Today's episode is a topic of great interest, at least in my experience. We're going to talk about some specific strategies to get out of company stock. We'll focus primarily on restricted stock and RSUs. However, you certainly could use these strategies for non-qualified stock options as well.
Before we jump into it, I want to share why having a disciplined strategy to sell company stock is so important. One reason 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 that people were worried about selling under the wrong market conditions. Another reason, 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 we're going to cover. These are not in any order of importance and my position is that the most important one is the one applicable to your personal situation and not some general rule developed by someone who does not know your circumstances.
You will want to hear this episode if you are interested in...
Set Price Target & Price Trigger Strategies
First is the set price target strategy. It’s a disciplined sales 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.
Strategy number two is price triggers. This is a price above and or below the current value of the company stock. In this situation, you set a trigger at 20% above the current value and when the stock appreciates this much, you sell the positions. On the opposite side, you set a bottom trigger price below the current value. Something like 10-15% below. Again, same situation, teh stock has dropped in value and you decide that's enough for those positions, then you sell them. The concept is that you protect yourself so you can get some gains if they are there and at the same time limit your downside exposure in case the stock drops.
Systematic Selling & Tax Management Approaches
Strategy 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, and not considering things like 144 issues. Just saying there are no limitations on how many positions you can sell.
The final approach is to focus on tax management. Personally, this is my preferred choice as it plays right into my mantra of it’s not what you make, it's what you keep. Here you consider things such as how much capacity you have in your current tax bracket, state taxes, and even upcoming changes in tax rates. I've mentioned state taxes as there was a great point made during the webinar. Check out the episode to hear about it.
This week’s FLASHBACK: A college ski trip I wasn’t supposed to be on
I went to Kent State for undergrad. In the fall of my senior year, a friend told me about a ski club trip to Steamboat Springs, Colorado. I didn't even know there was a ski club! There weren't exactly a whole lot of places to ski around Kent State. The fall semester of my senior year was my last semester on campus since I'd be studying in DC in the spring and I had a class at the time of the club meetings and since you had to attend meetings to go on the trip I wasn't planning to go and I didn't join the club.
Fast forward a bit. I started casually dating this girl and she told me about the trip. She was going along with a mutual friend and they talked me into trying to go too. I asked my friend to find out if it was too late for me to sign up and if I would be allowed considering I never attended a meeting. Amazingly (please note the sarcasm) I could go as long as I could pay the price.
The trip itself was one to remember from the start. The plan was to take a train from Cleveland to Steamboat Springs and then a bus the rest of the way. The train from Cleveland to Chicago got stuck, and 50 college kids ended up on buses from there to Chicago. In those days I couldn't sleep anywhere but my bed so I was awake the whole way. I saw some cool sites outside the window as we traveled across the Midwest. The ride back was a wild one, mostly because we were without power for most of the way. I think we were roughly an hour into the 20 plus hour trip when the power went out in our car. That meant no lights and no air circulation. I do sometimes wonder if it was done on purpose since we a rather obnoxious.
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 briefly dated convinced me to go.
Resources & People Mentioned
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.