Today’s post is a great topic of interest, at least in my experience. We are going to talk about some specific strategies to get out of company stock. You know, selling company stock. First off, thanks to a great webinar hosted by Kitces and PIMCO. Unfortunately, you need to be a member of his site to watch it, but I am not aware of any restriction if you wish to join.
Now, this is focused primarily on Restricted Stock and Restricted Stock Units, better known as RSUs. However, you certainly can use these strategies for Non-Qualified Stock Options you have exercised and continue to hold. Heck, you could probably use them for individual stock you own outside of the company, but the focus is on company stock. Because of that, I will be using the term Company Stock most often.
Before we jump into it, I wanted to share some thoughts why having disciplined strategies to sell Company Stock is so important. One apparent item is it helps reduce Concentration Risk. Some other reasons come from a study by Charles Schwab on why participants never sold their Equity Compensation positions. The two main reasons were fear of tax implications and worried about selling under the wrong market conditions. Another reason is people simply did not know how to sell these positions. Having a disciplined strategy helps to mitigate these issues.
There are four specific strategies that were covered in the webinar. These are not in any order of importance. As always, my position is the one that is most important is the one applicable to your personal situation and not some general rule developed by someone who does not know your circumstances. Let’s get to it.
First is the Set Price Target strategy. You might as well call this the Single Price strategy as it is a disciplined sale strategy designed around a set, single price. Basically, once you hit the price you have set you then sell the positions. The assumption with this strategy is there is only one set price. Obviously, you can adapt this method to fit your needs.
For example, you are awarded Company Stock annually. Each award has a different vesting date attached to it. Hopefully, the price of the stock increases over time and is a little bit higher each vesting period. Well, would you use the same set price you may have set for stock that vested in 2015 as you would have for stock vesting in 2025, especially if that stock has a history of decent growth? I think you know the answer to that question. So, maybe you your Set Price is 5% higher each year.
The next strategy is Price Triggers. This is a price above and/or below the current value of the company stock. In this situation, maybe you set a trigger 20% above the current value and if the stock appreciates in value this much you sell the positions.
On the opposite side, you set a bottom trigger price below the current value. Maybe it is something like 15%. Again, same situation. The stock has dropped 15% in value and you decide that is enough for those positions. Here you sell them.
The concept is simply that you protect yourself so you can get some gains if they are there and at the same time you limit your downside exposure in case the stock heads down. Think of it as a guardrail type of investment philosophy.
Strategy number three is setting up a Systematic Selling approach. The easiest approach here is to just set something as simple as selling on the same day every year. I’m keeping this simple so not taking into consideration things like 144 issues, just saying there are no limitations on how many positions you can sell.
Your system may be that you sell all your positions 5th anniversary of when they originally vested. Again, assuming you are awarded Company Stock annually. In this case, you will be disposing of a set number of shares every year and the ones actually sold are those that were fully vested and totally under your control the last five years. Or, you simply sell them as soon as they vest. Every company sets vesting dates when awarding you Company Stock.
The final approach is to focus on Tax Management. Personally, this is my preferred choice as it plays right into my mantra of “It Isn’t What You Make; It’s What You Keep.” Here you take into consideration things such as how much capacity you have in your current tax bracket, state taxes (yes, this is important), and even upcoming changes in tax rates.
Now, I mentioned State taxes as there was a great point during the webinar. Imagine you own a bunch of Company Stock and live in New York. However, retirement is nearing and Florida is calling your name. Well, the income tax rate in New York can get as high as 10%. Maybe it makes sense to sell your positions after you have moved and are now an official Floridian. Not sure if that is the right term, but I think you get my point. And this consideration comes into play in most states as nearly every state has a state income tax. So, this could matter if you own a bunch of stock in Sherwin Williams, Smuckers, Procter and Gamble in Ohio, Medtronic in Minnesota or Paylocity in Illinois.
Take the time to consider taxes as you sell Company Stock as there is no reason to tip Uncle Sam, or even State Uncle Sam.
This seems like a good place to stop. Again, having a disciplined strategy is important when it comes to selling Company Stock. But, be sure to consult with your CFP®, who I certainly hope caters to clients with Equity Compensation, and also your CPA.
FLASHBACK - COLLEGE SKI TRIP
Your flashback today is a story of a ski trip I took in college. It was a one-time thing, but a fun experience.
Some quick background. I went to Kent State for undergrad. In the fall of my senior year a friend of mine told me about a trip the ski club was taking to Steamboat Springs. Now, I had no idea there was a ski club. There weren’t exactly a whole lot of places to ski around Kent State and I never paid attention to whether there was a ski club. Regardless, my friend knew about the club and had been attending meetings. I guess you had to meetings to qualify for the trip, whatever that weird rule was.
Well, this was my last semester on campus as I was going to be studying in DC in the spring. My focus for the fall was to save as much money as I could as I wouldn’t be working in the spring. So, I had to say no to going. Another reason was because I had class at the same time as the ski club met, which meant I couldn’t meet their requirements.
Fast forward a bit, I started casually dating this girl and she told me about the trip. She was going and I started thinking maybe I could too. So, I asked my friend to find if it was too late for me to signup and if I would be allowed considering I never attended a meeting. Amazingly (please note sarcasm tone), I could go as long as I could pay the price.
I ended up not dating the girl much longer, but we still got along well enough us being on the trip together wasn’t an issue. The trip itself was one to remember from the start.
The plan was to take a train from Cleveland to somewhere near Steamboat Springs and then a bus the rest of the way. Well, the train from Cleveland to Chicago was stuck and we ended up taking busses from there to Chicago. I think there were somewhere around 50 of us. From that point forward it was a train ride westward.
Back in those days, I could not sleep anywhere unless it was in my bed. So, I was awake the whole way out and the whole way back. My point is I saw some cool sights outside the window as we traveled across the Midwest.
Because this was a college trip, it was a mix of students. Most of us were juniors and seniors. It was on the ride out I met one of the ski club officers who questioned who I was as she did not recognize me. Once I told her my name she responded “You’re the guy who had class during our meetings.” We also had a professor and some grad students on the trip. They were wise enough to fly out to Denver and pick up the train for the final leg.
The ride back was a wild one. Mostly because we were without power for about the whole way. I think we were roughly 1 hour into the 20+ hour trip when power went out in our car. This meant no lights and no air circulation. I wonder if it was done on purpose since we were rather obnoxious. I remember there was a mom and her young son on our train car. They were the only people not part of the ski trip. They both had a look of anguish in their eyes and fortunately a conductor moved them to another car.
Actually, most people slept on the ride home for a good portion. Everyone was tired after multiple days of skiing in mountains, which was new to just about all of us. Between the skiing and hanging out in the evening, we were all beat. For me, I didn’t sleep until I made it back home after the trip as I was wide awake for the whole train ride back too. I’ll share a couple of stories from skiing itself in another episode.
I was invited to go with the club the next year as they headed out to Jackson Hole. Unfortunately, I was in grad school at the time and I would have missed the first week of winter quarter at Ohio State. They weren’t back in school at Kent yet so the timing was off. All I know is I hope you were able to take a trip like this when you were in school. I’m glad a friend and a girl I dated briefly convinced me to go.
As always, thanks for taking the time to read this. Please do not hesitate to reach out if I can be of help with your equity compensation-related questions. The easiest thing to do is to click the little green box that reads “Schedule a Meeting” that can be found at the bottom of every page on my website. Or, just click my Calendly link right here.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.