In this article we discuss some of the key considerations that should go into the decision of whether to sell or to hold onto shares that an employee has been given by their employer (a.k.a. 'vested equity'). It should be useful for anyone who receives compensation from their employer in the form of shares.
It is not intended to be financial advice specific to your unique circumstances.
Employees of publicly listed companies - and some private companies - are often granted shares in their employer as part of their compensation. These are sometimes referred to as Restricted Stock Units or 'RSUs'. Typically these shares are subject to a 'vesting' schedule, which means that the employee has to wait a period of time (often up to four years) for the shares to be granted to them - and available to be sold.
For many people this equity represents a significant amount of money and therefore, once the equity vests and the employee has the option of selling the shares, they face the important question of whether to hold or to sell them. So what should one do?!
The simplest answer first...
If the employee wants or needs the value of the shares for another purpose - like buying a house in the near future - then selling the shares as soon as possible is likely to be the most appropriate decision. Having one's deposit for their future home in shares - any shares - is likely to be just too risky.
The rest of this article focuses on the more complicated scenario where one's investment horizon is longer term - and therefore whether it makes sense to hold on to the shares or to diversify into other investments.
A word on risk...
Risk is not necessarily a bad thing; in fact, in many instances it is a very good thing. It is difficult to build or even to maintain wealth without taking some risk. But it is vitally important to understand the risks that one is taking with their finances. Misunderstood risk is one of the greatest financial dangers because it makes reacting poorly far more likely when such a risk rears its ugly, unexpected head.
Therefore it is important to understand that owning shares in a single company (i.e. one's employer) is usually far more risky than owning shares in the overall stock market. By more risky we mean that the value of the shares in a single company are more likely to go up or down to a greater extent than the value of the overall stock market. Clearly, this risk can be a very good thing: just ask anyone who works for a big tech company and has held onto their vested equity in recent years. However such a positive reward for taking on that risk is not always the case - just ask (most) bankers.
So for a potentially greater reward one must take on greater risk. That seems fairly straightforward. However, the risk is seriously magnified when one is both an investor in and an employee of the same company. So both the value of your current investments and your future income are tied to one particular company*.
*note that your risk is really to the industry as well as to one particular company. If one big tech company or bank struggles it is quite likely that most, if not all, others will be struggling at the same time - so just hopping to a new firm may not be an option.
How much of your current and future net worth is tied to your employer?
Determining the proportion of your current net worth that is tied to your employer is fairly straightforward. Take the total value of your vested equity and divide it by the total value of your assets. There is no 'correct' answer to this calculation but the proportion of your net worth that is tied to your employer should generally be the lower the older that you are. For example, an employee in their fifties with 75% of their wealth tied up in one company is probably taking on too concentrated a risk; meanwhile that may be an appropriate proportion for someone in their twenties (as that person has a long time left to accumulate savings and diversify them over time).
That's the easy part. But how about your future net worth? This is point is often under appreciated.
If most employees in their thirties or forties did the math on this they would realise that a huge proportion of their future net worth depends on the compensation that they will get paid by their employer (or an employer in the same or similar industry). This is just natural: unless an employee starts with a large pot of independent wealth, future wealth is derived from their future compensation.
This is where our earlier point about unintended risk becomes relevant. There is nothing inherently wrong with taking a risk on one's current employer; for many people this has led to significant financial rewards. But it is riskier than diversifying one's investments - particularly when the employee considers how much of their future net worth is likely to come from the same or a similar employer. So by all means take that risk if you are comfortable with it; but understand that risk before doing so.
How we can help
We principally do two things: financial planning and investment management. This means that we can help clients determine the risks of holding on to vested equity (as part of a wider financial plan). We can also management the more diversified part of one's investment portfolio. As part of the latter service we can usually 'transfer in' vested equity, sell it on behalf of our clients and re-invest the proceeds immediately - which ensures the client is not 'out of the market' and also cuts down significantly on the client's administrative burden.
A big part of what we do is try to take a lot of hassle out of this process - although by far the most important part of what we do is to ask the tough questions like how exposed to your employer are you?! and to help ensure that our clients' financial assets match up with their personal aspirations. Please get in touch if you feel that you might benefit from such a service.