What to do with company shares? | Job Binary


Have you heard the term “concentrated stance”? This means that the investor has a large part of his investment portfolio in one stock. One of the most common reasons for this is related to the employer.

Maybe your company just went public, and your stock options turned into real shares that can be traded on the market. Maybe you’ve built through holdings Employee Stock Purchase Program (ESPP). Or, over time, value has accumulated through stock-based compensation and your company has done well.

In any case, this creates a special planning challenge. In these cases, there are important tax and risk considerations that your planner can help you address.

How much can you risk?

Holding any individual stock as a large percentage of your portfolio is risky. Even large and well-established companies can experience extreme volatility.

For example, using the S&P 500 index, which combines the 500 largest US companies, 79% have fallen 50% or worse from their peak in the past three years.

Moreover, one out of every 12 companies experienced a decline of 80% or more. This is about the chance to roll a 4 or 10 with a pair of standard dice.

To put things into perspective, imagine that every time you roll a 10, your wealth drops by 80%. How dangerous these single positions can be.

Clients often have significant concentrated positions in connection with a recent initial public offering (IPO). If a company is small and cash-strapped (like a startup), it often uses more stock-based compensation than its larger peers. If these companies make it to the public markets, longtime employees have a chance to realize something unexpected.

While this is a very interesting question, holding a concentrated position in young companies is riskier than the average individual stock.

For example, according to Bloomberg data, there were 190 IPOs (excluding SPACs, ETFs and closed-end funds) on US exchanges in 2021. 26% of them (~49) have fallen by 80%.

Consider your entire risk picture

The risk of holding a large amount of stock in the company you work for goes beyond just the value of your stock. For example, you may have future equity-based compensation, such as options, that increase your employer’s ability to influence the stock price.

Or you can participate in a bonus pool or profit sharing plan. It is generally true that when a company’s earnings fall, so does its stock price. Therefore, the bonus pool may also be smaller during those periods.

Finally, there is always the risk of a company going out of business. During the Great Financial Crisis, many employees of long-established firms such as AIG, Lehman Brothers, Bear Stearns, and Wachovia quickly went from paper millionaires to unemployed.

Although the risk is low now, it’s important to consider the possibility that your personal wealth and your job could be at risk in a disaster scenario.

Diversification is great, but complicated

So the good news is that your stock in your company is worth a lot of money. The bad news is that holding the stock comes with all the risks described above. There is an uncomfortably high risk of a disastrous outcome for your personal net worth.

In an ideal world, we recommend selling your company’s stock and reinvesting it in a diversified portfolio of stocks and bonds. This allows you to capture the value earned in your company’s stock and avoid the risk of undue volatility in the future. But unfortunately, the reality is often more complex and each client’s situation is slightly different.

One important issue is taxes. Depending on how you purchased the shares, selling the stock can have significant tax consequences. However, in most cases, we recommend selling most or all of your holdings regardless of taxes because the diversification benefits outweigh the tax costs.

However, depending on your individual circumstances, we may choose to manage sales over a period of time to spread your taxes. Facet’s planning team can work with you to determine the most tax-friendly diversification strategy.

There may be other considerations in your decision besides taxes. For example, you may have lock-ins or reporting requirements that make it difficult to sell. These are all factors that help Facet work to get you the plan that’s right for you.

What if I really want to hold stock in my company?

It is very common for people to feel an emotional attachment to their company’s stock. You may have been there for a long time or you may have been in the early stages of the company. You can also truly believe in the future of the company and expect the stock to grow significantly.

For these and other reasons, we do not always recommend that clients sell all of the company’s shares. Instead, we work with you to determine an acceptable amount of risk. This may include your other financial resources and general exposure to your company’s stock.

If you decide to keep some of your company’s shares, Facet can help you manage your other investments to maximize the diversification benefits of your shares.

Knowing what to do with employer shares can be difficult, but help is just a click away.

Create table a for more information free introductory call today.

Facet Wealth, Inc. is an SEC registered investment advisor headquartered in Baltimore, Maryland. This is not an offer to sell securities or the solicitation of an offer to buy securities. This is not investment, financial, legal or tax advice. Past performance is no guarantee of future performance.



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