Much of the work of personal finance isn’t objective. There isn’t An Answer. Because it’s “personal” just as much as it is “finance.”
Accordingly, much of the work we do with our clients isn’t us saying, “Do this! Stop doing that! Aaagh noooo!” Again, because we don’t know what The Right Answer is.
Instead, our work heavily relies on asking our clients questions that help them see their situation from new perspectives. And oftentimes one of those perspectives will create an “ah ha!” moment for them, and they can then more easily arrive at a decision that feels right for them.
Nowhere is this approach more necessary and effective, in my opinion, than when your company is going public and you have to figure out what to do with your options, stock, and RSUs…and the abundant grocery money you’ll eventually have.
I’ve tried out a lot of questions over the years. Some kinda fell flat. But some deliver time and again. Here are those questions that I have found particularly helpful in helping clients figure out what to do when their company goes public.
I don’t have any particular narrative in this blog post. If you find one question in here that helps shift or clarify your thinking about your company stock and your money in the upcoming IPO, then I consider it a success!
What percentage of your net worth is wrapped up in company stock?
Include the RSUs that’ll vest at IPO, any vested options, and any existing shares.
Disclaimer: financial planning is fundamentally a conservative profession. And we know that, on average, it doesn’t pay to have a concentration in any single stock. So, our default recommendation is usually something like “Don’t have any more than 5% of your investment portfolio tied up in a single stock.”
And I’m telling you, that rule is reasonable. Even further, on average it’s going to be the best recommendation.
But I also know that great wealth comes from concentration. It’s a hell of a lot riskier. But it’s the only way you’re going to 10x or 100x your wealth in a short period of time. You’re not going to get there—in the short term—by having an extremely uninteresting traditional investment portfolio (my favorite kind, fwiw). (That kind of investment portfolio is the most reliable way to get you there in the long run, let it be said.)
Which is all to say if your answer to the question is 90%, that doesn’t necessarily mean you’d be a fool not to sell some company stock. Just that you’re gonna have to convince me you’re not a fool. 🙂
How much company stock do you have vesting over the next year or so?
A lot of our clients had significant existing wealth in their company stock…but also a loooot more coming down the pipe, primarily in the form of vesting RSUs, but also sometimes vesting options and, to a smaller extent, ESPPs.
Many of them felt much more comfortable selling existing stock because they knew it was going to be quickly replaced by more vesting.
Calculate the value of your company stock. Let’s say it’s $1M. If I gave you $1M in cash, would you go out and buy $1M worth of your company stock?
Because holding on to company stock is the same thing. No really. That’s not poetic license.
There’s a fun behavioral bias called the endowment effect: If you already possess something, you value it more highly than if you didn’t already possess it. In this case, you’d value $1M worth of stock you already possess more than the $1M of stock you could possess if you had $1M of cash to buy it. You likely wouldn’t spend that $1M cash to buy stock. And this explains why.
“Value of your company stock” includes existing shares, RSUs that will vest upon going public, and vested options.
[If you want to get picky about it, your $1M in stock is worth less after taxes. So, if it’ll be worth only $500k because it’s RSUs that’ll all vest and be taxable on IPO Day and you’ll lose half of it to taxes…if I gave you $500k in cash, would you go out and buy $500k worth of company stock?]
How would you feel if the value of your company stock went to $0 (think BlueApron)? How would you feel if it lost half its value? How would it change your life if it doubled in value?
We can’t know ahead of the IPO how much it’ll be worth because we don’t know the stock price. So, before the IPO, maybe use the most recent 409(a) or the price that the stock has been selling for on the private market. I can guarantee only that that price will end up being wrong.
If it going to $0 would devastate you, both emotionally and financially, consider selling more shares sooner. If it wouldn’t change your life much, but it would meaningfully change your life if it doubled in value, then consider holding (and hoping).
If you could have One Thing in your life—be it an actual thing, or an experience, or a feeling—with the money you have currently wrapped up in company stock, what would it be?
One strategy to consider here is to sell enough stock to get the money to at least achieve that One Thing (oh yeah, and enough to fully cover the tax bill, too). You can think about the rest of the stock separately. With this strategy, at least you’re not risking that One Thing.
Do you want a trusted partner to ask you questions that allow you to think more deeply about your life, your company stock, and this IPO…and to listen deeply to the answers? Schedule a free consultation or send us an email.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.
