How to manage (when to sell) stock awarded by an employer?

[bprmp]

The company my wife works for is likely to go public in the next 12-18 months. She has been awarded 3,500 shares at a set strike price, half of which will vest this year. We have been given an equity statement with hypothetical values at different valuations. If the company goes public this year the shares will probably be valued at $30k (given their annual revenue and earnings statements). My question is what's the best strategy to manage this money? I know you can't time the market but where do we start? Should we just cash out as soon as they're awarded and walk away with $30k?

We're in our late twenties, no debt, $100k NW, and about to purchase our first home. My wife doesn't plan on leaving the company anytime soon so we'll likely be fully vested in 2 years. Maybe we cash out the first round and roll the dice with the next? Thoughts?

[Chrissy]

Sell.  Reinvest the money in an index fund. 

Why?  Diversification.  SEE:  Enron.  People lost their jobs AND their 401(k)s at the same time because they were in company stock.  Also, by letting it ride, you're stock-picking, which is risky business. 

$30k is a lot when you're worth $100k... but, you're young, and have time to recover from a loss, so if you really want to gamble, keep just a FRACTION of the stock.  I'd say $3-$6k.

[talltexan]

I'd vote for limiting the position in the company stock to about 5% of your total net worth.

[Retire-Canada]

Forget that she works there. Decide how much of that company would you buy and hold in your portfolio. Use that as you asset allocation target and keep selling company stock to move you towards that target % or $ amount.

[seattlecyclone]

Agreed that you probably don't want to hold much of this stock for the long term. It's common for there to be a "lock up" period (often six months) after the IPO where early employees are prohibited from selling. Will there be one of those here?

Another wrinkle comes into play if these are "incentive stock options" (ISOs). If so, there's some special tax treatment available for meeting the holding period (two years from initial grant date of the stock option, one year after exercising the option). For this reason you may wish to consider exercising the stock as soon as it vests, prior to the IPO, so that you've met the tax conditions as soon as you're able to sell. This comes with its own set of risks (what if the IPO is delayed or never happens, what if the IPO price is below your strike price, etc.), but it's something to consider.

[Car Jack]

I know lots of people who were granted stock during the dot com period and burst.  They had to pay a ton of tax on phantom gains.  Many of them held the stock and it all went into the toilet.  Now they have to take years to regain the taxes that have been paid and they have nothing from the stock.

What I do with RSUs and ESPP:  The milisecond that it's available to sell, it gets sold.  I'm fortunate that the stock goes to etrade and they have an option to sell on vesting.  So I never hold even a single share of stock. 

[Heckler]

So, what does the hive mind say about a potential new management position that may be compensated in ownership of the privately held company? I am totally against owning individual shares, but can see the reasons the owner would hire a manager interested in an equity share of the business.   

I could see me saying I only buy index funds at an interview being a final interview.  Thoughts?

[Proud Foot]

Heckler, that make sense from the owners position to want a manager to have some skin in the business.  From my standpoint I would remove the ownership portion from the offer and then evaluate the offer to see if it meets your requirements.  Any distributions you receive for being an owner can be treated as a bonus and then invested in your index funds.  It is possible the company may require you to hold the ownership position as long as you are employed by the company.  As far as your asset allocation and IPS go, just treat the company stock as a $0 investment.

[Retire-Canada]

So, what does the hive mind say about a potential new management position that may be compensated in ownership of the privately held company? I am totally against owning individual shares, but can see the reasons the owner would hire a manager interested in an equity share of the business.   

I could see me saying I only buy index funds at an interview being a final interview.  Thoughts?

Just depends on how much the equity compensation is relative to the overall compensation, how long you have to hold the equity and the needs of your FIRE plans. If you are making $100K now and the new position is $100K + $25K in equity that could be okay since you can save and invest as per normal with a decent potential for upside in the company equity assuming you can get out of it at some point that's reasonable.

OTOH if you'd get $75K + $50K equity I'd be far less stoked as your ability to save/invest gets reduced and your equity position starts to become a big risk.

So I wouldn't say it's a deal breaker under any circumstance, but I would carefully weight the details in light of the impact on your FIRE plans.

[ubermom4]

Check your tax liabilities -- very important. If it is a straightforward grant and you only pay capital gains (no phantom stuff) things are much easier.

I would strongly encourage you to sell all of it. Here are some reasons --many stocks go down in value (every day -- watch them!), how would you feel if the stock went to 0?, how about a 50% reduction (um, this is pretty common and I have personally experienced this 2x at different companies/industries), if a stranger showed up at your house and dropped $30k cash on your kitchen table would it be best for you to buy stock in this company?

Diversify away from too much exposure to one company/industry. If you can't agree with your spouse to sell the entire position, sell half of it. DH and I often disagree about when to sell and we use this strategy. Just this year we were disagreeing about selling some options and I used the cash on kitchen table image and it really helped him to be more comfortable selling. A couple of weeks later the stock price drifted much lower and we are very glad to have sold. Hope this helps you.

[Systems101]

So, what does the hive mind say about a potential new management position that may be compensated in ownership of the privately held company?

Lead with questions.

Ask questions about why the equity grant is there, and how pervasive it is across the company:
- Is it viewed as a sign-on incentive because this is a hard position to fill?
- Is it otherwise is taking away what would be a higher base salary because they feel you would want that and it's cheaper for them to do stock than dollars?
- Is it a requirement of managers will own part of the company to create a behavior incentive?.

If every other manager has it and you are saying no, you may be self-selecting against getting the job.  You may be okay with that, but it should be an informed decision, not just an "index funds or else" perspective.

At upper level management in various companies I've worked in, the requirement to keep company stock was a "you must own $X in company stock by the Yth anniversary of your promotion to Z rank".  It was a condition of employment.  X and Y were dependent upon Z, but X was usually 1X, 2X, 3X or 5X yearly base salary... so they had their management team putting pretty major skin in the game...  considering the base salaries were easily into 6 digits.  That was intentional to drive behavior of those people...  Y was often 5, and usually a portion of the salary was held back to put the person on the path to the necessary level of ownership...