Should I sell my stock in the company I work for which is about to go public?
October 28, 2011 12:05 PM   Subscribe

My initial vesting date will be just a few days after the IPO. Should I sell all the shares that vest on the vesting date immediately? How do I maximize my future happiness in making this decision?

The company I work for is about to go public, and part of my compensation package is a grant of shares of stock (RSUs—"restricted stock units"). My first vesting date is going to be just a few days after the company goes public, so I won't be beholden to the lockup period.

Should I sell all the shares that vest on the vesting date immediately? What kinds of things do you have to think about to make that kind of decision? What is the rational decision calculus for something like this? On the one hand, if the stock goes into the toilet and stays there forever, I'll regret not selling sooner. On the other hand, if it goes up and up and up, I'll wish I held on to the stock. How do I maximize my happiness?
posted by nohat to Work & Money (17 answers total) 2 users marked this as a favorite
sell half, this way if it goes in the toilet you have something to show for it and if it goes to the moon you won't regret selling all your shares.
posted by any major dude at 12:07 PM on October 28, 2011 [2 favorites]

I would sell and buy an index fund. People will tend to think they have inside info on their own company and can time the market to make money, but that rarely happens. You are better off just going with plain diversified mutual fund.
posted by amazingstill at 12:20 PM on October 28, 2011

Lots of variables here - the company, the industry, the amount of money we're talking about, etc. It's easier to think about it like this - under what conditions would you want to hold a bunch of stock in a single company? For me the answer would be - if the stock is not integral to my retirement plans or near term financial needs I would hold on to it. On the flip side, if it represents 50% of my retirement fund - I'd sell them asap and move into a fund with the risk profile I want.

If it's a lot of money, or other factors in play - I would find an advisor to talk it over with.
posted by machinecraig at 12:33 PM on October 28, 2011

Think of the opposite situation: if you had the cash value of your holdings would you use it to buy your position?
posted by 2bucksplus at 12:35 PM on October 28, 2011 [3 favorites]

Selling half is a good way to minimize your likelihood of future regret.

Beyond that, there are many things to consider that you don't mention in your question.

1. You say that your first chunk of RSUs will vest a few days after the IPO, but you don't say what how many more RSUs you'll get later. If the first chunk is only 10% of the stock you'll ultimately get, then you might want to sell all of it.

2. How much will that first chunk be worth? Enough to buy a nice dinner, a new car, take a year off from work, or enough to retire on?

3. How will the market respond to the IPO? You obviously won't know this until after the IPO, but it will make a difference in your decision to sell. What if the stock goes up 5-fold on the first day? What if drops by 50%?

4. What do you think of the company? Do you think it's built to last and will grow more quickly than the overall market, or do you think it's a flash-in-the-pan and that the IPO was timed to cash in on the ephemeral enthusiasm for this company's products and services?

5. What other savings and investments do you have? Do you need to keep value of these RSUs secure so you can add them to your long-term retirement portfolio? If so, you'd want to sell them and buy index funds as amazingstill suggested.

In general, owning stock in the company you work for increases your risk. Both your salary and your investments depend on one entity. If that entity goes south, you lose two ways. So that would argue for selling. On the other hand, if you think the company is really solid, maybe you should hold at least some for a while.
posted by alms at 12:36 PM on October 28, 2011 [3 favorites]

Here's my strategy on this, which may or may not be of interest to you.

First, I calculate how much money I will make, net, by selling the shares. For the sake of this comment, let's say it is $8000.

Then, I do the typical research I'd do on a company, as far as its future stock price is concerned.

I then ask myself: "am I willing to take $8000 out of my bank account, right now, independent of what I do with my options, to buy shares in my company?"

If the answer is clearly no, then I cash in the options and put it in my bank account. If the answer is clearly yes, then I let the options ride. If the answer is on the fence, I cash in half of the options and put it in my bank account1.

This way, I stop considering the options "free money" and start considering them as a genuine asset.

1 or I cash in all the options, because I personally don't like putting all my eggs in one basket, and if my company tanks AND their stock tanks, I'm doubly screwed. But that's just me.
posted by davejay at 12:37 PM on October 28, 2011 [2 favorites]

Or what 2bucksplus said much more efficiently than I did.
posted by davejay at 12:38 PM on October 28, 2011

Sell 100%. There is absolutely no reason a rational person would prefer to hold $8000 worth of your company's stock (that came for free) over just buying $8000 of your company's stock.

You wouldn't buy $8000 of your company's stock -- for one thing, you really shouldn't hold individual stocks in your portfolio. Even if you want to hold an individual stock, there are thousands to choose from, some of which are probably better choices than the company you happen to work for.

If you wouldn't buy the stock, then why would you hold the stock? The only reason I can think of is that the company is playing mind games with you.
posted by miyabo at 12:57 PM on October 28, 2011

People will tend to think they have inside info on their own company and can time the market to make money, but that rarely happens. You are better off just going with plain diversified mutual fund.

And if that does happen, isn't that insider trading anyways?
posted by Jahaza at 12:58 PM on October 28, 2011

Just to be sure, these are actual shares and not options, right? Because that makes a significant difference in how you want to plan this.
I once worked for a company that gave all employee's X number of options for the IPO at $30/share. Stock opened at $35, and 10 minutes later was trading at $20. And since the options came with a "you must hold the stock for 30 days" or something like that, everyone who exercised the options took a bath.
Just to increase the amusement factor, there were two divisions in the company, one that was making money hand over fist and the other that was losing it even faster. Virtually nobody in the division that was making money exercised the options. The opposite held true in the money-losing division, to the extent that some people were getting creative/risky in order to finance buying those options. As you can guess, inter-division relations hit a new low.
posted by Runes at 1:23 PM on October 28, 2011

To answer some of the follow-up questions:

(1) Yes these are granted shares, not options.
(2) The amount we're talking about, at the expected IPO asking price, amounts to "buy a nice car" territory, not "buy a mansion" or "retire at 35"
(3) I have existing 401(k) retirement funds, but I have a somewhat perverse view of the future in that I think by the time I reach "retirement age", the concept of retirement will be something completely different from what it means now.
posted by nohat at 1:39 PM on October 28, 2011

RSUs are considered part of your salary - and will be taxed when they vest. That's just one more reason to sell (so you can pay the taxes and then pocket the rest).

The other reasons are equally strong and compelling. I have a friend who had employee stock in one of those companies that failed three years ago, and it was not pretty to lose a job and an investment in one swoop.
posted by rainydayfilms at 1:41 PM on October 28, 2011

Oh, RSUs? Sell.
posted by davejay at 3:19 PM on October 28, 2011

If you like. Sell all then buy @100 percent. Then there is no holding time if it tanks
posted by CodeMonkey at 3:46 PM on October 28, 2011

RSUs are considered part of your salary - and will be taxed when they vest. That's just one more reason to sell

Well, usually there is withholding, but I think you can waive that. In my case I have the actual granted RSU's reduced by the withholding amount, so my expected additional tax should be 0 (aside from tax on capital gains between granted and sold share price).

I would definitely sell at least half, beyond that depends on what you think of future performance. IPOs can be a special case because the market hasn't yet determined what it thinks the value of your company is, so it could shoot up or down quite a bit.

With an established company I usually sell RSU's exactly 1 year after vest, so that any capital gains are taxed at long-term capital gains rate (15% in the US right now). At an IPO I'd definitely sell a chunk right away in case things go bad, but personally I'd probably hold 25-50% in case the market decides it's worth quite a bit more, assuming I think my company is solid.

If this was 1998 and it was a worthless tech company that might shoot up on day 1, you'd sell 100% for sure, but those kind of shady IPO's are less common now.
posted by wildcrdj at 4:55 PM on October 28, 2011

Withholding = taxes

You should absolutely talk to your accountant. It's my understanding that RSUs are not eligible for capital gains taxes and are instead taxed as income the year they vest.
posted by rainydayfilms at 6:03 PM on October 28, 2011

Don't get too caught up in rules of thumb. Treat this as any other investment opportunity. If you currently have no investment appetite for equities and are generally risk adverse, sell this immediately.

If you are open to having equity investments, treat this like any other IPO "opportunity." Take the time to review the S-1 filings with the SEC. Ask investor relations for any other materials. You actually do have an advantage here since clearly you know the industry well. Do you have any knowledge of financials or valuation? Perhaps you could seek out information about the key risks/concerns about the company and then consider if you have insight into those issues that give you a leg up.

As a general rule, if your company is making real profits and positive cash flows it will probably be much more stable than if you are working at an unprofitable "growth" company. The latter is much more likely to experience volatile price swings. If you are in this riskier camp you may want to sell a big chunk no matter what.

Feel free to PM me for further advice.
posted by jameslavelle3 at 9:52 PM on October 28, 2011

« Older What can systems theory do for me?   |   I know the shoulder looks like a sidewalk, but... Newer »
This thread is closed to new comments.