Ok, so you have some stock in your company but you don’t know what to do with it. Should you hold it? Sell it? We talk to a lot of people who have significant shares in their company, but aren’t sure what they should do with it.
In this article, we’ll focus specifically some strategies around how to sell stock in your company, but we have lots of other articles on equity compensation if you need a primer:
- Your Guide to Stock Options
- Everything You Need to Know About RSUs
- Stock Options vs. RSUs – What’s the Difference?
- How Does An IPO Work?
We’ll cover some guidelines to act as a frame of reference for exercising and selling strategies — however, given the array of equity compensation structures out there with varied terms and tax consequences, it’s best to consult a professional for your unique situation.
Exercising and Selling Stock Options
Let’s start with strategies for exercising and selling stock options.
Stock options present a unique challenge when it comes to exercising and selling. Because the effective value of your options is the market price less the exercise price, small changes in market price are amplified in your effective value, which boosts your options’ inherent investment leverage.
In other words, the same absolute price movement is higher on a percentage basis for your “equity.”
On the other hand, just as gains are magnified, so are losses. Options have little value unless the market value is greater than the exercise price, which creates a bit more risk than other forms of equity. If you exercise your options and the price decreases, then you lose both the money you’ve used to exercise the shares as well as any associated taxes. So how you exercise and sell your options is really going to depend on your specific situation – what is the market value of your stock? What is the exercise price? A financial advisor can help you decide whether it would be a good move for you to exercise and sell your stock options.
Exercising and Selling RSUs or RSAs
These types of equity compensation are taxed at the time they are vested.
In essence, you have been granted your company’s stock at the current market price. This means you should make the decision to sell them based on the stock price at the time of vesting and how large your investment is in your company’s stock. Unless you have a strong reason for keeping your company’s stock, it’s generally recommended that you sell as soon as your shares vest.
Strategies for ESPPs (Employee Stock Purchase Plans)
If shares are purchased at a meaningful discount (~10%-plus), then it’s generally recommended you participate as much as you can afford.
Then, if allowed, sell as soon as you purchase for reasons similar to those mentioned for RSUs/RSAs.
Equity compensation is complex, so we generally recommend that people consult a financial advisor for guidance on their specific situation. However, here are a few generalized additional considerations when it comes to your equity awards:
- Is Your Equity Creating Concentrated Positions? – A position is usually considered “concentrated” when it makes up more than 5% to 6% of your liquid net worth. If the vested/sellable portion of your equity awards exceeds this amount, there is normally an increased urgency to pare down.
- Do You Hold Stock in a Private Company? – If you have stock options for a private company, you likely will want to be very cautious about exercising your shares since you may not be able to sell until/unless there is a liquidity event.
- Will you Bump Into a Higher Tax Bracket? – Depending on the circumstances, it may make sense to defer a portion of sales until the following year if realizing gains will raise either your federal income or long-term gains tax bracket. Or, if diversifying your portfolio is more of a concern and your tax bracket won’t change from year to year, it might make sense just to incur the tax hit so that your overall concentration makes sense.
Did you know? Personal Capital advisors can help you determine the best course of action for your equity positions. Learn more about the process of working with our advisors here.
Disclaimer: The information and content provided herein is general in nature and is for informational purposes only. It is not intended and should not be construed as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professional to help answer questions about specific situations or needs prior to taking action based on this information. Tax laws and authorities are subject to change, either prospectively or retroactively, and any subsequent change could have a material impact on your situation.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
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