Top 5 Things To Consider If You Own Too Much Company Stock

Are you having trouble deciding how much company stock to own or wondering “Should I sell my stocks now?” It’s not uncommon for employees to struggle with the task of trying to cash in big while avoiding the real possibility of disaster. Regardless of whether your shares rocket to the moon or fall off a cliff, employees with equity compensation will assume the responsibility of making ownership decisions (i.e., hold vs. sell). 

The reality surrounding today’s professionals pretty much forces you into playing the role of investor, where the risk vs. reward tradeoff is a delicate balance that many must contend with. Do you DIY, hire a financial planner, talk to coworkers, or leave it up to a Reddit board to determine how much is too much? 

Walking away with investor terms like HODL “Hold On for Dear Life” or “Diamond Hands” may refer to refraining from selling your stock, but that is not typically an advisable strategy, especially if you own a boatload of shares. If you find yourself in a situation wondering when is the best time to buy and sell stock, you must take several things into consideration.

How do you know when to buy and sell a stock?

Navigating the delicate balance between reaping the rewards of company stock and safeguarding against potential pitfalls is a challenge many employees face. As the lines blur between professional roles and investment decisions, the decision to hold or sell company stock requires thoughtful consideration.

1. The Baseline: How much is too much?  

If your company stock exceeds 10-15% of your total net worth, then most financial advisors will flag your ownership as a “concentrated” stock position. You may be thinking that is a low threshold depending on the industry you work in. If you work at a technology or space company, then you’re likely receiving some form of equity compensation such as NSOs, ISOs, RSUs, ESPPs, that could catapult you well above the 15% threshold. 

Typically, companies will continue to award their employees with more and more stock via equity grants, which will, in turn, increase their ownership and so-called “skin in the game”.

2. The Playbook: Are you keeping your emotions and your exposure in check? 

Getting amped up about your company because it’s defying the laws of gravity is invigorating. Many employees felt this high during the pandemic when their companies emerged on the scene and changed how we lived. It was a cultural movement and arguably was the new norm for our society. The stay-at-home theme altered consumer behavior and the way people spent and invested their money. Case in point – Peloton. 

It seemed like everyone during that time wanted to either buy or invest in Peloton stock. As a result, employees with equity comp witnessed their share price quadrupled in a matter of months. Instant wealth was created, and not getting caught up in the hysteria was nearly impossible.

Employees caught the rush at Zoom as well, where virtual meetings took center stage.  Imagine the feeling of seeing your stock options go from $50 to $300. Your total compensation at Zoom may have shot into the hundreds of thousands or millions.  If you continued to keep your exposure through the remainder of 2021/2022, then your losses would have been just as drastic.

So how do you stay level headed if you own company stock?  How do you ensure what the best time to buy and sell stock with transaction fee is? There are three things that can help strip out the emotion.  

Do Your Homework

• Benchmark Valuations– Determine if your company is overvalued or undervalued. Price to earnings ratios, and earnings per share growth are fundamental indicators that you need to be aware of. If the company is privately held, then fundamental information could be less accessible. If so, another helpful way to benchmark valuations, is to track your company’s market cap and the market cap of its competitors to properly evaluate where you stand.
• General Market Conditions–There are external market forces (geopolitical, cultural, regulatory, etc.) that could have a significant impact on the winners and losers in the equity markets, including your company stock. Understanding the ebb and flow of these forces will help you identify potential risks or opportunities in the future.
• Don’t Work in a Bubble – The best person to get a grasp on your company’s future performance is likely you. Make sure you get in the habit of poking your head up every now and then to take a gut check. Research your company’s leadership team, culture, core values, and problem space to get a better feel if things are going well or starting to go haywire.

Understand the Guideposts

For publicly traded companies, what-if scenarios of your stock’s performance can be modeled by running hypothetical market simulations, where the performance will be stress-tested during both positive and negative market environments. Adding guideposts to frame your downside and upside capture in percentage terms will help you stay on course should market volatility strike. 

Get Professional Help

If you’re posing the question “How do you know when to buy and sell stock?” and you aren’t sure, don’t dwell on it! There are professionals that can help you make informed decisions. Seek a Financial Planner and/or Tax Professional that specializes in equity compensation. Not everyone is a DIYer, so there is nothing wrong with asking for help.

Amazon

Meta

Source: Riskalyze (projections or other information generated by Riskalyze are hypothetical in nature and do not reflect actual investment results and are not a guarantee of future results).

3. Your Risk, Your Plan: What about your personal situation? 

Determining how much stock ownership makes sense for your personal situation requires a comprehensive financial plan. Creating a roadmap with the bigger picture in mind will help you navigate the push-and-pull effects of owning too much or too little stock. For example, if you have short-term goals such as a down payment or saving for a child’s education, then you should consider earmarking your company stock as a potential funding source. If your plan is proactive, then you could lay out hypothetical scenarios that would model a target stock price, and tax implications if you were to sell your stock. Playing with these goal assumptions well ahead of any future transaction(s) will provide you with valuable insight before you make an irrevocable decision. 

If you don’t have any major spending goals and your objective is purely diversification, then you may want your plan to include a targeted ownership percentage with specific triggers in place to liquidate stock. This liquidation schedule could be based on the total value of your shares. For example, if you owned 1M shares, and had a strong conviction that your shares could increase by 4x or higher (projections), then it’s possible to build in liquidation layers that allow you to slowly diversify out of your position, while still leaving the bulk of your money invested until your projections are hit. See a hypothetical example below.

4. Selling Out: Is your employment status impacting your liquidity?

If you are a VP or Director, you typically need to navigate blackout periods for a publicly traded company. The first and often the most dangerous is entering periods of illiquidity where you can’t sell your stock due to insider trading rules, which typically happens before company earnings are reported. Witnessing your stock rocket to the moon and plummet back to earth is not for the faint of heart. To get around this problem, most publicly traded companies offer their employees entering trading windows the option of having a 10b5-1 plan on file. This plan gives control back to the employees during blackout periods by allowing you to enter a predetermined number of shares and trigger a price to sell your stock. If you are in a trading window and the stock price were to drop from $50 to your trigger price of $40, then it would automatically sell out of the predesignated number of shares you included in the 10b5-1 plan. Thus, avoiding any further losses (Note: you may also enter trading orders if the stock were to increase to lock in gains). 

If you are employed at a private company, then you will most likely need to navigate liquidity issues. Privately held company stock makes it inconvenient for employees to simply access their brokerage account and trade on the open market or implement a 10b5-1 plan. Company buybacks or liquidity events are typically the only way to sell and may be few and far between. When deciding to work at a private company offering equity compensation, it is wise to ask HR about future liquidity opportunities, such as an IPO or SPAC. You need to protect yourself, so it is fair to ask these types of questions when you are interviewing. 

5. The Payoff: Letting your profits ride?

You don’t get rich by cutting your profits short. When it comes to making money in stocks, the trend is your friend. There are some cases where it may make sense to keep more than a target percentage (i.e., 10-15% of total net worth or the percentage defined in your comprehensive financial plan). It will largely depend on your appetite for risk, but if the company outlook is favorable, the analysts are extremely bullish, and there is a healthy wave of news hitting the company press releases, then it could make sense to dial up your exposure. 

With that said, what kind of stock are we talking about here and what are the other risks you should consider? Is it a privately held company that is somewhat sheltered from the public markets, a meme stock that has caught the wave of Wall Street Bets, aka revert to the meme? Fundamentals, strong leadership, new products, and new services are still extremely relevant and should be taken into consideration. If you are sitting on a boatload of shares of hot stock, you want to be grounded as to why it’s going up.

Little Known Facts:

• The percentage of value lost this year in many markets (especially tech) was palpable. Due to the carnage, employees now find themselves on the wrong side of their equity awards. The risk is real when it comes to having too much stock ownership concentrated in a single company.

 

Employees caught the rush at Zoom as well, where virtual meetings took center stage. Imagine the feeling of seeing your stock options go from $50 to $300. Your total compensation at Zoom may have shot into the hundreds of thousands or millions. If you continued to keep your exposure through the remainder of 2021/2022, then your losses would have been just as drastic.

Wondering what is the best time to buy and sell stock? Augustus Wealth is here to help!

Navigating the complexities of company stock ownership demands strategic financial planning, and our wealth management services are tailored to guide you through every step of this journey. At Augustus Wealth, we boast a team of experienced financial advisors in LA County who will provide personalized solutions. 

Whether you’re grappling with the nuances of equity compensation or seeking to optimize your portfolio, our team is committed to helping you make informed decisions. Additionally, we specialize in comprehensive financial planning, including services such as 409A valuation assistance and guidance on 83(b) election and what it entails. By entrusting your financial future to us, you gain a partner dedicated to maximizing the benefits of your equity while mitigating risks, ensuring a secure and prosperous financial path.