Assumed audience: People already familiar with the basics of how stocks work, and who aren’t already experts in stock-based compensation.
Epistemic status: Not a finance expert, and definitely not your financial advisor. But someone who has been thinking about this for quite some time. And this is the kind of thing I wish someone had told me a decade ago!
Some theses that I think should be fairly obvious and agreeable to most readers:
- Holding stock in a company is, at a basic level, a bet on the performance of that company in the future.
- Most companies do not outperform an index fund in the long term; few companies even do so in the short term.
- When you are working for a given company, you already have a significant amount of your compensation tied to the performance of the company. I.e., if the company goes out of business, or has to do layoffs, your income from it can quickly go to zero.
Given those, my basic advice about vested, liquid stocks (read: it’s a public company) is: sell them. At a baseline, just sell all of them. If you want to treat them as investments, turn around and invest them directly in an index fund. That rule of thumb is very simple and maximally decouples you from the specific risks of your specific company. You may lose out on some future gains, but you also might get to skip out on some major losses. That goes double if you have to pay taxes on what you vested and now don’t even have that value left in the stock!
You might think “Well, but I have good reasons to think this company will outperform the stock market and thus index over the next 5 years.” Maybe it is a company that is currently on a tear, with a strong history over the past few years. Even acknowledging that past performance does not predict future performance, you might have strong reasons to believe that the company will keep growing meaningful. A lot of my colleagues at LinkedIn made out with remarkable gains from their Microsoft stock grants by making that bet. Microsoft stock roughly tripled in value over the course of my tenure at LinkedIn.
As a good rule of thumb, though, if you wouldn’t explicitly go out and buy stock in your company on the basis of how confident, you should be evaluating whether you should keep it. Most of us are not savvy enough to pick individual stocks, period. I would never choose to put any meaningful percentage of my income into a specific individual stock, because I have zero expertise there.
Assuming you do have that kind of confidence, though So add one more layer of nuance: keep a percentage of the stock corresponding to whatever you are willing to bet — literally bet! — on the company outrunning index funds. You can get as fancy about this as you want, with expected return rates factored in, different grant prices, etc., or you can be slightly more naïve in your calculations and say “Eh, I give it about a 10% chance of outrunning index funds, so I’ll keep 10%.”
The fact of a stock grant — i.e., that you are given these stocks rather than having to buy them, may feel meaningful in this evaluation more than the others… but that’s actually a fun little cognitive bias leading you astray. Remember that you can exchange that grant directly for cash by selling the stocks immediately and then using them however you want, including reinvesting them immediately in an index fund. Thus, you should mentally file the stocks as equivalent to their current value in cash. Then consider: given that cash in your bank account, would you spend it on your employer’s stock? Probably not.
Assuming you have anything like a decent handle on your company’s market position and the general expected performance of index funds (the S&P 500 has about a 10% annual return on average), either of these approaches is quite likely to leave you ahead of keeping most or all of the stock in your current employer, especially over a longer time horizon. If you’re in the average successfully-IPO-ing, your stock probably doesn’t look like “keep your original stock and be a bazillionaire in 30 years” like the stories you hear from early Apple or Microsoft employees. It is far likelier that it will never again be worth as much as it is at the IPO1 as that it will grow meaningfully. So: treat it like a bet, and decide whether you want to make that bet on your specific company, and how big you want to make it.
A minor postscript —
If you’re curious: I don’t have a penny of Microsoft stock at this point, because I went with the simple path. If I were to go back and do it again, knowing more about finances but not knowing what Microsoft’s future was, I’d consider keeping ~10%, based on a simple bet and the tear the company was on (and Microsoft is one of the few companies on that kind of tear)… but more likely I would still just sell it all. Yes, in this case, missing out on some upside. But I did not and could not know that then.
Notes
If this surprises you, go look at the stocks prices from all the tech company IPOs from 2010 through now. They’re all over the place in terms of returns! ↩︎