What should you do with your vested RSUs & ISOs?

As a financial planner who works with tech and media professionals, I’m always fascinated by how people think about their employer stock.

• Do they think it’s their meal ticket to unbridled wealth?
• Do they merely look at vesting RSUs as another source of immediate cash to pay the bills?
• Do they think about it similarly to their 401k? (IE: in that they don’t really think of it as “money” until retirement?)

I’ve seen prospective clients do just about everything possible with vested company stock...

👉 I had a respective client at Google tell me during their Right Fit Call that every time their RSUs vest and their trading window opens up, they sell ALL of it immediately and then move that money to their savings account.

When I asked why, they said “Not sure, started doing it a few years back and kind of just got used to it….”

👉 I’ve spoken with a young woman that has built up over $1mm in Facebook stock over the years…to the point that this one company stock makes up over 90% of her family’s net worth…and she hasn’t sold a dime! She prefaced by saying that she knows she probably should sell but hasn’t been able to pull the trigger!

I could keep going….but I would say the common thread in all of these RSU stories is that a lot of these decisions are done through inertia. They haven’t put together a full financial plan, one that incorporates their company stock into the mix and so they’re not really sure what to do and the seemingly “easiest” and most comfortable path becomes what they end up doing.

If you are interested in discussing your financial world, please set up a time to connect and Book a Right Fit call with me here.

Let's continue! What questions should we be asking ourselves when it comes to our vested stock and when we should be selling it?

My starting point is always this: There are only two fundamental reasons to sell company stock that we’ve accumulated:

1. Cash Flow
2. Diversification

We can put this another way…selling from a position of weakness/need or a position of strength/opportunity.

Let’s start with the first reason, cash flow. If you have a substantial amount of company stock (whether in the form of RSUs that have vested, ISOs, Employee stock purchase plan purchases) but you also have some credit card debt hanging over your head or a lacking emergency fund, then company stock can and should be thought of as a godsend.

Before we can focus as extensively as we want on the planning aspect: investing, retirement planning and tax coordination... we NEED to make sure there are no creaks in the floorboards.

Eliminating credit card debt should be the very first priority in a financial plan, especially if you are a 6-figure earner with other assets. Honestly, credit card debt should not even be something you’re willing to stomach!

So if you have $300k in vested company stock and $10k in credit card debt (when I say debt…I mean that you have had an outstanding balance for more than 30 days and it is actively accruing interest against you), well guess what, even if you think the stock is going straight to the moon…selling to eliminate that debt should be your very first move!

Part of this is about habits and drawing a line in the sand: credit card debt is not on the table.

But part of this is just math…Credit card debt works against you to the tune of 19%, 20%, 25%...these are outrageous numbers! Maybe your company stock (or other investments) will reach those highs, it’s absolutely happened in different years, but we don’t know if that will happen whereas we KNOW that those negative interest rates will be there every single month until the debt is gone.

Moral of the story, if company stock allows you to do so, rip off the band aid and consider that part of your life over.

I look at this similarly to someone that doesn’t have their 6 month emergency fund in cash.

If you only have $10k in the bank but it costs you $50k to wake up in the morning for the next 6 months, I’d want to see you take some of that equity and set up your lifetime emergency fund.

Having an adequate and comfortable cash cushion gives people the confidence to invest and stay the course through good times and bad. They’re never going to find themselves in a position of NEEDING to sell their holdings in order to raise cash, pay taxes, pay for a trip etc. It’s a short-term sacrifice (moving the money to cash) to set up a foundation that will benefit you for life.

OK, so those are the times when you are selling stock because you “need” to rather than because you “want” to…it’s coming from a position of fixing a problem rather than enhancing an opportunity.

A lot of our clients have that all covered though. They have an emergency fund taken care of and they have no outstanding credit card debt. Why should they sell be selling their accumulated company equity? While the details surrounding how much to sell, when to sell, what the tax ramifications will be, what to do with the proceeds etc. are part of a larger conversation, lets at least discuss “when” you might start thinking about this.

If company stock is making up a disproportionate amount of your net worth (I hesitate to give a specific percentage here because this is totally family specific), it might make sense to sell your stock and then re-invest in a more diversified and broad compilation of capital assets (Go to chapter 7 of my book How To Avoid HENRY Syndrome for a deeper conversation about investing in equities & about WHY we don’t want to have so much of our money in any one company stock!)

Essentially, we’re taking some risk off the table. While we think your company is going to do well and grow forever, we don’t know that! Things happen. Any one company can go belly-up, can lose 80% of its value in a year never to truly recover etc. But historically, this has never happened in the stock market as a whole (and again, read chapter 7, but even logically it really can’t happen as well).

Moving money from one company stock to a fund that has 2,000 company stocks means eliminating concentration risk and understanding that the historical average for the stock market as a whole 7-9% is nothing to sneeze at. Again, this is totally client specific!

There are times that it makes sense to not sell your company stock because of it’s growth potential, your financial position and you want to hold on.

Many of my clients are in a position where they can take more of a long term risk.

There are also absolutely going to be times where you want to “lock in” your gains so to speak (again, based on the historical performance of the stock market as a whole that’s effectively what you’re doing by diversifying your assets) and then keep on accruing more company stock…so we can evaluate all over again next year!

If you have any questions about your financial world, please set up a time to connect and Book a Right Fit call with me here.

For Educational Purposes Only – This does not constitute a recommendation.

3671779RH_JUL23 *Registered Representative & Securities & Investment Advisory Services offered through Hornor, Townsend and Kent, LLC. Registered Investment Advisor Member FINRA/SIPC (212) 697-1355. Drucker Wealth Management is Independent of HTK. Past Performance does not guarantee future results. Listed recognitions cannot predict the recipient's future performance - please reference linked articles for details.