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Stop Avoiding Decisions on Equity Compensation: Part III - Don't Let FOMO Ruin Your Finances

Diversify Your Windfall

For equity holders in a private company, a public offering can translate economic value (paper gains) into actual cash. 

This is the realization of a windfall. 

The post-windfall planning strategy is about managing downside, applying the cash towards personal priorities, and avoiding the lure of playing “one more hand” at the casino by holding shares with no defined exit plan. 

Diversification is a must at this point.

In my experience, unhelpful emotions can really prevent sound decisions here. There are three common situations: 

1.    Stock options were never exercised and there are now high taxes. 

2.    Stock options were exercised, and there are (relatively) low taxes to pay upon sale.

3.    RSU grants are vesting quarterly with little tax implications upon sale. 

Here’s how it would look for Planner Pete vs. someone that did no planning from the last article.

Taxes are a tough pill to swallow—no doubt. But regardless of the tax consequences from selling stock, I would recommend both people to sell the stock and keep their money after a 20x return. Don’t play another hand

Folks never really want to sell because they’re holding onto hope (real or imagined) that the stock will appreciate further. In other words, the perceived opportunity cost of selling the stock is too high—they have FOMO

“Not sure if I want to sell now, I think we could double or triple in the next year.”  

This is just like someone that wins big at a casino and keeps playing. If someone wins $50,000 playing roulette, they should simply walk away and stop trying to recreate the windfall. They’ve paid for their entire trip, and probably four or five more vacations. But they think can go 10x again…..

The difference is that early stage company bets require relatively low capital risk, with huge upside potential. After the windfall the risk/return metrics shift. Folks now have their entire nest egg in an asset that has already experienced multiples of growth. Now you are risking much more money. 

Develop a plan to consistently sell your holdings in a way that is mindful of taxes. Then apply the proceeds against your personal financial goals. 

For everyone that receives RSUs post-IPO: TREAT THEM AS A VARIABLE CASH BONUS AND SELL IMMEDIATLEY AT VEST

RSUs are very common, especially in tech. 

Let’s look at a quick example. Danny Director signs on with Techflow, Inc. two years after an IPO and receives 5,000 RSUs, vesting 25% over four years. He receives the same grant for the following three years—total RSU grants of 20,000 that star, vesting over eight years on the following schedule. 

Now let’s examine a “sell at vest” vs. “hold forever”. Our sell at vest assumes post-tax proceeds go into a diversified account that earns an average return of 7%.  

1.    Stock Falls Scenario- Stock initially rises, then crashes towards the end.

2.    Stock Rises Scenario- Stock steadily rises with a big pop in later years. 

Here are the four scenarios with each year broken out.

And here’s the summary with a visual graph for comparison

Just to address the obvious, the “sell at vest” strategy never comes out on top if shares continue to appreciate. Folks need to be ok with that (and many aren’t!). Successful long-term decision making is about playing the odds, and the “sell at vest” strategy forces trading the best possible scenario to avoid the worst possible scenario.  

RSUs are just deferred compensation tied to company performance. With this strategy you mitigate downside risk, and still participate in upside. 

Selling at vest makes sense because the worst-case scenario hurts you MUCH more than the best-case scenario helps you.

You shouldn’t risk (almost) everything to (possibly) gain a little more. A bird in the hand is worth two in the bush. Don’t be greedy. You get the point….with a “hold forever” strategy, there is almost never a point where it makes sense to sell. The flipside is that the strategy is ALWAYS carrying heavy risk.  

Every investment needs an exit plan. 

As the charts show, you still participate in upside as the company does better. But you participate much less in downside. 

Bringing This Back to Fundamentals….

Goals based financial planning is about meeting financial priorities through informed, disciplined and sustainable actions. Sticking to fundamentals makes decisions easier

With this strategy, we’re removing guesswork and keeping decisions simple with the goal of avoiding the “big miss” and staying on track through minimizing company risk but keeping some return. 

Don’t worry about what your co-workers are doing. Understand your own personal situation and have a plan to execute your goals that removes as much risk and contingency as possible.  

Don’t let FOMO ruin your finances. 

Disclosure:   Claro Advisors, LLC ("Claro") is a registered investment advisor with the U.S. Securities and Exchange Commission ("SEC"). The information contained in this post is for educational purposes only and is not to be considered investment advice. Claro provides individualized advice only after obtaining all necessary background information from a client. Please contact us here with any questions.

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About the Author

Robert E. Dockendorff, JD, LL.M

Robert E. Dockendorff, JD, LL.M

Robert Dockendorff is a Vice President of Claro Advisors, LLC. Bob serves as an Advisor at Claro, where he helps clients achieve financial goals through careful analysis and the development of long-term plans that encourage consistent, achievable actions. Bob also enjoys sharing helpful financial planning insights on his blog and is an active contributor on Investopedia's Advisor Insights website.

Prior to joining Claro, Bob was a Senior Associate Financial Counselor at The Colony Group, supporting a team of financial counselors with research and analysis on all areas of wealth management and financial planning for high net worth individuals. He also focused on the implementation of investment, estate, and tax planning tailored to the specific goals of diverse clients. Prior to joining The Colony Group, Bob worked as a Tax Associate at the international accounting firm Ernst & Young, where he conducted tax research for multi-national businesses. Bob received a Bachelor of Arts in Philosophy from the University of Vermont. After college, Bob earned a Juris Doctor from Suffolk University Law School, Cum Laude, and an LL.M in Taxation from Boston University Law School. Bob has previously passed the FINRA Series 65 and the MA Life and Health Insurance Producer Exam. In his spare time, Bob enjoys the mountains, the beach, and playing golf. Bob resides in Hingham, MA with his wife Caitlin and two sons, Charlie and Tommy.

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Disclosure: Claro Advisors LLC ("Claro") is a Registered Investment Advisor with the U.S. Securities and Exchange Commission ("SEC") based in the Commonwealth of Massachusetts. Registration of an Investment Advisor does not imply any specific level of skill or training. Information contained herein is for educational purposes only and is not to be considered investment advice. Claro provides individualized advice only after obtaining all necessary background information from a client. This report is not a financial plan and is not intended as a solicitation or advice to purchase specific investments, but the information provided can assist you in evaluating your current financial situation and your ability to achieve your investment goals. Any projection of investment outcomes is hypothetical in nature, does not reflect actual investment results, and is not a guarantee of future results. Similarly, other information regarding various investment outcomes are hypothetical in nature, do not reflect actual results and are not guarantees of future results. The projections may not include all taxes applicable to your situation. Past performance is no assurance of future results. Investments may fluctuate and lose value, and unexpected market movements may result in changes in rates of return and anticipated performance. Claro does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. Claro will provide all prospective clients with a copy of our current Form ADV, Part 2 ("Brochure") prior to commencing an Advisory relationship. Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. or toll free at 800-604-2838 with any questions.

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