If you have more than 10-20 percent of your total investable assets in single company stock, you likely have too much and would be considered “highly concentrated.”
I focus on helping Silicon Valley tech professionals with employee equity and many of my clients come to me with 50, 80, and even 95 percent concentration, which is not uncommon in the tech industry with thriving companies like Snowflake and Airbnb and giants like Google, Netflix, and Facebook. However, just because it’s common, doesn’t mean it’s the right thing to do.
That’s because there’s a ton of risk and volatility in holding that much of your net worth in a single stock. This is an easy question to answer mathematically, but not so easy to know what you should do if you’re in this situation.
In this article, you’ll learn how to figure out if you have too much company stock and, if so, what to do about it.
How to calculate your company stock concentration
Follow these simple steps to calculate your company stock concentration.
Calculate the total value of your vested company stock including Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs), Restricted Stock Units (RSUs), and Employee Stock Purchase Plan (ESPP). If your company is publicly traded, use the current share price. If your company is still private, use your company’s most recent valuation.
Example: You have $4,000 vested RSUs in company stock and the current share price is $100. That means that you have $400,000 in vested company stock.
Calculate the total value of your investable assets. This includes assets such as savings accounts, brokerage accounts, investment accounts, stocks, bonds, mutual funds, retirement accounts, 401ks, IRAs, and Roths. You should also include the value of your vested company stock. This does not include assets that are not highly liquid such as the equity in your house or other real estate.
Example: You add up the values of your savings accounts, brokerage accounts, and 401ks and calculate that you have a total value of $600,000. You add this $600,000 to the $400,000 value of your company stock and you have $1000,000 in the total value of investable assets.
Take the total value of your vested company stock and divide it by the total value of your investable assets to get a percentage. This percentage represents your concentration. If that percentage is greater than 20 percent, then you are highly concentrated and should keep reading to understand how to reduce your concentration and diversify your risk.
Example: You take your $400,000 of the total value of vested company stock and divide it by your $1,000,000 of the total value of investable assets to calculate that you are 40 percent concentrated in company stock. Since 40 percent is more than the 10-20 percent threshold, you are highly concentrated and should keep reading to understand how to reduce your concentration.
Learn from past concentration mistakes
The reason you should think about reducing your concentration is that there is much higher risk and volatility in a single company stock vs. a broadly diversified portfolio.
This risk is captured with the story of Enron. For those of you who don’t remember, Enron was a high-flying energy company in the early 2000s. The stock skyrocketed for years up to more than $90/share in mid-2000 until news about an accounting scandal broke and the stock plummeted to less than $1/share by November of 2001.
Unfortunately, some employees had most of their 401ks in Enron stock since contributions could be invested in company stock and 401k matches were made in company stock. These employees lost hundreds of thousands of dollars of their retirement savings because they were too highly concentrated in Enron.
You don’t want this to happen to you.
Many of my clients respond to the Enron example by saying, “My company is different since we’re in a dominant position and won’t have an accounting scandal.” This may be true but Enron employees also thought their company was in a great position and didn’t expect an accounting scandal.
Having said that, here are a few other examples of companies who suffered significant drops in their stock over short periods for various reasons including Facebook, Apple, Google, and Amazon.
4 Steps to Reduce Your Company Stock Concentration
If you are highly concentrated and recognize that your company may not be different, here’s what you should do to reduce your concentration.
Identify any valid short-term financial needs with short-term defined as less than three years.
Examples of these types of needs could include paying taxes, building an emergency fund, or funding a down payment. These are needs that you know you will need to fund in the near term so you should take the money off the table out of your concentrated stock to make sure you have the cash. Sell enough company stock to fund these needs and to cover any taxes related to the sales.
Decide if you want to keep a certain percentage of your company stock for the long haul since some employees truly believe in the future of the company and want to hold a long-term stake. I typically recommend keeping 5-10 percent of your company stock holdings at most. Then you can set aside this company stock and not touch it.
Take your remaining company stock. Here are a couple of ways to reduce your concentration:
- Sell immediately
This is simple since you just sell everything as soon as you can. There is data showing that this way has the highest probability of minimizing your regret relative to the ideal selling strategy. If you want to keep your life simple and this data makes sense to you, then this is the way to go.
- Sell on a schedule
For example, you could sell 1/4 of your total company stock every quarter over four quarters as soon as your employee trading window opens.
The benefits of this option are that if the stock keeps going up, you’ll get some of the upside and you won’t happen to pick the single wrong day to sell since you’re selling on more than one day. Also, you have more control over your tax bill since you can spread it out over multiple years. Setting a schedule also minimizes emotions since you sell your company stock on autopilot and don’t need to stress about if the stock is high enough at a particular moment.
Take your proceeds, set aside a tax reserve to cover the taxes for your sales, and invest your proceeds into a broadly diversified, globally allocated, and cost-effective investment portfolio. (I’ll delve deeper into this in a separate article)
Owning stock in your company can be exciting especially if the stock continues to go up but there are risks in owning too much. When you take these steps to manage your concentration, you will be able to make the most of your hard-earned company stock to help you achieve your other financial goals.
If you would like help developing your concentrated stock action plan, schedule a free call with me to talk through your situation.