Editor’s note: Interested in learning more about equity compensation, the best time to exercise options, and the right company stock selling strategies? Read our Guide to Equity & IPOs
Sudden money – such as comes with an IPO or an acquisition – is a good thing, right? Yes, but it’s often accompanied by stress. People who have been working within a constrained budget, steadily paying off college loans and sizable Silicon Valley mortgages, suddenly find themselves with a seemingly limitless number of options for spending their money.
In this recent Quora post, Wealthfront Director of Research Jeff Rosenberger answered the question: “What advice would you give to someone who has the opportunity to cash in some of his private company stock in the low seven digits?” Jeff offered a three-step plan.
Divest your stock
“Unless you have an informational advantage that tells you your company stock is meaningfully under-valued and worth accepting the diversifiable risk of continuing to hold, then you should sell it down over time. How long you take to sell it down is something most people really struggle with, so we’ve written a number of blog posts on this topic.”
Develop a plan for the proceeds
“While everyone is unique, with his or her own individual situation, there are some clear guidelines,” he wrote.
He listed the issues and the order in which most people consider them:
• rainy day fund
• existing debt
• a real estate purchase
“After the real estate decision, people tend to have varying priorities. Some will focus on economic security and long-term goals like investing for education expenses for their children or retirement. Others will be more interested in philanthropy, making more speculative investments like angel investments or buying new toys,” he wrote.
Invest to meet your long-term goals
Jeff suggested researching the timing and pace of a stock sale with the help of this recent research paper from Vanguard. You can also see our thoughts on the topic.
Then, he said, “Invest the net proceeds in a diversified portfolio using low-cost index funds or ETFs across asset classes that you rebalance systematically.”
“If you’re interested in learning more I would encourage you to read Unconventional Success by David Swensen, who is the Chief Investment Officer of the ~$20B Yale University endowment and A Random Walk Down Wall Street, by Princeton economist Burton Malkiel.”
One final note.
The questioner asked, “Should I buy gold?”
The answer, clearly, is No.
“Buying gold is speculation because it has no rational value. Owning a broad basket of natural resources as part of your overall portfolio will provide a better inflation hedge,” Jeff wrote.
About the author(s)
Journalist Elizabeth MacBride is Wealthfront's editor. Her work has appeared in Crain's New York, Advertising Age, the Washington Post and the Christian Science Monitor, among other publications. View all posts by Elizabeth MacBride