The Risks of Holding Too Much of Your Company Stock
Updated: Aug 29, 2019
If you work in the technology or biotech industries, you may have been offered equity in your company through a combination of stock options, SARs, RSUs, restricted shares, or ESPPs. Equity compensation can be a great way to build wealth and own a stake in the company you work for. If you’ve been with your company for some time, you may have accumulated a large number of shares of company stock in relation to your entire investment portfolio. This kind of imbalance reduces your level of diversification and greatly increase the amount of risk you hold in your portfolio.
Companies provide equity compensation to give their employees a greater sense of being invested in the company. This vested interest may also be an incentive for employees to work harder, feeling they are contributing to the company’s success and, in turn, their own stock’s value. But, this personalized interest often makes it very difficult for employees to exercise their options and sell their stock. Good investors make reasoned investment and diversification decisions, but for some, this personalized interest in their company stock can make this difficult.
Employees can be optimistic about the future growth of their businesses, but holding a concentrated position in company stock comes with certain risks. It’s important to remember that stock prices take into account all currently known information about a company. Past performance does not indicate what the stock price will do in the future. If something unexpectedly detrimental happens, such as a disappointing product launch or an unforeseen lawsuit, not only could you lose value in your company stock, but you might also lose your job.
The most well-known example of this kind of risk is the infamous Enron Corporation bankruptcy in 2001. Many of Enron’s employees were very confident in the company’s success and acquired vast amounts of their stock. Some employees had their entire retirement savings in Enron stock. After Enron’s fall, many employees lost their jobs and most of their retirement savings. Those that were more diversified in their investment portfolios may have lost their jobs, but not their chances for retirement. This extreme example demonstrates how a concentrated equity positioning in your company stock could expose you to unwanted risk.
The Challenge with Diversifying out of your Company Stock
While there is always risk inherent to investing in the stock market at large, by diversifying your portfolio and owning stocks in different industries, you can drastically reduce your risk. The most difficult challenge you will face when attempting to diversify out of your company stock is minimizing your tax consequences. Non-Qualified stock options (NQ), Incentive Stock Options (ISO), Employee Stock Purchase Plans (ESPP), and Restricted Stock Units (RSU) all have different rules on taxation that make them challenging to navigate. For example, you can receive a more favorable tax treatment on the sale of ISO shares if appropriately managed, but if you exercise too many shares in one year, you may have to pay extra taxes due to Alternative Minimum Tax (AMT) rules.
Working with a financial planner or tax specialist who specializes in helping employees manage their equity compensation can be extremely valuable and save you from making costly mistakes. If you are looking for help managing your stock options and minimizing tax consequences, contact us. We can schedule a Complimentary Get to Know You Meeting to show you how we can maximize the value of your equity compensation.
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