When to Update Your Equity Diversification Plan

Diversification plans are different for every client based on the importance that this money has in terms of accomplishing goals.  When a company goes public and your private company stock gains significant value, several factors come into play when deciding how to handle the newfound wealth.

Regardless of what you want to turn those golden handcuffs into, for most people the ultimate goal is to secure the highest possible stock price while paying the lowest amount of taxes. These two factors play a crucial role in determining the optimal time to cash out. Based on my experience, particularly with Duolingo employees, I have learned that while tax planning is important, it should not get in the way of a fair stock price.

Due to the complex nature of equity taxation, shareholders with ISOs, RSUs, and company stock must consider capital gains tax, alternative minimum tax, and state/local taxes (if applicable, such as in Pennsylvania). By creating a tax plan that minimizes these factors, advisors can generate significant value for stock recipients.

For instance, one tax-saving strategy is to exercise and hold shares for one year (and two years after they were granted) before selling, thereby qualifying for long term capital gain tax treatment.  Depending on your tax bracket, this approach can save you up to 17% on your tax bill compared to a cashless exercise and sale. This tax strategy is one way to maximize value while juggling AMT, blackout periods, and RSU wash sales.  

More importantly, my exposure to the tech industry has taught me that the value of your share price is oftentime more important than tax savings.  Although they go hand in hand, selling your stock at a higher value gives you the opportunity to pay more tax.  If you don’t have the opportunity to pay more tax, that means your stock isn’t as valuable.  It takes a shift of the mind for that to make sense…who really wants to pay more tax?

To give you an example, let’s say you exercise shares of stock at $140 per share and plan to hold them for one year to pay a lower capital gains tax rate.  Theoretically, if you are able to sell the stock at $140 per share one year later, you would secure a higher “net value” per share because you are paying less tax.  But what happens if the stock price goes down to $68 per share?  

“Will you wait for the stock price to go back up?  Will AI continue to lift the tech sector?  Will the Fed continue to raise interest rates?  If the stock price goes down to $68 and stays there, you would have been better off selling at $140 and paying the highest tax rate because your net value is going to be higher than $68. ”

Will you wait for the stock price to go back up?  Will AI continue to lift the tech sector?  Will the Fed continue to raise interest rates?  If the stock price goes down to $68 and stays there, you would have been better off selling at $140 and paying the highest tax rate because your net value is going to be higher than $68.  

No matter how innovative a technology company is, there are a number of outside factors that dictate the value of the stock price.  I have ridden the roller coaster with clients at Duolingo, Facebook, Agora, ZScaler, Palantir, Signet and General Electric.  A common thread with all clients is that when the Cool-Aid is flowing, it is difficult for them to order a water.  A good earnings report and a 52 week high will have you wanting to buy more shares, when in reality, the prudent move is to slide some chips off of the table.

As an advisor to clients with concentrated stock positions, it is my job to help you establish goals and determine how this equity fits into that plan.  If this company stock disappeared, would that change your life in any way?  Would it affect your ability to buy a home?  Would it affect your ability to have a work optional lifestyle?

Keeping your equity diversification plan updated will increase the probability of reaching your goals.  We usually help our clients’ make plan adjustments if their goals change, potential employment changes are on the horizon, they have more stock vesting, and when their stock moves significantly in one direction or the other.  

If you’d like to learn more about our financial planning process around concentrated stock positions, please schedule a free Zoom call at your convenience.