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The 'Golden Handcuffs' Dilemma: 3 Strategies for Managing Concentrated Company Stock

Jeff Blomgren CFP® |

For many successful professionals, especially in high-performing industries like mining, tech, and pharma, a large portion of your wealth isn't in a 401(k). It's in your own company's stock. Through Restricted Stock Units (RSUs), stock options, or an Employee Stock Purchase Plan (ESPP), you've built a significant position.

This is a sign of success, but it's also a high-risk problem. We call it the "golden handcuffs". You are in a position of "concentrated risk." If the company does well, you do very well. But if the company (or the entire industry, like we see in cyclical sectors) hits a rough patch, your net worth and your career can take a hit at the same time.

Diversification is the solution, but how do you do it without writing a massive check to the IRS? Here are three strategies to discuss with your financial advisor.

1. The "Sell and Reinvest" Strategy (The Simple Fix) The simplest, and often best, strategy is to systematically sell your company stock as it vests and reinvest the proceeds into a diversified, low-cost index fund.

  • For RSUs: When RSUs vest, they are taxed as ordinary income. Many people make the mistake of then "holding" that stock. This is a bad idea. You've already paid the tax. The day your RSUs vest, you should treat it as a cash bonus and sell the shares, using the cash to buy a diversified portfolio.
  • For Vested Options: This is more complex, but the same principle applies. Exercise and sell, then diversify.
  • The Objection: "But I'll have to pay taxes!" The Reality: Yes. But you're only paying capital gains tax on the appreciation since you acquired the stock. Holding on "to avoid taxes" is like refusing to cash a winning lottery ticket because you'll have to pay the tax.

2. The 10b5-1 Plan (The Automated Fix) This is the preferred tool for executives and insiders. A 10b5-1 plan is a pre-arranged, automated selling plan. You set it up before you have any inside information.

  • How it Works: You instruct a broker to sell a specific number of shares or a specific dollar amount at set times (e.t., "Sell 1,000 shares on the 15th of every month").
  • Why it's Smart: This takes all the emotion and guesswork out of the equation. It also provides a legal "affirmative defense" against any claims of insider trading, allowing you to sell stock even during company-imposed "blackout periods".

3. The "Collar" Strategy (The Advanced Fix) If you have a very large, highly appreciated position and are not allowed to sell (or don't want to trigger a massive tax bill all at once), you can use options to create a "collar".

  • How it Works: This is a two-part move.
    • You buy a "put" option, which gives you the right to sell your stock at a set "floor" price. This protects you from any downside.
    • You sell a "call" option, which gives someone else the right to buy your stock at a set "ceiling" price. You use the money from selling this call to pay for the put.
  • The Result: You have effectively "collared" your stock. You are protected from a crash, but you have also given up any potential gains above the ceiling. This is a sophisticated, short-term strategy to hedge risk.

Your company stock is the reward for your hard work. Don't let it become a source of unmanaged risk. The key is to have a plan to turn that "company wealth" into "your wealth".

What percentage of your net worth do you feel is "too much" to have in one stock? Let us know!

Schedule a Consultation These are general strategies and may not be right for your specific situation. If you'd like to discuss how these concepts apply to your financial plan, please feel free to schedule a complimentary call: Complimentary Meeting