Do You Own Too Much Employer Stock?
You’ve been accumulating employer stock through: RSU grants, stock option grants, ESPP, 401(k), or purchases in a brokerage account. At a certain point, you may ask:
- How much employer stock is too much?
- How much stock should I sell?
- When should I sell it?
Build Your Balance Sheet
As a starting point, you’ll need to determine how much employer equity you have relative to your total investment portfolio. The first step is building a balance sheet. I go through this step with every client as we begin the financial planning process.
There are a few different ways you can do this.
Excel Spreadsheet
Open an Excel spreadsheet (or Google Sheets) and create two columns: Assets (on the left) and Liabilities (on the right). On the Asset side, make a list of every investment asset you own: brokerage accounts, 401(k)’s, retirement accounts, RSUs, Stock Options. Next to each asset item, list your best-guess of current market value in the adjacent cell. Next to each liability item, list your current outstanding balance in the adjacent cell. Below is a template of a Balance Sheet built in Google Sheets.
Aggregation Software
You can also use online account aggregation software to build a balance sheet. Several options exist including: Mint.com, Quicken, and Personal Capital. You would link up brokerage accounts, 401(k)’s, employer equity brokerage account, and liability accounts. Balances are updated automatically (daily), so it wouldn’t require manual updating over time. Most financial planners will use aggregation software when building financial plans.
Adding Employer Equity
For vested employer RSU positions, determine the total number of vested shares you own, and multiply the share quantity by the current market price. If you’re building this balance sheet in Google Sheets, try the =GoogleFinance function. This function will look up the current trading price (with a 20 minute delay).
For vested employer stock options, determine the difference between the exercise (strike) price and current trading price of each vested option grant. I suggest using a separate spreadsheet to keep track of your vesting schedule for any employer equity grants.
The brokerage firm where the RSUs and stock options are held should provide an approximate market value of all vested equity. You can confirm this with the balance sheet you created.
Employer Equity Exposure
- Add up the assets column to determine the total market value of your investment portfolio
- Add up the value of all employer RSUs and stock options. This will provide the total value of all employer equity currently owned.
- Divide total employer equity (step 2) by the total portfolio value (step 1). The resulting figure will be your employer equity exposure percentage.
How much employer stock is too much?
There are several key factors to consider: portfolio diversification, company growth prospects, future vesting rounds, tolerance for risk.
Diversification
Many financial planners suggest a maximum position size of 10% for any one stock relative to the total value of your portfolio. This is especially important if the stock you own is also your employer’s stock.
If a company experiences financial difficulties (e.g. due to economy, competition, debt, etc), you may experience double-trouble:
- declining stock price (reducing the value of your RSUs/options)
- possible layoff or furlough
Many employees expect their employer’s stock price to go up forever. However, this isn’t the case most of the time.
One recent example is General Electric (symbol: GE). Let’s assume you’ve worked at GE for the past 5 years. You were granted GE equity as part of your compensation package, and you decided to hold GE stock instead of diversifying into a broader portfolio. The chart below (from Google Finance) shows the performance of GE’s stock price compared to a basket of the largest 500 companies in the US (S&P 500) over a 5 year period ending 07/16/2020. Holding your GE stock would have resulted in a 73% decline. Meanwhile the S&P 500 increased 54% during the period.
An individual company’s stock price can go down for many reasons: competition, declining industry, technology, business cycles, etc. See this blog post to learn more about the risks of holding one company’s stock long term.
Company Growth Prospects
Your employer’s current size, growth prospects, and positioning within its industry can influence your decision.
For example, owning a substantial percentage of total equity in a young tech startup is very different from owning a tiny equity percentage of an established tech giant.
The upside potential of an established company is limited compared to a startup. We wouldn’t expect a tech giant such as Apple to quadruple in value in the next 3 years (although possible). Apple has already captured a significant percentage of the cell phone and laptop markets (high market-share). Many established companies grow revenue through acquiring other startup companies.
On the other side, it’s possible that a young tech startup could quadruple in value in the next few years. Although the likelihood of any particular startup turning into the next tech giant is very low. The vast majority of startups will fail.
A few questions to think about:
- Where does your company stand relative to its competitors?
- What is your company’s market share in the industry?
- What is the industry’s overall size? (How much room for growth exists?)
- Could advancement in technology make your core product irrelevant? (e.g. cell phone camera replaces digital camera)
- How strong is leadership and your team?
The answers to all of these questions could be favorable. However, we also need to guard against familiarity bias. Familiarity bias suggests people have a tendency to invest in things they understand. This causes many employees to buy (or hold onto) shares in their employer’s stock, because they believe their company is significantly better than other companies.
Future Vesting
Another important factor to consider is unvested equity. How much stock do you expect to receive through future vesting rounds and future grants? You’ll be exposed to the movement of the stock price through these future vesting rounds, even if you decide to sell all of the employer stock you currently own (vested shares).
Although you don’t own any unvested RSUs or options yet, you are contractually entitled to them in the future (as long as you stay with the company). Changes in the stock price affect how much value you will receive in the future. If the stock price increases before vesting, the value you receive in the future will be higher (and vice-versa).
We shouldn’t add the unvested equity to our balance sheet directly, since we don’t own it yet. It’s simply a contract. However, if you expect a substantial amount of equity to vest in the next few years, consider how this would affect your overall level of concentration.
Risk Tolerance
Understanding your preferences for risk is crucial throughout your financial journey. A few questions to think about:
- Do you consider yourself a risk-taker?
- How soon will you begin withdrawing the invested funds?
- How would you respond if your investments declined temporarily by 40-50%? (The March 2020 market decline may be a good reflection)
- What is your leverage ratio on the balance sheet (total debt divided by total assets)?
The answers to these questions can help illuminate how much employer equity you should be holding.
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