Biggest financial decision of my life: selling a big wad of options

[neversell]

Hi.

I've been lucky enough to enjoy a big windfall thanks to my employer stock options (NSOs) going through the roof in the last few years. A recent run-up has made it a whopping 80%+ of my assets, so I'm planning to diversify.

My question is: what's the best way to go about selling? This is probably the biggest financial decision of my lifetime, and getting it right or wrong means the difference between early retirement and a lifetime of kicking myself.

Some facts:

• The options' value currently sums to $13.0M, and exercise price sums to ~$1.4M, for a net of $11.6M before taxes.
• Those numbers already reflect that I sold 10% of my holdings last quarter. I already regret it, since the stock price has grown a lot since then.
• My marginal federal and CA tax rates for 2018+ will be the maximum. So I'm treating short-term capital gains as 50.3% and long-term as 37.1%.
• I can only trade my company's options/stock within a brief trading window after each quarterly earnings report.
• The oldest options expire in 2022.
• My newest options are a small share of the total value, since I'm granted fewer options at current stock prices. So, new options don't substantially increase my exposure.
• I'm 37. My wife and I both work, though my income is much higher (~$1M vs. $120K). We'd survive losing this windfall, but obviously we'd rather not.

Now my plans, which need your skepticism:

• I plan to sell gradually, rather than immediately-- something like 8-10% each quarter, possibly a bigger lump initially. The stock has always been volatile, and there's always a risk any individual company will tank, but I assume the most likely outcome by 2022 is continued growth.
• To minimize taxes, I intend to do a cashless exercise and hold the resulting shares for a year before selling. This would delay my diversification by a year, but with a big tax benefit.
• I don't plan to talk with a financial adviser, since A) I don't even know where I'd find a good one, and B) I associate financial advisers with peddling funds with high fees. Also, C) my plan is flawless, so of course I don't need one, right?

What am I not considering?

[Skierajs]

I would definitely get some professional tax planning advice. FWIW if these are non-qualified stock options I don’t think holding the stock for a year following exercise lowers taxes on the initial gain at all. Also, a “cashless” exercise usually is the term for taking the cash value immediately as ordinary income. The likely best answer here will be to cash them all out as soon as possible to diversify into your target asset allocation.

Holding vested options is like holding a concentrated position in a single stock. The only reason it would make sense is if you expected your tax bracket to go lower in a future year so you could time the exercise for when you are in a lower bracket (or maybe no longer a CA resident).

[cmdreset]

Been in your exact situation (and in CA too)

It looks like you did most of your homework. Not sure if you have Incentive Stock Options (ISO) or Non-Qualified Stock Options (NQSO) [edit- oops, I see you said NSO which I assume is NQSO?] There is no tax benefit for exercise-and-hold of NQSO's - this strategy is only potentially useful for ISO's (where if you exercise and hold for a year you are taxed at the lower capital gains rate when you sell, but risking that you paid tax on the ISO gain and the stock could drop a LOT in a year, so you could lose your shirt this way. I saw it happen to people during the first internet bubble of the 2000.) You will have a big tax bill either way - it's a good problem to have, so smile when you write those checks.

I think you have the right idea about selling gradually - choose a fraction to sell in each trading window then stick with the plan. You may be able to set up a 10b5-1 plan (pre-planned stock sales) which can take away some of the temptation to deviate from your plan (and this allows you to sell outside the standard trading window.)

In my case, I had expiring options so I had to sell within 1 year. I had quarterly trading windows so I basically sold twice each trading window (so about 1/8 of my holdings.) I decided to exercise and hold the last 1/8, and the stock went way down for a while so I felt stupid, but now it has recovered so I feel smart again

Remember, you have won the lottery any way you look at it - if the stock goes way up or down don't kick yourself. Just be try to be happy with your success. I went through a number of failed start-ups that only gave me some amusing looking pieces of paper before I had options that were worth anything at all.

[johan851]

If they're that far in the money (sounds like ~10x the strike price) you're basically holding shares of company stock. If you had the equivalent cash value, would you buy shares of your company? I wouldn't - I'd diversify per my investment strategy. I think it makes the most sense to sell now.

Early on, your options have significant leverage, which makes the case for holding them stronger. At this point they're much less leveraged, and you're basically invested in a single stock.

Tax treatment would have to change a lot to make holding them longer a smart option. Considering a value in the millions, it'll take you years to sell them if you want to stay in the 35% bracket. And then you're only "saving" 2% by not going to the 37% bracket. I don't think tax treatment makes much of a difference for this decision.

As for regret, don't confuse strategy with outcome. Selling to diversify is the right strategy. The stock happened to go up later. Great. It could've dropped 50% too. A single stock holding is very volatile - that's why we diversify.

[ryman554]

You're making $1M a year.

You have $10M in options.

You said they are NQO ( and not ISO), so there is no tax benefit to selling later rather than sooner unless you are gambling on price appreciation, in which case you want to exercise options as soon as they vest. Since you aren't doing that, I propose that you sell it all now. Your already at the max bracket, so unless you plan on quitting now, there is no tax benefit to spread it out.

Right now you have life changing money. This money is concentrated in one company. On average that is a very very bad bet. So diversify.

Presumably you are also getting options refresh, so you're still getting an upside going forward. In absolute dollars, new vs old options are a wash. Sell your old and change your life.

[neversell]

Thanks, this has been super helpful. I didn't know about the tax distinction between NQSOs and ISOs, so that makes a big difference. (I said NSO because I just saw an Investopedia article that refers to NQSOs as NSOs.)

My remaining struggle is about timing the market. The stock recently hit stratospheric highs outside of my trading window, but has come down a good amount since then. I can't help but feel like I'm throwing money away by not waiting for it to reach those highs again, even though I know rationally that it's possible it may never hit those highs again. So that's another reason why I intend to sell off gradually, and should force myself to sell 5-10% this quarter even though the gambler in me wants to "win it back."

[johan851]

That can be rough. If you do sell in chunks, I think the best reason (as you said) is to manage regret. It's the same philosophy as dollar cost averaging. By the numbers, selling everything now might make the most sense, but if you can come up with an aggressive selling plan and be disciplined about it, that can help mitigate some of the emotional swings.

[Stinky]

I faced a somewhat similar situation, back in 2004. Much smaller numbers than yours, but still material to me. The options represented about 90% of my financial net worth at the time.

I chose to sell pretty quickly, over a period of a few quarters, and then reinvest in index funds. I took the approach of "bird in hand vs. two in the bush", and captured the bird in hand.

While I didn't sell at the high, I was pretty close. Had I held on longer, I could have gotten a little higher price in 2006-7, but many of my options would have expired basically worthless during 2008-9 when my company's stock declined over 90% from the price at which I exercised.

Don't know how your company might be affected by a future recession, but I'd definitely grab the bird in the hand . . . .

[HornedToad]

Thanks, this has been super helpful. I didn't know about the tax distinction between NQSOs and ISOs, so that makes a big difference. (I said NSO because I just saw an Investopedia article that refers to NQSOs as NSOs.)

My remaining struggle is about timing the market. The stock recently hit stratospheric highs outside of my trading window, but has come down a good amount since then. I can't help but feel like I'm throwing money away by not waiting for it to reach those highs again, even though I know rationally that it's possible it may never hit those highs again. So that's another reason why I intend to sell off gradually, and should force myself to sell 5-10% this quarter even though the gambler in me wants to "win it back."

I'd personally take a step back on this. Instead of focusing on potential regret of selling now vs. selling later, look at what it means to your life. What is the material difference between 5Mil, 7.5mil, 10 and 15 mil from the results of these options after tax. What about if options are $2.5 mil or $0?

For some people there is substantial difference, for others it's minimal. Depending on how you would behave differently or live differently based on the money then you can make a decision. Ala, if you've already won then quit playing.

If it was me I'd sell half now and then sell the other half in 1/3's over the next 3 quarters but there's multiple different strategies. If this was from an IPO, Wealthfront had a blog post with research on different optimum selling patterns based on past tech stock IPO results that might be worth looking at.

[Dottie57]

You can’t see the future. Any road you take may contain regret. I would follow the saying “@ bird in hand is worth two in the bush”. Sell.

[Shallowpockets]

This is not an unfamiliar subject on these board. Windfalls of stock, options, etc. Posters never seem to want to name the stock. Why? I am curious, not on the why, on the stock.
Would there be some financial or secret reason people will not say?
To break the ice.
I also have a position, AMZN, with good gains and have to consider the implications of large capital gains. But when you are collecting SS and medicare, you can have consequences beyond your usual taxes, as in getting taxed on up to 85% of your SS and bumping up into another payment category for your medicare. At least you do not have that to consider.

[simas]

Thanks, this has been super helpful. I didn't know about the tax distinction between NQSOs and ISOs, so that makes a big difference. (I said NSO because I just saw an Investopedia article that refers to NQSOs as NSOs.)

My remaining struggle is about timing the market. The stock recently hit stratospheric highs outside of my trading window, but has come down a good amount since then. I can't help but feel like I'm throwing money away by not waiting for it to reach those highs again, even though I know rationally that it's possible it may never hit those highs again. So that's another reason why I intend to sell off gradually, and should force myself to sell 5-10% this quarter even though the gambler in me wants to "win it back."

that is normal - most basic emotions are greed and fear. right now the demon of greed is having you by (whatever body part you desire here). as others said, set a sell plan, STICK THE PLAN, whether stock goes up, down, sideways, whatever. trying to time the market is a great way to kill the success you worked very hard for. turn off stock price tracker, stop checking for it , etc.

I worked for small startup that similarly granted people options at substantially below $1 range, multiple rounds of equity, re-valuations where you would get more options for the same, stock went public and into double digits. so success story , right? some 20 something kids that for free got multi million dollar fortunes? well, many of them got so blinded by greed (it will always go up, I will so regret it if I sell now and it would go up, etc) so they let stock ride up and up (30+) and then come crashing down (~6-7 range). did they do ok? yes. could they have done much better by avoiding the timing, absolutely yes.


last thing here - how much do you actually need/want to have (with 1 million salary and windfall coming)? when you (already) won the game you should playing...

[TomatoTomahto]

I don’t know diddly about options and the timing of their sale. I do, however, know something about psychology, and you should have a big red flag going up when you post

Those numbers already reflect that I sold 10% of my holdings last quarter. I already regret it, since the stock price has grown a lot since then.

A lot of life is regret avoidance. You have hit the lottery. Instead of counting your blessings, you’re rueing the few shekels you left on the table. Beware.

[PhilosophyAndrew]

OP, congratulations on your financial success!

Unless your family’s income drops considerably, you can expect to be remain in the highest tax brackets until you retire, you will owe a lot of taxes whenever you sell.

To me, the benefits of diversification — and the risks of continuing to fail to diversify — justify selling all now.

I would also try to dampen down your emotions about past and future prices of your company’s stock; indulging in greed or fear would distract you from making the rational decision that you rightly want to make.

Andy.

[Valuethinker]

I know too many Nortel millionaires who didn't sell. Now in addition to not having that money their pensions have also been cut.

Also met a couple of former Enron employees.v and even a couple of Bear Stearns types. The employees owned 25 per cent of that company.

I would sell half, right now. The rest you can take your time. But half, now. Taxes be damned.

It's not money until you have diversified it.

[neversell]

Thank you, everyone. Sounds like I should accelerate my sales plans.

On whether I've already won and don't "need" any more: I figured I'd retire early if I hit $20M, as 5% long-term return would yield my current salary. That said, I'm not willing to gamble the whole pot in the hopes of getting to $20M sooner, so I will definitely diversify.

If I sell everything now, I should end up with a total of something like $10M in assets after paying taxes on my options-- which is still great, as I think I could reach $20M around age 50 if my income and savings rate never change. To retire on $10M, I would need to adjust my lifestyle or leave the SF Bay Area, and I'd rather keep working. We have a baby and plan to have another, so I'm not retiring to Thailand any time soon.

This is not an unfamiliar subject on these board. Windfalls of stock, options, etc. Posters never seem to want to name the stock. Why? I am curious, not on the why, on the stock.
Would there be some financial or secret reason people will not say?

Couple reasons:

• Small chance I (and my salary and savings) could be identified by a colleague reading the forum
• Even smaller chance that anything I say about my bullishness for my company could somehow be read as insider information (revenue or industry trends, etc.)

Suffice to say, it's an established FAANG company. So while it's not bulletproof (I'm cognizant of Yahoo et al), it's not a flash-in-the-pan IPO, either.

[cmdreset]

I would definitely get some professional tax planning advice.

I second this BTW - you can afford a good accountant, everyone at my company who tried to "save" money by DIY taxes on a big sell year made expensive mistakes and/or got audited.

[BogleBike]

I too lost half my fortune (at that time) when my employer's stock collapsed. It was a Fortune 500 company that is now featured in case studies at business school... which I attended afterward!

Don't focus on "winning your gamble" or "maximizing the payoff" or anything like that. Sell enough right now (meaning your first available selling window) so that if the company collapses the day after, and you and your wife decide to go on vacation forever, your proceeds minus tax will be enough to fund the safe comfy lifestyle of your choice. If you can achieve 25x your current spending, achieve that. Put a moat around your family/marriage.

The rest is play money; do whatever you want with it. But lock down your future first.

Edit: Ah, you posted while I was typing. Good deal. $10 million is a nice sum - obviously there's something in the second $10M that you also desire, but the first $10 million still has the majority of the utility. "The first $10M is the hardest", right? I like that you have a healthy plan to also achieve the $20M.

Anyway, congratulations. Let us know how the sale goes...

[Sasquatch]

I held the majority of my 401k in my employers stock. It’s a top 20 Fortune 500 company. In setting up for FIRE I knew that was incredibly risky so I sold it all in March and went to a broadly diversified index based portfolio. Since my sale the stock has run up 20% to this point. My gut said average out of it. The hourly based financial planner we hired for an analysis expressed a lot of concern and pushed to sell it off quickly. Am I sad I missed out on the 20%? Well sure. If it had went down 20% though I would be setting at my desk at work right now.

If your stock went down 20% in a few months how would you feel? Would you be able to resist the sale and ride it out? You have accomplished incredible things. I personally would take at least a portion and cash it in, pay the taxes and be happy.

Retaining a very skilled CPA would be worth their weight in gold I think.

[Quaestner]

I live in a different world than you (take home pay under $800/week). So it's hard to relate - but my initial reaction would be to diversify as fast as possible! From this point forward, which will lead to more regret, missing out on a big gain, or taking a big loss?

[Jack FFR1846]

I was cured of my thoughts to let the tax dog wag my stock option behavior. Bought at 48, sold at 12. The stock never recovered. Now I sell at vest and take my profit and run.

[ryman554]

Thank you, everyone. Sounds like I should accelerate my sales plans.

On whether I've already won and don't "need" any more: I figured I'd retire early if I hit $20M, as 5% long-term return would yield my current salary. That said, I'm not willing to gamble the whole pot in the hopes of getting to $20M sooner, so I will definitely diversify.

If I sell everything now, I should end up with a total of something like $10M in assets after paying taxes on my options-- which is still great, as I think I could reach $20M around age 50 if my income and savings rate never change. To retire on $10M, I would need to adjust my lifestyle or leave the SF Bay Area, and I'd rather keep working. We have a baby and plan to have another, so I'm not retiring to Thailand any time soon.

Sell it tomorrow. =) (if you can.) Then see your name in the paper about large transactions and feel like a 0.1% for a day.

But really... you have a lifestyle that really requires $1M a year to live? I try not to judge, but.....

Let me put something to you this way. You're clearly a smart+values engineer/salesman to get this salary. With it comes long hours and meetings literally around the clock. You must be working very very hard. Ask yourself if you really are getting $1M worth of enjoyment out of it? I get the fact that you like your job and it probably feels like a hobby that someone is paying you very well for. You probably would keep doing what you're doing even if you weren't getting paid. If that's you, then it would be wrong for you to retire now. If it isn't... take a long look.

Let's look at your $1M salary, however. It's really $500k after tax, quite a bit less if you are saving like a madman. You have to be saving at least $100k a year, let's call it that. So you are really living on something like $400k, after tax. *That's* the number you should target for retirement, not $1M. And if we add your wife's income, lets say $500k after tax.

After paying your taxes on the options, you are clearing $10M -- in after tax funds. That can support a $400k, inflation adjusted, pretty much post-tax retirement for a very long time. You're not paying taxes on that $10M ever again, and if you quit working, you aren't paying much tax on the growth, either. Even by your large lifestyle requirements, you could probably quit working today with no impact to your lifestyle. Think about that long and hard. Think about the confidence it will bring you to take even more risks in your career to get rid of the things about your career that you don't like in favor of doing the stuff that you really do.

[KSActuary]

You're making $1M a year.

You have $10M in options.

You said they are NQO ( and not ISO), so there is no tax benefit to selling later rather than sooner unless you are gambling on price appreciation, in which case you want to exercise options as soon as they vest. Since you aren't doing that, I propose that you sell it all now. Your already at the max bracket, so unless you plan on quitting now, there is no tax benefit to spread it out.

Right now you have life changing money. This money is concentrated in one company. On average that is a very very bad bet. So diversify.

Presumably you are also getting options refresh, so you're still getting an upside going forward. In absolute dollars, new vs old options are a wash. Sell your old and change your life.

+1 Life changing money at this point in your life. Take your winnings, diversify and get back to work. Your family (and possibly several generations thereafter) have a great future.

[Valuethinker]

Thank you, everyone. Sounds like I should accelerate my sales plans.

Scratch accelerate.

Execute. Execute a sales plan. Now. The time you are spending on this forum is delaying you.

You are also going to get nailed by Close Periods. If you are that senior, you are almost certainly privy to material price sensitive information. Your windows for sale are not large-- and make sure you have cleared it with requisite authorities (usually compliance or Chief Legal Officer's office)-- that's probably "as read" for you, but just in case a 3rd party is reading this and faces a similar issue.

On whether I've already won and don't "need" any more: I figured I'd retire early if I hit $20M, as 5% long-term return would yield my current salary. That said, I'm not willing to gamble the whole pot in the hopes of getting to $20M sooner, so I will definitely diversify.

Oh so very very dangerous. Many of us are veterans of conversations like that during the dot com era. Some (wisely) cashed out, some did not. Don't think because you can make this money at the top of the cycle, that you can make anything like that at the bottom.

BTW it's life changing to hit $1m. It's probably life changing to hit $5m. After that? We have exited the realm of conceivable material need, and entered into the land of ranking ourselves against our peers. Read Andrew Tobias' Getting By on $1m a Year article, and Tom Wolfe's Bonfire of the Vanities. These were about Wall Street in the 1980s, and you'd have to roughly double the numbers to get to a similar cost of living, now, but they are instructive as to lifestyle inflation.

(I recognize in this that a 4 year college education for your kid can cost $200k+, and that a house in Bay Area can be $2-3m).

If I sell everything now, I should end up with a total of something like $10M in assets after paying taxes on my options-- which is still great, as I think I could reach $20M around age 50 if my income and savings rate never change. To retire on $10M, I would need to adjust my lifestyle or leave the SF Bay Area, and I'd rather keep working. We have a baby and plan to have another, so I'm not retiring to Thailand any time soon.

As above.

This is not an unfamiliar subject on these board. Windfalls of stock, options, etc. Posters never seem to want to name the stock. Why? I am curious, not on the why, on the stock.
Would there be some financial or secret reason people will not say?

Couple reasons:

• Small chance I (and my salary and savings) could be identified by a colleague reading the forum
• Even smaller chance that anything I say about my bullishness for my company could somehow be read as insider information (revenue or industry trends, etc.)

Suffice to say, it's an established FAANG company. So while it's not bulletproof (I'm cognizant of Yahoo et al), it's not a flash-in-the-pan IPO, either.

[/quote]

In the age of the web confidentiality is warranted. That kind of money would make you or your family kidnapping fodder in a lot of places. There's a reason Russians and many Emerging Markets rich send their kids to English boarding schools-- it's an island 700 miles long (Great Britain), and kidnappers probably won't get very far (the Skripal team by contrast appears to have left the country before discovery).

Look at the share prices of Amazon, Microsoft during the dot com bust 2000-03 and post. Let alone Yahoo AOL Time Warner, Cisco, Lucent, Intel, IBM, HP etc. i.e. where there are current "winners" they still collapsed in price, let alone the losers. Imagine the US government seized assets of Amazon, for example, or indicted Jeff Bezos for some crimes? Stock price of Amazon would be a lot lower? From memory, it's something like 2012 before an investor in Amazon 2000 got their money back?

And there's risk in any company that would be known only to the CFO and a few other execs, around accounting items. Think Enron or Nortel. You would not necessarily know it.

[BanditKing]

Dumb question, but any benefit to relocating, at least on paper, to another state to avoid the CA taxes? Not sure the nuance of it, but CA = ouch.

[bgf]

Thanks, this has been super helpful. I didn't know about the tax distinction between NQSOs and ISOs, so that makes a big difference. (I said NSO because I just saw an Investopedia article that refers to NQSOs as NSOs.)

My remaining struggle is about timing the market. The stock recently hit stratospheric highs outside of my trading window, but has come down a good amount since then. I can't help but feel like I'm throwing money away by not waiting for it to reach those highs again, even though I know rationally that it's possible it may never hit those highs again. So that's another reason why I intend to sell off gradually, and should force myself to sell 5-10% this quarter even though the gambler in me wants to "win it back."

unless you are an alien, i can pretty much guarantee you the regret of losing money will far exceed the regret of missing out on gains beyond what you have at this very moment.

also, the 'sell gradually' strategy leaves you wide open to the common situation of chasing losses. you sell some, stock goes down, you sell some more, stock goes down... uh oh, then you sell everything as stock continues to go down. you'd have been better off just selling all at the outset.

of course, you could sell some now, stock goes up, sell some more, stock goes up, etc. but then you are back where we started, with the emotional effect of loss aversion and regret. those incremental gains just won't offset the pain you will feel should you continue to suffer more losses.

[knowledge]

I would think that your username would give you the answer.

I assume that these thoughts have been percolating in your head the last couple of years as the stock has been rising. As you've already pointed out, the $'s are too big to optimize taxes (aside from moving to different state - moving to NV for a year could save you $1m.) and you won't qualify for LTCGs. Further, you still have a few more years to expiry, and yet even with this massive payday, you won't have hit your "number."

Given all that, and assuming your comfort with risk is beyond the typical boglehead (Given that you've already held on while the paper value has gone above $10m & reading into your username), I'd likely lock a solid baseline (Say 20%?) in now, and sell the remainder gradually, or try to stomach it until expiry. You don't get into positions like this often, so maximizing this opportunity could easily get you to your "number" and beyond.

That said, the result could easily end up with 50% less than what you have right now, but I think you know that.

BTW, I've always found the grouping of FAANG a bit funny. One company clearly does not belong.

[ryman554]

Dumb question, but any benefit to relocating, at least on paper, to another state to avoid the CA taxes? Not sure the nuance of it, but CA = ouch.

Not from the options, no. I learned this the hard way.

Options are taxed as sourced to the state in which the options were granted. Even if you move to Florida, you will owe California taxes on the W-2 income. You can get away with capital gains taxes by moving, but that is not the case for the OP.

[leftcoaster]

His.

I've been lucky enough to enjoy a big windfall thanks to my employer stock options (NSOs) going through the roof in the last few years. A recent run-up has made it a whopping 80%+ of my assets, so I'm planning to diversify.

My question is: what's the best way to go about selling? This is probably the biggest financial decision of my lifetime, and getting it right or wrong means the difference between early retirement and a lifetime of kicking myself.

Some facts:

• The options' value currently sums to $13.0M, and exercise price sums to ~$1.4M, for a net of $11.6M before taxes.
• Those numbers already reflect that I sold 10% of my holdings last quarter. I already regret it, since the stock price has grown a lot since then.
• My marginal federal and CA tax rates for 2018+ will be the maximum. So I'm treating short-term capital gains as 50.3% and long-term as 37.1%.
• I can only trade my company's options/stock within a brief trading window after each quarterly earnings report.
• The oldest options expire in 2022.
• My newest options are a small share of the total value, since I'm granted fewer options at current stock prices. So, new options don't substantially increase my exposure.
• I'm 37. My wife and I both work, though my income is much higher (~$1M vs. $120K). We'd survive losing this windfall, but obviously we'd rather not.

Now my plans, which need your skepticism:

• I plan to sell gradually, rather than immediately-- something like 8-10% each quarter, possibly a bigger lump initially. The stock has always been volatile, and there's always a risk any individual company will tank, but I assume the most likely outcome by 2022 is continued growth.
• To minimize taxes, I intend to do a cashless exercise and hold the resulting shares for a year before selling. This would delay my diversification by a year, but with a big tax benefit.
• I don't plan to talk with a financial adviser, since A) I don't even know where I'd find a good one, and B) I associate financial advisers with peddling funds with high fees. Also, C) my plan is flawless, so of course I don't need one, right?

What am I not considering?

Does your tax calculation include NIIT?

[grkmec]

My two cents - I would sell the options based upon the following framework:

1) Uncomfortable threshold of my net worth... Which would likely be >30%. Here is my reasoning. We are similar ages (I am 39), so my pure equity allocation is between 60-70% across my overall portfolio. The most I could possibly fathom would be 1/2 my equity portfolio in my employer's stock. If you asked me what a more comfortable range was, I would say 10-20% of my net worth. Anything sub 10% I would not lose a wink of sleep if the company stock went to zero.

2) What do I think the value of the stock is worth relative to its earnings growth rate and market multiples. I find it incredibly difficult to value high growth tech stocks, so any conclusion I would reach would be highly suspect.

If I were you, I would sell at least half the company stock to as close to 30% of net worth as possible. Then I would institute a quarterly sales plan to get it under 20% over the next 12-18 months. I would use proceeds to pay taxes, pay down all debt and superfund kids 529s (150k each). Then take the rest and invest it in a boring taxable account that is tax efficient given your income levels and state of residence.

[limeyx]

I would definitely get some professional tax planning advice. FWIW if these are non-qualified stock options I don’t think holding the stock for a year following exercise lowers taxes on the initial gain at all. Also, a “cashless” exercise usually is the term for taking the cash value immediately as ordinary income. The likely best answer here will be to cash them all out as soon as possible to diversify into your target asset allocation.

Holding vested options is like holding a concentrated position in a single stock. The only reason it would make sense is if you expected your tax bracket to go lower in a future year so you could time the exercise for when you are in a lower bracket (or maybe no longer a CA resident).

Seconded! And yeah if they are NSO's not ISO's I think you are stuck with short-team cap gains on the spread at exercise and then LTCG on any increase past that date so I'd definitely look toward cashing out a bunch and buying my own beach somewhere if it was me !

I just had a work colleague who was putting off retirement for a couple more years due to the cost of medical care. Sadly she passed away suddenly and never got to enjoy a single day of retirement and it's really re-enforced how I think about saving for retirement

[neversell]

Wish I could "like" every post. I am reading and considering every one, even though I don't have something unique to say in response to each.

Does your tax calculation include NIIT?

Hm-- if the income is from capital gains, but the capital gains are from a business in which I materially participate (i.e. it's my day job), does NIIT still apply?

[Skierajs]

Wish I could "like" every post. I am reading and considering every one, even though I don't have something unique to say in response to each.

Does your tax calculation include NIIT?

Hm-- if the income is from capital gains, but the capital gains are from a business in which I materially participate (i.e. it's my day job), does NIIT still apply?

I believe the income from exercise of NSOs is considered earned income not capital gains so should not be subject to NIIT but may be subject to Medicare (0.9%).

[RedJunglefowl]

Sell it all promptly. Don't take more than two trading windows and sell at least half at your earliest opportunity. You are still exposed to this stock since you work for this firm. If the stock does poorly, you will be happy you sold. If it does REALLY poorly, you might lose a job and be even happier you sold (you can never count out executive fraud or government action). If the stock doesn't move, you will be happy you sold. If the stock goes up a lot, you will still be getting equity refreshes and perhaps have new vesting options and are more likely to have an upward adjustment to your compensation. You will have missed out on some gains, but maybe the market will also be going up? You have plenty of exposure and you will be likely to benefit a lot from the stock's continued success even if you sell your current position.

[Valuethinker]

Wish I could "like" every post. I am reading and considering every one, even though I don't have something unique to say in response to each.

Does your tax calculation include NIIT?

Hm-- if the income is from capital gains, but the capital gains are from a business in which I materially participate (i.e. it's my day job), does NIIT still apply?

Just sell. Quit mucking around and considering and sell. Take half the money off the table. Then you can think about being optimal on the other half.

You are just one step away from financial independence aka Eff You Money. Once you have done this, your employer no longer owns you. OK you'd have to downshift that lifestyle, but you could move somewhere else, live on $100k pa.

[AZAttorney11]

OP, I hope you don't work for Facebook. Ouch.

Facebook plunges more than 24 percent on revenue miss and projected slowdown

https://www.cnbc.com/2018/07/25/faceboo ... -2018.html

[grkmec]

My guess was Netflix !

[ausmatt]

OP, I hope you don't work for Facebook. Ouch.

Facebook plunges more than 24 percent on revenue miss and projected slowdown

https://www.cnbc.com/2018/07/25/faceboo ... -2018.html

I came back to post this. It’s a good example of the unpredictability of an individual equity.

When your options are liquid, you have to ask the question, “if I didn’t work here, would I be putting $xxx into this stock? Why not others in the same sector?” It ultimately goes back to your investment statement and strategy.

I’m in a similar boat and I sell (and generally take STCG) to derisk.

[goodenyou]

I'll say it again. "Pigs get fat and hogs get slaughtered".

[ChowYunPhat]

Neversell, welcome to the forum and congrats on your hard work and good fortune. You should feel great about the position you're in. You should also consider changing your username

Most of the other posters have already covered it well, but I would reinforce the following:
* Sell at your next trade window. The FB dip today is an excellent case study, and the forum is littered with examples of public companies which met an untimely end.
* There is zero tax incentive to hold as your salary pushes you to max marginal tax rates into the indefinite future. There may be something creative you could do with a deferred compensation plan if offered at your employer, but may not make a difference anyway depending on caps.
* Hire a tax counsel / CPA for this transaction. While the forum typically spouts a DIY approach to most matters, the scale of your transaction makes a little hand-holding worthwhile and money well spent. FWIW, your audit risk will spike this tax year.
* Take some of the proceeds out of the game. You've won the wealth game and will continue to work. There is a lot of discussion potential on how to invest this piece, and many threads on windfall management already in place.

Again, congrats and best of luck to you and your family as you navigate this decision.

[gips]

I was in a similar position but with somewhat higher comp/stock and disagree with a lot of the posters here. Had you posted two years ago, you'd have heard the same advice to sell, albeit at a much lower level.

If you really believe in the stock, my advice is to sell enough to bank 35x expenses (after tax) and hold on to the rest of the stock. This assures your financial independence, if the stock loses 50% of its value it will still be worth quite a bit and you have strong comp. Basically, you're in a great position to take a gamble.

good luck!

[limeyx]

Wish I could "like" every post. I am reading and considering every one, even though I don't have something unique to say in response to each.

Does your tax calculation include NIIT?

Hm-- if the income is from capital gains, but the capital gains are from a business in which I materially participate (i.e. it's my day job), does NIIT still apply?

I believe the income from exercise of NSOs is considered earned income not capital gains so should not be subject to NIIT but may be subject to Medicare (0.9%).

Yeah I think that's right (I mistakenly thought it was short term cap gains)

https://www.investopedia.com/articles/o ... oabout.asp

"Taxation begins at the time of exercise. The bargain element of a non-qualified stock option is considered "compensation" and is taxed at ordinary income tax rates."

[shess]

I once was in your situation, except not quite: I had a nice bundle of pre-IPO shares at a company that could do no wrong, but my prior employer was a great company which the market destroyed. So when I got the chance to ask the question "Should I sell or hold steady?", the obvious response was "OMG, don't hold onto all of it!"

But regret is real. My first suggestion to get in the mood is to think of what you'd do if your long lost uncle died and left you $10M in CAT stock. Would you hold onto it for old time's sake, or would you sell immediately? How about MSFT? INTC? If you'd hold ... why wouldn't you sell the stock you have and buy INTC, given that you love it so much? Basically, my goal with this line of reasoning is to separate prudence from emotion. Simply put, you work at your employer because you believe in your employer, so OBVIOUSLY you're convinced they are going places, so OBVIOUSLY you really want to hold, that's just human nature, and you need to program yourself against it (to some extent, you don't want to brainwash yourself into disliking your employer).

Then, think on what your goal in life is. For instance, a few years after our paper windfall, my wife and I decided to move to a city we liked which was near work, but it was pretty high-cost city. We could qualify for a mortgage covering at best 40% of the purchase price of the houses we were looking at. In the end, I told my wife that we wouldn't get any points for having a big portfolio, we could sell some of it to fund the house and live in our money. This was an excellent decision, our house isn't super deluxe nice, but it's a nice house in a nice neighborhood with enough space, etc, so it's paid daily dividends. [Also, I don't know where you get your idea that $10M isn't sufficient for retiring in the SF Bay Area. Maybe I'm just not doing it right?]

Lastly, think about prudence. If you shoot for the stars and lose it all, you're going to feel like an idiot when you can't afford to send your kid to college, or when you can't afford to remodel your kitchen, or you're arguing about how much to spend on a vacation. You had it all! So selling some makes sense. But it can be hard to implement, every selling point feels like a new decision! I used a few approaches. One approach was to just pick a reasonable share count (or dollar amount) which will take "awhile" to get rid of everything, and sell a bit when the window opens, and again before it closes. This isn't meant to be perfect, rather it's a reasonable idea which at least got me moving in the right direction. Another approach I used later was to aim for a certain portfolio exposure to company stock. For me I decided that 25% seemed reasonable, given that the other 75% was more than I needed to retire already. Since retiring (early) I've dropped that to 20%, but, weirdly enough, the company stock rises faster than the market so it keeps generating more sales .

Hmm. Also, a last technique I use is to sell a bit whenever I'm nervous about the price. In the fall of 2007, the stock was repeatedly surging to new highs so I'd sell a bit just to let off steam, until I was selling on a weekly basis. Then it started dropping and over about six months the stock lost around 60% of its value. I have very little regret about selling shares at 1/10 (or even 1/20) of the current price, but I have a TON of regret about not selling more shares at that local high. I mean, it eventually came back, but it took years.

---

Anyhow, I can't repeat this enough: Don't turn winning into losing by overplaying your hand. Don't think about percentages, don't think about how much you could have made if you had held, because those issues simply don't matter at this point. Think about building a solid future for yourself and your family.

[Bfwolf]

Wow, what a thread. OP, I really do hope your company isn't Facebook.

The advice to take half off the table immediately is great. Twice as great advice would be to take it all of the table immediately.

Imagine you had this money in cash. Would you ever for a second think of buying your company's stock? Of course not. So why would you not sell all your shares immediately given you are in the top tax bracket no matter when you do it?

A smart guy like you knows that's illogical.

Stop analyzing. Sell all now. Right now. The next window. Do not delay.

[libralibra]

post removed

[financeguy88]

Wow, what a thread. OP, I really do hope your company isn't Facebook.

The advice to take half off the table immediately is great. Twice as great advice would be to take it all of the table immediately.

Imagine you had this money in cash. Would you ever for a second think of buying your company's stock? Of course not. So why would you not sell all your shares immediately given you are in the top tax bracket no matter when you do it?

A smart guy like you knows that's illogical.

Stop analyzing. Sell all now. Right now. The next window. Do not delay.

Even if it is Facebook, the stock is only back to where it was at the start of the year and up probably 50% over the last 18 months (too lazy to check the exact amount). I doubt anyone there is shedding too many tears, except maybe the employees that just started and received stock near the recent high levels.

[mike_in_ny]

I also work in Tech and have seen it before. While difficult to do (FOMO), the smart
decision is to sell a significant portion to lock in gains and lifestyle. Even the multi-billionaires
founders that we all read about at IPO lock in their gains (often $20-50M) as soon as they
can, while letting the rest run. That is the best advice money can buy, so I'd suggest that
you figure out your number to take off the table as insurance and don't look back.
The other aspect about this that needs to be discussed is the chit-chat around the
water-cooler at work. I realize there is a real energy and peer pressure, especially on days
that the stock is up $5 or more. All the discussions on what to do, as everyone shares in
the success. You can still be a part of that as you trim your shares considerably. But my
rule has always been to never talk what I'm doing personally and talk about the stock like
the weather -- something that everyone sees and can talk about.

Best wishes.