What To Do With Your Vested RSUs And Stock Options

One of our favorite things about being financial advisors is that we get a real insight into how people think about money from seeing what they do with theirs. Between learning this about our clients and helping them clarify what success looks like to them, we get to make a positive difference in their lives.

It’s the same with tech professionals and professionals in other industries (or ‘Aviators,’ as we call them at WestStar) and their employer stock programs: over our many years of working with Aviators at companies like Amazon, Apple, Microsoft, Meta, Nike, Starbucks, Oracle and others, we’ve seen how they think about these benefits by looking at what they do with them.

Mostly, we’ve found that the thinking and doing parts exist in a “cause and effect” relationship. And that’s a good place to start, because success begins with your mindset.

Your mindset is a set of beliefs that shape how you think, feel, and behave in any given situation. It means that what you believe about yourself impacts your success or failure.

Thought Determines Action. Action Determines Success.

We love advising Aviators: for one, they’re smart. Second, they’re successful and make great money. And third, our advice can really help them reach the stars.

Sounds simple – but it’s not, really, because just like the right mindset is the first step to success, the wrong one can result in costly mistakes. And because the stakes are so high for Aviators, mistakes couldn’t be more expensive.

Here are some common mindset-related mistakes we’ve seen over our years advising those with employer stock plans:

• Some Aviators believe that employer stock is their VIP ticket to the moon.
• Others see their vesting RSUs as a source of instant cash to pay the bills.
• Some think about it similarly to their 401K – they don’t think about it as “money” until retirement.
• We’ve met prospective clients who – every time their RSUs vest and their trading window opens – sell all of it immediately and move the proceeds to their savings account.
• And we’ve met prospective clients that have over $1M in one company’s stock – and that single stock makes up almost 100% of their family’s net worth.

If you Google ‘Learn from your mistakes quotations’, you’ll get hundreds of cheesy variations on the theme. But few – in our opinion – say anything meaningful about the cost of mistakes, whether in terms of lost money or lost opportunity. Except for this one:

The long and short of it is that many people make decisions without a clear goal, or through inertia, because they don’t have a holistic financial plan that incorporates their company stock into the mix. They’re not really sure what to do with their vested stock, and end up making costly mistakes that are entirely avoidable.

So, how should you think about your vested stock and when should you be selling it?

There are only two fundamental reasons to sell company stock that you’ve accumulated:

1. Cash Flow
2. Diversification

Interestingly, when you dig a little deeper, you’ll find that these reasons come from very different motivations. When selling for cash flow reasons, you’re most likely to be selling from a position of weakness or necessity; and when selling to diversify your portfolio, you’re selling from a position of strength.

Selling Vested Stock for Cash Flow Reasons.

Let’s start with cash flow. If you have a substantial amount of company stock (whether it’s in the form of RSUs that have vested, Stock Options, or ESPP purchases), but you also have other immediate financial needs and obligations to fulfil, then you may be advised to sell some vested stock to meet these obligations.

Maybe you have some credit card debt hanging over your head, or an emergency fund that you need to create confidence (and because it’s a smart move). In these instances, company stock should be thought of as a real blessing.

Selling Vested Stock to Eliminate Credit Card Debt.

Some Aviators get such a kick out of seeing their money grow that they’re prepared to ignore more pressing priorities – and their consequences.

Credit card debt works against you to the tune of 19% – 25%, and you know that those negative interest rates will be there every single month until your debt is gone.

Eliminating credit card debt is an important part of any financial plan, but especially so if you are a 6-figure earner with other assets. So if you have (for example) $250k in vested company stock and $15k in credit card debt – and it is actively accruing interest against you – selling to eliminate that debt should be your very first priority!

Selling Vested Stock to Create a 6-Month Emergency Fund.

Would you bet the ranch on batting 1000 without ever seeing a curveball? Many Aviators haven’t ever asked themselves how much they’ll need to cover their living expenses if they lose their jobs, experience reduced income, or incur an unexpected expense.

If you have $10k in the bank but it costs you $60k to wake up every morning for the next 6 months, it would be a wise move to take some of your equity and set up an emergency fund.

Most financial experts agree that you should set aside 3-6 months of living expenses in an emergency savings fund. We think 6 months is twice as good as 3 – it’s simple math.

Another great reason for Aviators to have an emergency fund is that having a cash cushion gives you confidence to stay the course and invest through the good times and the bad.  You won’t need to sell your holdings in order to raise cash, pay taxes, cover an emergency, or pay for a trip. Not to mention, you might sleep better at night.

Creating an emergency fund (moving the money to cash) is a short-term sacrifice to set up a foundation that will benefit you for life – and help you quit worrying about life’s next curveball, whenever it comes.

Selling Vested Stock to Pay Off a Tax Bill.

Deciding whether to sell vested company stock to pay off a tax bill depends on various factors, including your financial situation, tax implications, investment goals, and risk tolerance. We advise Aviators to keep these general considerations in mind when making their decision:

• Tax Consequences: Selling vested company stock may have tax implications. Depending on the type of stock (e.g., incentive stock options, restricted stock units), the timing of the sale, and the gain realized, you may incur capital gains taxes. You should consult with a tax professional to understand the tax implications of your specific situation.

To read up on how to avoid a tax surprise with an RSU tax strategy, Click Here.

• Financial Needs: Consider your current financial needs and obligations. If paying off the tax bill is a priority and you don’t have other sources of funds readily available, selling some vested stock could be a viable option.
• Alternative Solutions: Explore other options to pay off the tax bill, such as using available cash, taking out a loan, or utilizing other investments.

So whether you need to sell stock to eliminate credit card debt, set up an emergency fund or fix a tax problem, in each instance you are selling stock because you “need” to rather than because you “want” to. You are coming from a position of fixing a problem rather than building on an opportunity.

Selling Stock from a Position of Strength.

The details surrounding how much to sell, when to sell, what the tax ramifications will be, what to do with the proceeds, etc. vary between clients, and so are a part of a larger conversation we have with them about an overall financial plan. But the reasons why you might consider selling are more general, and worth thinking about.

Selling Vested Stock to Diversify Your Assets

If company stock is making up a disproportionate amount of your net worth (this percentage will be 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.

Essentially, we’re taking some risk off the table. While you think your company is going to do well and grow forever, you don’t know that! Just ask Twitter employees that have seen their stock prices plummet recently. Things happen. Any company can go belly-up or lose 80% of its value in a year. This probably hasn’t happened to your company in the past, but that doesn’t mean it really can’t happen either.

This risk is called concentrated stock risk – the risk of having all your eggs in one basket if and when the basket falls. Moving money from one company stock to a fund that has 1,000 company stocks means eliminating concentration risk. When we understand that the historical average for the stock market as a whole is 7-9%, that’s nothing to sneeze at.

To read up on how to incorporate RSUs into your investment strategy and avoid concentrated stock risk, Click Here.

There are times that it makes sense to not sell your company stock because of its growth potential and your financial position, and you may want to hold on. Many of our clients are in a position where they can take more of a long term risk.

There are also going to be times where you want to “lock in” your gains by diversifying your assets and then keep on accruing more company stock.

Should You Hold, Sell, or Exercise Your Vested RSUs And ISOs?

When it comes to dealing with vested RSUs (Restricted Stock Units) and stock options (Incentive Stock Options or Non-Qualified Stock Options), there are several options to consider. The appropriate course of action depends on your individual financial goals, risk tolerance, and your tax situation. And while it is always advisable to consult with a financial advisor or tax professional for personalized guidance, here are a few common strategies:

• Hold
• Sell
• Exercise and hold
• Exercise and Sell

Let’s unpack these:

Hold: You can choose to hold onto your RSUs and stock options without taking any immediate action. This strategy allows you to retain ownership and potentially benefit from future price appreciation. However, it also exposes you to market risks, and the value of your equity could decrease.

Sell: Another option is to sell some or all of your vested RSUs and stock options. This approach provides immediate liquidity and allows you to diversify your investment portfolio. Selling your equity grants locks in any gains you have accrued and mitigates the risk of future declines. Additionally, selling your RSUs and ISOs may help you finance other financial goals or expenses as we’ve mentioned earlier.

Exercise and Hold: If you have stock options, you may have the option to exercise them and hold the underlying stock. This strategy allows you to take advantage of potential future growth while potentially accessing favorable tax treatment. However, it’s important to consider the associated tax implications and potential risks of holding concentrated positions.

Exercise and Sell: With stock options, you can exercise them and sell the acquired shares immediately. This approach allows you to realize the value of your equity grants and diversify your investments. Be mindful of the potential tax consequences and consider consulting a tax professional to optimize your tax strategy.

What are The Tax Implications of Exercising or Selling Your Company Stock?

Tax Planning: RSUs and stock options have different tax implications, and it’s crucial to understand how exercising or selling them may affect your tax liability. Depending on your specific circumstances, it may be beneficial to consider tax planning strategies such as holding periods, tax-loss harvesting, or utilizing tax-advantaged accounts.

Future Prospects: Evaluate the future potential of the company’s stock. If you believe the stock will continue to grow in value, you may want to hold onto some shares for potential future gains. Remember, though: assumption is the mother of failure, so avoid it as far as possible!

Cost Basis and Holding Period: The cost basis of the vested stock and the length of time you’ve held the stock may impact the tax you owe upon selling. Stocks held for longer periods may qualify for more favorable tax rates.

It’s essential to seek advice from a qualified financial advisor or tax professional who can analyze your specific financial situation and provide personalized guidance based on your goals and circumstances. They can help you make an informed decision that aligns with your financial objectives and minimizes potential risks.

WestStar Prosperity Partners’ Advisor Team guides and mentors many Aviators. Our ‘advice in plain English’ approach brings confidence and clarity to managing your compensation programs.

Through understanding your program, your goals, and your mindset, we can help you make and implement decisions with a successful long-term financial plan in mind.

If you have questions about your specific circumstances, or want to talk further about what to do with your vested RSUs and Stock Options, please get in touch. We welcome the opportunity to chat with you.

We wish you every success in the future and hope to hear from you soon.

Sam Gullette & Erik Alexander

Disclosure: “A diversified portfolio does not assure a profit or protect against loss in a declining market.”