Ask HN: When do you sell your stock grants?
I'm just about to receive the first chunk of stock from the publicly traded company that I work for. I'm wondering when to sell, and how much. I'm a very risk averse person, so my instinct is to sell it all as soon as I can, since the unvested grants are about 10X my current net worth and I don't want to be too invested in one company.
Lots of my coworkers seem to just hold their stock though. Am I crazy that that's a bad idea? My mind always flashes back to the scenes from The Smartest Guy in the Room, when the CEO of Enron was encouraging his employees to put their 401k's in the company stock.
As a bonus question, at what point do you get a financial advisor? It seems like it'd be a reasonable time to get one, but I don't want to pay a bunch of fees for basic advice.
57 comments
[ 2.9 ms ] story [ 119 ms ] threadBetter to stay diversified.
Prudent financial planning would mean it is wise to put a large chunk of your savings in something other than the company you work for. But rationally optimal financial planning should incorporate the benefits of a vesting stock plan as well. It’s a balance.
If you won't be caught by the SEC, you're probably not an insider. If all/most employees know something; it's probably "public" enough information.
Once you've figured that out sell everything except the amount you would buy.
It's effectively the same decision, but framing it this way can be helpful. Say your stock is worth 100KUSD. If you had no stock and 100KUSD, would you really spend 100KUSD on the stock? 5K? 10K? That's how I have made these choices in the past.
Also, keep at least one share. The information you get by virtue of being a shareholder is often interesting.
Now that’s not justification for keeping it in company stock. If anything, you’re better off liquidating it and putting it in something else you’re not going to sell for a long while (say diversified ETFs). But it’s not apples to apples like having the cash to start.
When you exercise them, the company's most recent valuation will include a value for the common stock you purchased, and you can get hit by AMT on the value increase from the strike price to the current value.
Note: I am not a tax expert and my memory is imperfect.
You can get in real trouble with options of non-public companies and with ESPP plans. Stock from an ESPP plan, if sold in the first 12 or 18 months of holding (depending on the plan details) will be reported as ordinary income at the time of purchase. If you sell during that 12-18 month period at a loss you will still owe taxes at the full price, and that can get you in a hole. I've heard of people owing 20k taxes on a 5k return because of a panic sell during a market downturn.
I'm just an engineer and not a tax professional, so there may be errors in what I've stated.
... you will never go underwater from holding onto a vested stock grant. (This is the situation the OP was asking about.)
... you will never go underwater from holding onto a vested & exercised stock option if you paid taxes out of pocket.
... you may go underwater if you take on debt to finance the tax liability incurred when exercising stock options and the value of the retained stock subsequently drops below the unpaid portion of the debt you undertook to exercise it. (This is the scenario that led to the stories you refer to.)
Now you DO have to worry about the taxes on capital gains. I recently had to deal with this because I sold my RSUs on the day they vested, thought the 3rd that auto-sold covered me, but didn't realize the .88 cents that the stock rose in the hour before I sold the stock qualified as cap gains and I needed to deal with declaring it. Short term cap gains in this situation basically is just your standard tax rate.
If you don't need the money and you think the company's stock is going to do decently over the next year then holding on to your shares for a year to get to long term cap gains isn't necessarily a bad idea. Depends on the company.
Once you've figured that out sell everything except the amount you would buy.
This is the correct answer. When your publicly traded company pays you in stock, they're just giving you cash in an inconvenient form. If you wouldn't use this hypothetical cash to buy stock in your company, you should liquidate it all immediately.
Note that so long as you have unvested stock and intend to stay at your company, you essentially already are invested in your company. And since you said your unvested stock is worth 10x your salary, you'll probably have more exposure to the stock than you ideally want even if you do sell all your shares. So keeping some probably doesn't make much sense.
Point being, that decision is very personal in nature, it depends on your circumstances. So you want to start there, with your personal circumstances. Then after that, it depends on what you think of the company prospects. If you think the company is going to be far more valuable in ten years, regardless of the present stock market bubble, then that should influence your choice. I would suggest avoiding trying to guess where the stock market bubble is going to go, who knows if it's going even higher yet or if it's just about to pop; and focus on things you can control and understand with certainty.
Finally, obviously you don't have to liquidate all of your holdings. If you have $50k in student loans, sell at least enough to wipe that out. Debt is one of the few things I overwhelmingly will always argue in favor of eliminating at the first opportunity. There are a lot of ways to earn $300,000. Debt can and often will make your life a living hell on the other hand.
Consider long-term vs short term capital gains, but if the stock volatility is higher than the difference (and the difference is meaningful to your financial health) you may still want to sell at the higher tax rate.
If you are in high-interest (credit card, payday loan) style debt, you almost always want to sell and retire that debt; nothing can beat that.
They are gambling. If you sell and they hold, they might make more money than you. They might make a lot more money. Or, they might lose most or all it.
Playing the lottery is a bad idea, but lots and lots of people do it.
One way to view it is you can trade your potential (but less likely) future gains for a guarantee today. If you won't feel bad taking your 10x now and watching a co-worker get 100x later, if that possibility doesn't bother you, then sell and don't worry about it.
As far as an advisor, if you have goals and already know exactly how to meet your goals, and you stay on top of your investments, you might not need one. Lots of people are like me and hate actively managing their money. Lots of people don't know what their investment options are and don't have concrete steps in mind for reaching retirement with a specific amount of money.
That said, I've found the fees for financial advice to be worth the money almost always. Similar to getting a lawyer or having someone do my taxes. I usually discover that doing it myself is a mistake and that getting professional help is worth paying for.
There is a big difference in playing the lottery and having shares in publicly traded companies.
The closest to gambling that this is is "putting all of your chips on red".
If they'll be taxed at the short-term level, wait one year until they turn into long-term capital gains. You'll be saved from paying thousands in taxes.
If you won't need the money immediately; and the company prospects look mediocre to good; keep for a year. Then re-balance your portfolio.
It all depends on your risk tolerance of course, but avoiding selling at a gain RIGHT NOW in order to avoid taxes is not a good reason.
When you do, be aware that financial advisors who take a commission have an incentive to sell you products that will make them money. Look for a fee-for-service FA who has a fiduciary duty to you. NAPFA[0] can help with this. You pay them for their advice. They don't make money off your investments.
[0] https://www.napfa.org
If you can predict and act on these patterns better than the market, you should go open your own hedge fund.
RSUs are already taxed, so not selling them is like a conscious decision to buy the company's stock.
Your intuition is correct. Holding your employers stock means that if your employer implodes not only do you lose your job you lose a nice chunk of your savings.
Money is fungible. Your vested stock is just the amount of money it's worth today. If you wouldn't go out and buy that much of the stock today then you shouldn't hold it. You should sell it and go buy the thing you would have bought with that money instead. Don't be anchored by the wrong thing.
In my case I strongly prefer diversification and reducing tail risk over potentially more lucrative outcomes that I might get from having concentrated holdings in successful companies.
I would like to say I sell the stock as soon as it vests, and that is my goal, but I've been misbehaving and had a limit order open for 6 months. I really shouldn't do that considering the risk and upside are not at all proportionate.
RE financial advisers:
The #1 rule of financial advice is never take financial advice from someone who takes a percentage of your investments. Anyone who charges based on AUM is only interested in soaking you for fees with expensive investments that give them kickbacks.
You want a fee based adviser if you want one at all. I don't think you do if you are in the accrual stage. Just invest passively in the entire market of things you can cheaply invest in using index funds with a low expense and pick a ratio of stocks to bonds that you are comfortable with and let it grow. The most important skill is staying the course, staying in the market, and purchasing regularly (don't time).
I only own one fund. https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
It's a wrapper around several other index funds. Simple. I don't have to think about rebalancing or anything else. I'm going to keep buying this fund until I am in my 50s or 60s and have to rethink as my time horizon shortens. When this fund is not available such as my 401k I mimic it's allocation using the available index funds.
I used to try and do it cheaper by buying the underlying funds with lower expense ratios. Gaming taxable vs tax deferred. I lost interest.
https://www.etf.com/docs/IfYouCan.pdf
If after you've done some reading and you have some specific investment you are interested in, maybe it makes some sense.
It's not crazy to hold stock, as long as the company has a good business and management and you think it's prospects are good. But it's not an all or nothing choice. What is crazy is to hold onto stock if you can't afford to wait out a downturn in the stock market, which can be many years.
I can remember https://en.wikipedia.org/wiki/Enron_scandal and how some people had all of their 401k money in Enron stock. They got laid off and their 401k balance went to $0 :(
Myself I sell my RSUs and invest them in a low cost S&P 500 index fund instead.
I've worked for public companies that went from $80/share to $2/share (Sun Microsystems) and from $24 to $4 (Groupon) and in both cases, I knew a LOT of people that just held on, thinking the decline was temporary.
In fact, if it's a regular monthly or quarterly vest, look into setting up a 10b5-1 plan to automatically sell your shares even during blackout periods. The broker handling the shares for you will often do this for free.
I had to pick one of them, so I think describing it as "setting up a 10b5-1 plan" might be inflating the difficulty of the process somewhat, even if that might be what I was unknowingly doing at the time.
+ When you sell, don't broadcast it to people in the office. Office politics may portray it as signaling a 'lack of faith' and there is no upside to publicizing the decision anyway.
+ One way to look at the money from the sale of stock is as the return on an investment. This means that it is ok to protect that return for the future rather than following the conventional advice that it should be risked for further growth. Walking away from the poker table with money in your pocket is not foolish.
+ The general advice of financial advisors is for ordinary individuals to gamble against professional and institutional investors. There's no need to pay a fee for that advice. They pitch a system based on the idea that dumb money can beat well capitalized professionals over time when those well capitalized professionals sole objective is to take dumb money.
+ The booming current market hasn't brought back the 401k's that were wiped out in 2008. Portfolios that lost 50% of their value would need 10 years of sustained after inflation 7% growth to get back to where they were (with no fees while ignoring the time value of money). [1] [2]
Good luck.
[1]: Edit, the growth would have to be specific to an actual portfolio and not generalized to a market or an index.
[2]: Edit, this also assumes no losses after 2008, i.e. someone pulled their money out and sat on it (hard to do with a 401k without incurring a penalty).
When I got my RSUs in my last company they were worth $45, the company had just announced that the company had lost some customers. While I thought things could only get better from thereon I put in staggered stop loss order - sell x at $42, y at $40 etc, while letting the upside open. I did sell some of the RSUs at $42. Then things turned around and I was lucky to sell some of the stocks at $70.
Recently I quit the company. The quarter just before quitting was terrible. The CEO talked about the stock prices during the All Hands and asked people to pour in some more money into the company stock. This sent alarm bells ringing. I sold everything as soon as the meeting ended.
Then again, this whole thing might not be for every one.
For example, EquityZen is a platform that lets employees sell shares before IPO: https://equityzen.com/?utm_source=hackernews&utm_medium=comm...
For a case study in why you want to do this, just look at what would have happened if you were paid in IBM stock and laid off in their restructuring in 1993.
I work for a company whose stock is going up. This makes it a great company to hold stock in. Unless, some other company's stock is going up faster. Which there always will be, but I don't necessarily know which one. I could be making more money. The trick is knowing which, unfortunately reading tea leaves is difficult.
So I diversify. I leave some money in my company, I put some money in other investments. That way, if my own company goes down in flames, I am not totally lost, and if they continue going up, then I gain.
What you need to do is understand your company, its products, its history, likely future, and risk factors. Yes that is a lot of stuff to research, but it is the way to sleep better at night while feeling good about yourself and your investments.