Saturday, September 7, 2019
When to Sell Your Company Stock
For the last 2.5 years I've been working for Zoom, which before April 18th of this year was a privately held company. Before Zoom, I had always worked for large public companies. Now that we are public I've been doing a lot of research about when to sell company stock. Prior to my current gig, anytime I had company stock I was using it to pay for grad school, pay off debt or build an emergency fund. This is the first time that I have company stock and all those things are behind me.
I'm fortunate to have many friends and mentors who have gone through this before and I've been relentlessly bugging them and getting their advice. I've also been doing my own research linked out below to some of the best resouces I've found on the topic. I've always felt the best financial advice is not easy to find so I wanted to share what I've learned about when to sell your company stock.
FRIENDLY REMINDER THAT I'M NOT A FINANCIAL ADVISOR, PLEASE CONSULT ONE AND AN ACCOUNTANT AND MAYBE A LAWYER. ANY SPECIFIC NUMBERS OR PERCENTAGES OF HOW MUCH TO SELL ARE JUST EXAMPLES, EVERY SITUATION IS DIFFERENT.
But....here are some guiding principles about when to sell your company stock.
If you have debt, sell baby sell. Earlier in my career I primarily used any stock I had to do two things, pay off debt and to build an emergency fund. The general conservative financial wisdom would seem to agree that this makes the most sense not just for stock but any sort of windfall or extra income.
Assuming you have no debt and a solid 3-6 month expenses in an emergency fund. Here are some other ways you should think about your stock ranked in order of most conservative to risky.
Sell everything as soon as you can and diversify. Even with no debt, there is solid data to back this one up, check out this article from Wealthfront. Another article walking through why this could be a good idea.
Make a plan and put it on autopilot. This takes the emotion out of when and how to sell. Emotion seems to be the biggest enemy to wise stock selling decisions. There are so many variations, but the key is to decide in advance how much stock you want to sell in what time period. For example you can have a plan to say that 4 years from now I want to have left 25% of a specific stock grant, so you would schedule regular amount of shares to sell each month to sell 75% of your shares. You could also say you'll sell everything over 12 months. The possibilities are endless, but should be influenced by your networth, what your financial needs are in the near and long terms as well as your risk tolerance.
You don't get rich by diversifying. I had a mentor and someone I really respect tell me this. I think I would modify it a little to say "you don't get REALLY rich by diversifying". Think about the employees who followed all the previous advice at Apple, Google, Facebook and all the other stock super stars. They got rich, but not nearly as rich as the would have had they held on for a long time. Most companies are not going to be in that category...but some will be. General conventional financial wisdom suggests you should almost never have more than 10-15% of your network tied up in your company stock. Personally, I think the key is being able to be realistic about the risk and comfortable with it. Can you take on that much risk? Are you more worried about winning big or losing big? Do you have enough money outside of the stock position to do what you want to do for the next 5-7 years? Any big purchases you need to make in the near future? How are you tracking for retirement, kids college savings etc? If you are in a solid position to have a concentrated position in your company stock and want that to be a high risk/high reward part of your portfolio, then that makes sense.
As I've been talking to experts on this topic and reading up on my own, I keep coming back to one important thing to consider. No matter what you decide to do you need to make a thorough enough and smart decision that no matter what happens with the stock price you can look back and maybe not be happy with the outcome, but be happy with your decision.
In my opinion, what it takes to get to that place is to have a solid plan, get good advice, be realistic about your risk level and have a solid financial foundational.