make sure you’re comfortable with risk
Would you be ok if you woke up to the news that the value of your company stock had fallen by 20%, 30%, 50%? Could you afford that kind of financial hit? Drastic and unexpected declines in individual stocks are all too common, whether because of accounting scandals, failure to get FDA approval for a new drug, or failed product launches—to name a few.
Every investment carries a risk of loss. Risk and return are two sides of the same coin. You can’t get one without the other. Your vested stock compensation is no different. There’s nothing inherently wrong with choosing to take on a high level of risk. But if you do, just be aware that’s what you’re doing. And make sure you can afford to take on that much risk without jeopardizing your overall financial position.
#4. Your current financial situation
Is your net worth negative? Do you have tons of student loans or other consumer debt? If that’s the case, it could make sense to lock in your gains now, and use at least some of the proceeds to shore up your overall financial position. You’ll want to make sure you talk to your tax expert first though. While there are no tax consequences to exercising your options, you’ll owe federal (and potentially state) taxes when you sell your shares. If you’re dealing with RSUs, you’ll pay ordinary income taxes when they vest, then capital gains tax on any profit you make from selling your shares.
#5. Your future (short and long-term) goals
Will you need funds soon for a big-ticket purchase, like a home? Are you itching to start a business? If you’re counting on your stock position to help you meet those goals, selling some shares now so that you have at least a minimum amount set aside can mean the difference between meeting your goals, delaying, or even scrapping them. You always want to stash funds you’ll need in the short-term in an account with no or very little risk. (Think high-rate savings.) That way, you avoid the chance that the value falls just when you need the cash for a down payment or to fund your business.
The bottom line is, your equity compensation shouldn’t be an emotional anchor holding you back. It should be a springboard to hitting your long-term financial goals. It can be hard to let go of what your stock compensation represents, especially if you truly believe your position has a good chance of gaining in value. It helps to ask yourself if you’d be comfortable investing the same amount of your own money today in your company’s stock. If the answer is no, that’s a good gut check in deciding what your next step should be.
We work with our clients, and in close collaboration with their tax professionals, to determine how their equity compensation fits into their overall financial picture and priorities, and how to manage it in a way that makes sense from a tax planning perspective.
Want to learn more managing your equity compensation? Contact us at firstname.lastname@example.org.
GRID 202 Partners is a holistic financial planning firm specializing in fee-based, comprehensive financial and investment planning for individuals, couples, businesses and institutions. We serve successful, ambitious professionals and business owners ready to take the next step in developing a budget, reducing debt, and creating wealth for themselves and future generations.