Stock Options

[Cipro]

Lock-up period for shares granted to me in company I used to work for is ending in about 1 week. Total value of shares currently about $1.3 MM. Would like to hold but wanted to check with board.

Little background - married 60 yo with 3 kids out of house, finished college - thinking about retiring soon (next 2-3 years) - some current job instability though likely can find alternative job with some effort - wife works. My income around 300k, wife around 40k.

Downsizing - currently preparing house for sale - will likely rent for a while before buying new house - anticipate decreasing expenses.

Saved about $3.3 MM for retirement invested about 50% equity/50% fixed. Live in HCOL area. Household expenses high. Following 25x rule, really need about $6 MM to retire though considering anticipated expenses, I think we could live on about $4 MM.

Should I sell the stock in part or whole? I left company over a year ago, but since IPO, I know there may be impending news that could effect share price (positively or negatively) - I'm feeling bullish but don't want to be silly.

[Misenplace]

Are you so bullish that you would buy 1.3 M of former company stock? Because that is essentially what you are doing by holding it and not diversifying.
Also, one could consider that you are not really 50:50 anymore with 1.3 M of pretax dollars in a single stock.
Diversification is the only free lunch on the street.

If you think you might be unemployed in the next few months, then one could argue spacing out the sale over a couple of years to fill lower tax brackets, but that is taking a real risk on a fairly new public company. If your options are out of lock up, then so are a lot of others. Honestly, you should exercise ASAP and not let the tax tail wag the dog.

[ohai]

Sell the stock as soon as your situation allows it. Even blue chip stocks like GE can decline by 70% while the general stock market is fine.

[Jack FFR1846]

Sell it all the first milisecond that you can. Best is if there's an automatic, future option to sell all at market at vest.

I've seen too many options go under water for friends while I live in my mortgage free house, paid by options and my wife drives in her new car, paid by options.

Pigs get free cars.....hogs get nothin'

[Cipro]

Well seems to be consensus so far. Pigs are cute, hogs are ugly.

[SQRT]

Conventional wisdom would be to sell all of it ASAP. I was in a similar position though, kept the stock, and made millions. But I was an insider and had an intimate understanding of the company. Wouldn’t recommend what I did.

You didn’t mention your total net worth but if it’s less than $10million, you should probably sell most of it.

[ModifiedDuration]

These are options, not stock, correct?

You are saying that the difference between the strike price of the options and the current market price of the underlying stock results in a $1.3 million gain?

[Cipro]

Stock not options sorry - concerted to stock at IPO.

[deanmoriarty]

Sell 25% as soon as you can, and put automatic orders to sell the other 75% over the next 12 months, selling every month an equal amount, at market value.

It's not like you are starving, you have 3.3M which will give you a sweet lifestyle in a LCOL/MCOL, so take some tiny bit of risk.

Most people are way too conservative on this forum IMHO, it's not that by selling them all your net worth will double, especially if the amount is pre tax.

[not4me]

I'll throw out some (unpopular no doubt) options for you to consider. These might fit your situation even if not right for most folks. First, I'd consider factors that you've mentioned in relative terms...how shaky is your current job? what is your overall risk tolerance (50/50 allocation says you may be more risk averse than these ideas would warrant)? what is your cost basis (is the $1.3M all long term cap gain)?how much of your retirement is currently tax deferred? how volatile is the company stock & how deep is the daily volume? what is your state tax situation? etc

You seem to indicate you are a little over half way to your preferred retirement goal with 2-3 years left, although this might get you a little over your low end goal. From a fed tax view, selling immediately would put you in the highest bracket & might result in 5%+ of overall in extra taxes. Instead, you could sell a major chunk immediately & give some to a donor advised fund. Bunch your deduction to offset some of the gain. You could then use a covered call option strategy & couple with a put option in case the stock price fell dramatically before next tax year. Let you keep some upside potential, does NOT eliminate single stock risk but does mitigate to an extent...depends on the stock performance (really relative to your 50/50 allocation you'd put proceeds into).

Good luck in your decision. No one ever went broke taking a profit

[Misenplace]

You seem to indicate you are a little over half way to your preferred retirement goal with 2-3 years left, although this might get you a little over your low end goal. From a fed tax view, selling immediately would put you in the highest bracket & might result in 5%+ of overall in extra taxes. Instead, you could sell a major chunk immediately & give some to a donor advised fund. Bunch your deduction to offset some of the gain. You could then use a covered call option strategy & couple with a put option in case the stock price fell dramatically before next tax year. Let you keep some upside potential, does NOT eliminate single stock risk but does mitigate to an extent...depends on the stock performance (really relative to your 50/50 allocation you'd put proceeds into).

I had you right up til you got to the donor advised fund, then I lost you. OP said nothing about charitable intentions, only getting to a SWR. How does a DAF help?

Also, could you explain more about this covered call + put option and how it helps OP overcome some issue? With the tax rates low for high earners right now, what is the advantage?

Edited to add italics

[not4me]

You seem to indicate you are a little over half way to your preferred retirement goal with 2-3 years left, although this might get you a little over your low end goal. From a fed tax view, selling immediately would put you in the highest bracket & might result in 5%+ of overall in extra taxes. Instead, you could sell a major chunk immediately & give some to a donor advised fund. Bunch your deduction to offset some of the gain. You could then use a covered call option strategy & couple with a put option in case the stock price fell dramatically before next tax year. Let you keep some upside potential, does NOT eliminate single stock risk but does mitigate to an extent...depends on the stock performance (really relative to your 50/50 allocation you'd put proceeds into).

I had you right up til you got to the donor advised fund, then I lost you. OP said nothing about charitable intentions, only getting to a SWR. How does a DAF help?

Also, could you explain more about this covered call + put option and how it helps OP overcome some issue? With the tax rates low for high earners right now, what is the advantage?

Edited to add italics

You're right to call me out on the DAF, but let me expand on what I was thinking. Really at a disadvantage not knowing the real situation -- how much is long term cap gain vs ordinary income? state tax status? etc. OP didn't mention charitable intent & that was where I overstepped without adding that there MIGHT be ways to offset some of the income. IF there is usually charitable donations from income, donating appreciated assets might help. Same might be said for doing some tax loss harvesting -- but I wasn't clear & probably wandered too far. Thanks for helping clarify.

As for call/put, I'll start with the theory. Pick a strike price that is higher than current price such that if the stock got that high, the gain would more than offset higher tax rate & perhaps seen as unsustainably high. So, at price "a" it would be too good to refuse to sell. Then pick another stock price that is lower, such that anything below that would cause more angst than paying the tax. So, at price "b", you'd want to sell because anything lower would be too low. Then, sell a covered call for some/all of shares being held with a strike price of "a" -- collect the premium for that & use it to buy (or at least offset cost of) a put at strike price "b". If stock goes above price "a", the shares would (highly likely) be sold & there wouldn't be a temptation to be greedy & hold even longer. If stock falls below price "b", you exercise the option to sell & limit downside risk. If stock price stays between, then the stock is held until another tax year....

Now, that was the theory. In practice, determining price a & b may be challenging when faced with the reality of the options for that specific stock. It kinda sets a floor & ceiling for a time period & if premiums are such they offset, it doesn't cost anything. Some upside is still available, but downside is limited. Again, we don't have enough info, but I thought it an option worth exploring. If too much trouble, move on.

Not sure if that explanation is clear enough, but hope it clarifies some.

[Misenplace]

Thanks for your reply not4me, now I see better what you were thinking. Agree that in practice, it may be hard to determine price a and b. However, the put/call seems like a valid strategy for someone young who still has significant human capital still in front of them. If I were in OP’s case, I would still want to take the non- diversified risk (and windfall) off the table.

[Cipro]

Thanks all for advice. Seems to be clear consensus to sell all or most. Despite my current 50:50 stock/bond allocation, I am feeling like it may be worth taking risk letting most of it ride. Just for an indication of my risk tolerance, I have spent most of my life at 80:20 then 65:35 and only 50:50 due to worries about political instability leading to market instability (and turning 60!).

I have deep understanding of the technology that the company is selling and believe that it may be successful. There is a high enthusiasm in the field with major technical publications lauding the approach and many competitors jumping on board (both megacorps and small company). Recently, the company went public with one product in testing (which should read out in the next 1 year) and a second shot to be teed up shortly. In my experience, I would give each program a 50:50 chance of showing favorable results validating the technology. Would be significant change to field and share price could jump.

What if it doesn't? Disappointing but I'd survive. Although 3.3 MM is not enough according to the 25x rule, I plan on selling house in next several months and renting (or moving to vacation house temporarily). This will cut expenses considerably. Is planning using the 25x rule necessary? I really don't think that in retirement, with no kids, my spending will approach what is has approached in the last 15 years. In reviewing my bank statements in last 2-years, It seems like I usually spend around $16k/month with all current overhead of big house etc....

[Tamarind]

I also would sell most or all, despite the factors you mention in your reply, OP. Once your company is publicly traded, knowledge about the quality of the company product or leadership or strategy is no longer sufficient to predict its stock performance.

There is a reason Bogleheads avoid single-company concentration no matter the source (stock picking, ESPP, options, RSUs). It is of necessity a high risk bet that is tempting mainly because you think you know better. "Pigs get fat, hogs get slaughtered."

[libralibra]

post removed

[CaliJim]

my humble advice..... minimize regret....sell at least 50% right away then dollar cost average out over the next 12 months.
diversify out of non-systemic risk asap.
concentrated risk can be a quick wealth builder
concentrated risk can be a quick wealth destroyer as well.
figure out how to live on less! $4m is more than many people will ever earn in a lifetime. congratulations on your great good fortune!

[Cipro]

Ok - the board has convinced me to sell. Lock-up just ended today. The shares are being held at company. I checked - if I were to sell entire stake, would cost about $10K in commission. I also got a call from representative from investment bank that underwrote the IPO. They claim they can match buyers with sellers and get higher prices for sellers especially in situations were there is very little daily share volume. They'll make 4K in commission. I can also transfer to discount brokerage and sell for fraction of costs. Is it worth the cost to get broker involved in cases of low volume stock trades?

[CaliJim]

10k in txn fees is outrageous. 4k is high too.

[Cipro]

Just to update board. Sold $1.1 MM of company stock over past 3 days and it feels great!! Glad to have turned theoretical long term pay incentive into real money.

[Darth Xanadu]

Just to update board. Sold $1.1 MM of company stock over past 3 days and it feels great!! Glad to have turned theoretical long term pay incentive into real money.

This is great, congratulations!

[Misenplace]

Just to update board. Sold $1.1 MM of company stock over past 3 days and it feels great!! Glad to have turned theoretical long term pay incentive into real money.

Bird in hand is worth two in the bush. Congratulations!
Now don’t look back and invest the Boglehead way.