Selling your stock
The road to IPO, with all of its twists and turns, can feel very overwhelming. Before the champagne pops, you'll want to make sure you're setting yourself up for the best financial outcome. In this section, we'll explain how to handle the emotional roller coaster of selling your stock.
Selling your stock
You might find selling to be a more emotional decision than you ever imagined: you're excited to cash in on all your hard work, but feel anxious about selling your shares and want to hold off for just the right moment.
Deciding when to sell
The IPO is a bit of a hurry-up-and-wait, as employees usually can't sell their stock for up to 180 days. This is called a lock-up period, and is meant to prevent employees from all dumping their stock and depressing the stock price.
"Many of our clients express a 'damned if I do, damned if I don't perspective on selling company stock, reflecting their fear of selling and then seeing the stock appreciate, or holding on and then seeing the stock decline," says our Director of Research, Celine Sun. "In other words, they are paralyzed by the ‘fear of regret.'"
It's going to be hard to completely ignore the commentary on your company's stock price during the lock-up period, but don't get sucked into the chaos. This is the same advice we give to our clients when the stock market experiences volatility: you can't time the market, so following the ups and downs of your company's stock price will only cause you to feel anxious.
Pro tip: Avoid decision paralysis by coming up with a plan ahead of time
Post-IPO stock is known to be volatile, and in the heat of the moment you'll likely make a rash decision. Make a plan and stick to it!
How to choose the right selling plan for you
When considering your options for a selling plan, we suggest considering the following three factors:
Risk
Besides the risk associated with holding a concentrated position, it's important to consider what level of risk you can take given your personal financial situation.
Taxes
Depending on the type of equity you have, you may be able to make some optimizations to reduce your tax bill. (We highly recommend working with a good tax accountant on this.)
Emotional wellbeing
A good selling plan will minimize regret. A great way to avoid worrying about when to sell is by automating the decision.
Some selling plan options
The optimal selling plan:
Sell your stock swiftly!
It's hard to take emotions out of your own personal financial decisions, so our research team conducted an analysis using historical data to illustrate the best scenarios.
We looked at IPO stocks and mature public companies and analyzed the impact of selling $100,000 worth of a single company's stock over 18 different windows, ranging from selling immediately to holding on indefinitely.
On average, the best returns came from selling the stock immediately after the lock-up period, and investing the proceeds in a diversified portfolio. The longer our hypothetical employee held onto her stock, the less she was left with — with the lowest proceeds coming from holding on to the stock indefinitely.
Have RSUs?
If your company gave you a year-end cash bonus of $50,000, would you use all of it to buy your company's stock? Probably not. But that's essentially what you're doing if your company is public and you hold on to your RSUs after they vest. Unlike with options, there is very little tax advantage in holding RSUs — you're better off selling immediately.
Which selling plan is
right for you?
Sell immediately:
- Best approach, according to research
- Minimize risk exposure
- Benefit from dollar-cost averaging
- Easier to stomach
Scheduled selling
It's clear you should sell your company stock as quickly as you can — but odds are, emotions will take over and you won't. In that case, you're probably best served choosing how much stock you would like to sell upfront, and then committing to a schedule of selling the same amount of stock every quarter in the future.
The amount to sell upfront is usually a function of your skittishness over the current value of your stock and whether you need the money to make a significant purchase (like a house) in the near-term.
Selling a constant amount each quarter allows you to benefit from dollar-cost averaging, which is likely to generate a larger amount of proceeds from the sale of your stock over time than trying to time the market.
Pro tip: Benefit from using tax-loss harvesting
If you have money in an investment account with tax-loss harvesting, it can help reduce your tax liability by offsetting capital gains and ordinary income you'll realize when you sell your stock.
Other options we don't recommend
Some people will try to hedge their stock to reduce the risk of negative price movements. Because we don't believe it's possible to time the market, we don't recommend you pursue these strategies, but you should be aware they exist and have an understanding of them.
Pro tip: It's not possible to time the market
Instead, focus on tracking broad market indexes through passive investing: investing in a portfolio of low-cost index funds.
Set a limit order
A limit order allows you to automatically sell your stock at a given price. The challenge with this approach is that the stock price might never reach the price you set in your limit order.
Buy a put option
A put option allows you to "put" your stock to the buyer of the option at an agreed-upon price. For example, if you buy a put option at an exercise price of $20 per share, then you are guaranteed to be able to sell your stock at $20 per share — even if the price drops below $20. However, the net price you receive is the price at which you sell your stock less the cost of buying the option.
Short your shares
To lock in the value of your stock while avoiding any taxes, you can take a "short" position equal to the number of shares you own. To short your stock, you borrow shares from your broker and then sell them in the open market. You pay back the loan with stock in the form of exercised options or RSUs when you are ready. Your option or RSU agreement typically forbids you from shorting shares while you are in the IPO lock-up period and the cost of borrowing shares can be very expensive soon after the lock-up expires.
Implement a costless collar
For some people, the prospect of trading some of their potential upside gain for a guarantee to limit their downside is appealing. The most popular way to implement this is through what is known as a costless collar, which means you simultaneously sell a call option on your stock and you buy a put option. A call option entitles you to buy a stock at a predetermined price up until a particular time in the future. The sale of the call option pays for the cost of buying a put option. Once again, selling call options is typically not allowed during the lock-up period and the commissions on the two trades make it less desirable than it appears.
Pro tip: Be wary of bias
It's common for employees to be overconfident in their company.
Even the likely winners can fall prey to a market decline. That's why we feel confident saying you are more likely to sleep well at night if you sell a little bit of your stock every quarter.
Still not ready to sell?
Remember the risk of a single stock
When you sell and build a portfolio diversified among different asset classes, you avoid taking on the risk associated with a single stock and the risk that the company will stumble.
Over time, one asset class may rise and another may fall. By investing across asset classes, you can insulate yourself, to some extent, from the losses while tracking the broad performance of the overall markets. When judged on a risk-adjusted basis, single asset classes are not expected to match the performance of a well-diversified portfolio.
Be wary of bias
It's common and natural to be excited about the value of your company — after all, you work there for a reason! That being said, its extremely common for employees to be overconfident in their estimates of the company's performance.
If you truly believe you work for one of the big winners, the idea of holding on to all of your employee stock might seem seductive. But even the likely winners can fall prey to a market decline or to some other unforeseen event just when you need the money. That's why we feel confident saying you are more likely to sleep well at night if you sell a little bit every quarter.
Taxes, trading windows, and ESPPs, oh my!
Let's take a deeper dive into some of the more complex factors you should consider when forming a selling plan.
Taxes
Selling your company stock will impact your tax bill. According to Terry Dickens, CPA, Tax Senior Manager at Moss Adams, just how much you'll owe depends on many factors, including:
- Whether you have ISOs, NSOs, or RSUs
- How long you've held the stock
- The price at which you bought the stock (if they were options) and how much they're worth when you sell them
- The state you live in
- Your income bracket.
That's why it is very important to consult an accountant to outline different scenarios and discuss how to minimize your taxes. For a deeper dive on taxes and equity, head to our Tax Overview & Glossary section →
Trading windows and blackout periods
Trading windows are times when employee trading (selling and buying stock) is allowed. Blackout periods are times when employees are not allowed to trade, or sometimes even to exercise. They're set up to prevent the possibility of insider trading, and usually happen every quarter from the beginning of the last month of each quarter until a few days after quarterly financial results are made public. They also happen when your company is in discussions with another company on a major transaction that could affect the value of the company. Missing a trading window may be detrimental, because of the taxes associated with when you sell — so make sure you discuss the schedule with your accountant when you're developing your selling strategy.
The 10b5-1 plan
Your company may offer 10b5-1 plans, which is a trading plan that you set up to specify when you will buy or sell shares at specific, scheduled times. This is usually only made available to C-suite or executive-level employees to help them buy or sell shares without violating laws against insider trading. But employees at more levels are being offered 10b5-1 plans these days. If you are interested in participating, you'll definitely want to consult with a broker to make sure you're fully complying with all relevant regulations.
Employee Stock Purchase Plans (ESPPs)
An ESPP is a benefit that offers you the opportunity to purchase shares of your employer's stock at a discount through accumulated payroll deductions. If your company offers an ESPP, we recommend you participate at the level you can comfortably afford, and then sell the shares as soon as you can.
- 01 —
Choosing investment bankers
Once your company is confident it wants to pursue an IPO, it chooses investment bankers to manage the offering. These bankers will provide financial advice and analysis and introductions to potential buyers of your company's stock. Morgan Stanley and Goldman Sachs often act as lead underwriters for most high profile technology companies.
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Filing the S-1
The company's management team gets together with bankers, lawyers, and accountants to draft an initial prospectus, also known as the S-1. This process can take 1-2 months. The initial S-1 is filed confidentially with the Securities and Exchange Commission (SEC), which responds with comments the company must address. It can take 2-4 months for the company and SEC to agree on the edits and disclosures that need to be added. Once both sides are in agreement, the "preliminary" registration statement is made public on the SEC's EDGAR database and a "red herring" prospectus is distributed to interested investors. (Note: To check out any company's S-1 form, go to SEC.gov, enter the name of the company, and look for the form titled S-1). At this point, the prospectus only contains a potential range for the amount and pricing of the offering.
- 03 —
The IPO roadshow
Once the preliminary prospectus is made public, the company is ready to begin its "roadshow," where members of the executive team travel to major cities around the US (and potentially even Europe and Asia) to meet with potential investors. The roadshow typically takes 2-3 weeks to build enough demand to create a successful IPO. These days are jam packed, with management presenting to up to 10 unique investors each day before flying on to the next city.
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Final countdown
Once the roadshow is complete, there are only two things standing in the way of your company and an IPO: the "pricing" meeting with investment bankers and the SEC's final approval. The final steps happen in rapid succession: With investor feedback in hand, the investment bankers and company management meet to formally price the offering (i.e., set the price at which shares will be offered and the number of shares that are available to be purchased). Once decided, a final registration statement with the SEC is then filed. This usually happens the night before shares can officially be traded, so it's a pivotal moment for the company. The next morning, the SEC has to approve the final terms of the offering (known as when the registration "goes effective"). Once approved a few hours later, shares can be formally offered for sale. And with that, trading commences and your company is officially public.
Selling private stock
These days, companies are taking much longer to go public than they did in the past. That means employees have to wait much longer to recognize liquidity from their hard-earned equity.
To lessen this burden, many companies are arranging secondary sales with private buyers that allow employees to sell up to 20% of their vested shares, also known as a tender offer. Softbank's recent secondary purchase of Uber employee shares was perhaps the largest of its kind.
While this is a great opportunity for employees, it also poses a dilemma — is it worth selling now, or should you wait for a potential larger upside down the road with an IPO?
The tender offer dilemma
All things being equal, you should probably hold onto to all of your stock if your employer's growth rate and margins are increasing. But all things are not equal.
When to consider a tender offer
If you're not sure how to evaluate the growth and margin question then you might want to sell a small amount (10% to 20% of your vested stock) now and additional stock incrementally over time if you have the opportunity.
If the IPO seems years away or management shows no interest in going public, you should also sell some stock — you might not get another chance.
If your company stock represents the vast majority of your net worth, it might also make sense to take a little bit off the table and diversify your portfolio.
It's also a good idea to cash in some of the equity if you have some expenses coming up or simply want to get further along with some of your other financial goals (such as a down payment for a house).
If you do sell early, keep in mind that your company's value could continue to grow significantly. But don't let seller's remorse control your life. Once you make the decision to sell, don't look back.
REVIEW: SELLING STOCK
The bottom line? We think you should sell your stock soon after the lock-up period, and invest the proceeds in a diversified portfolio.
If that seems too difficult for you, determine how much stock you would like to sell upfront, and then commit to a schedule of selling the same amount of stock every quarter in the future.
A great way to avoid worrying about when to sell is by automating the decision.
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