We get asked about company stock a lot? When should I divest? What’s the appropriate amount to own? Should I participate in my Employee Stock Purchase Plan?
We all have heard about that janitor or secretary that has worked at a public company for forty years, amassed a ton of company stock, and then retires a multi-millionaire. But for every story like that, I think there are two that go in the other direction. Enron, Lycos, Lehman Brothers, Polaroid…are just a few that I can think of. And I heard a lot of “janitor” stories from GE personnel back when Jack Welch was running the show, but have you looked at GE’s stock lately?
It’s a slippery slope when you look at one’s overall net worth. We have examined some prospect cases where one has 50-75% of their net worth tied up in one company. We talk to people about diversifying risk, and sometimes it is an uphill battle. Some also don’t realize that having both your everyday income and overall portfolio tied to one company further exacerbates risk. There is some amazing planning that can be done with company stock. Discussing concepts, like 83(b), with your advisor can provide huge benefits down the road. Enjoy a list of FAQs on the subject:
You own a ton of company stock, what do you do now?
You’ve worked at the same company for a long time and in doing so have amassed a considerable amount of company stock. Now what? Is it better to leave it alone, or is it better to act, possibly selling it off or reinvesting? As rewarding employees with stock options or shares becomes the norm, the issue of what to do with all this company stock will become more relevant to more employees. Currently, a lot of company stock goes underutilized or they may hold onto their company stock out of misplaced loyalty.[i] In this article, we can walk through some options you can take with your company stock.
RSUs and Restricted Stock
People normally build up a hoard of company stock because they received them as RSUs, or Restricted Stock Units. RSUs have a vesting period before, normally a period of work or performance targets, and they cannot be sold before they reach maturity. Unlike other stock options, which are taxed when you exercise them, RSUs are taxed when they are fully vested. RSU’s also maintain an intrinsic value as long as the company is in business. Once you have completed the period, the RSU’s are fully vested and you own stock in the company. Some other stock options will be taxed once they are exercised, some will have an expiration date and others may have blackout periods for selling. The variety of stock options offered makes it important to educate yourself and make plans so as not to lose out. The worst thing you can do is nothing, as you may lose out on your other options.
Highs and Lows of the Stock Market
If you hold onto that stock and don’t touch it, there is a possibility that your company’s value could rise, making your stock more valuable. If you have a lot of your personal wealth in company stock, this could be great. But, if it takes a plummet, you too could see your net worth go down with it. The stock market has highs and lows and a stock good portfolio is diverse to withstand that turbulence. Having all your eggs in one company stock basket may make you a lot of money, but it also may hurt if the value drops precipitously.[ii] Evaluating your appetite for risk will be a major deciding factor in how much stock to keep in place.
Once your stock is vested, best to sell off some and spread around the risk and investment.[iii] A conservative investment approach is to own no more than 5% on any single stock. You may not see the dramatic gains if your company stock is doing well, but if it tanks, you also will not go down with the ship. For someone saving for retirement, keeping 10% of their company stock may be a better fit. To offset some of the taxes, taking some of the stock sales and maxing out you and your spouse’s 401(k) contributions may be a good option.[iv] Diversification, however best it is divided for you, tends to be the best way to go. Having a strong portfolio that can handle the ups and downs of long-term investing tends to be a sound choice.
Looking Ahead
Deciding what to do with a large amount of company stock, you should factor in where you are in your career, what you want for the future, and how your life would change if you suddenly lost that investment. If you could afford to take the loss, then perhaps waiting and seeing how well the stock can do may be an option for you. Wherever you fall, the best thing to do is your research, ensure that you are actively factoring in your company stock and using it to its best advantage. The worst thing to do with company stock is to ignore and not take advantage of the financial benefits.
Oftentimes in life “out of sight, out of mind” and retirement and investment needs seem far away until they don’t. RSU stock options are often underutilized, in part due to lack of understanding what they are. RSUs are taxed when they are vested, which means if they go unused and the stock falls, they will have not only lost the value of the stock but paid the higher tax price, essentially losing twice. Experts agree that treating RSUs like a cash bonus and selling them as soon as they are vested tends to often be the soundest way to handle them.[v] We do not have the ability to see the future, but what we can do is plan for different scenarios. A lump sum of company stock may continue to climb and climb, but it also may tumble down to worthless, better to cash some out and diversify to protect yourself and your future.
[i] https://www.cnbc.com/2016/09/17/watch-out-more-workers-want-company-stock.html
[ii] https://www.nytimes.com/2018/03/22/your-money/equity-stock-compensation.html
[iii] https://www.cnbc.com/2015/07/20/how-to-avoid-the-tax-traps-of-restricted-stock-units.html
[iv] https://www.forbes.com/sites/davidrae/2018/09/04/your-employee-stock-options/#7938970f2e6e
