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Let’s say the company you work for goes public and your stock is suddenly worth $1,000,000 (as an example). A wise investor, you normally put all of your other

Let’s say the company you work for goes public and your stock is suddenly worth $1,000,000 (as an example). A wise investor, you normally put all of your other savings into broad market index funds. Now, do you sell your company’s stock that was given to you and took you four years to vest into, or do you hold on to it and hope the valuation keeps rising? (This is a rhetorical question btw)

frisco 9y ago
It’s not all or nothing. Selling 25% probably makes sense. Selling 100% probably doesn’t. The right balance depends on what % of your total net worth that $1M represents. I also think it highly depends on your answer to “how excited are you about the company’s roadmap for the next few years?” and “do you feel like you / the company have more to do on the topic?”
- encoderer 9y ago
  Yes exactly. For somebody really looking to optimize, research Kelly criterion.
zapita 9y ago
The short version is: retain a competent wealth manager to advise you. EDIT: not all wealth managers are scam artists. If you suddenly earn lots of money and don't know what to do with it, find a professional paid by the hour to advise you. Do not listen to the people telling you that anyone charging you for advice is automatically a scammer. Also don't listen to people telling you that it's "not that hard" without any context on your experience and understanding of finance. They have nothing to lose by looking smart and confident on the internet while discussing your money. It depends on your overall net worth. If the stock represents the majority of your net worth, you might want to diversify across different types of assets - your newly introduced tech stock being on the high-risk end of that spectrum. If on the other hand you have "enough" of your savings in lower-risk assets, then it can make sense to keep all your stock.
- frisco 9y ago
  > The short version is: retain a competent wealth manager to advise you. This is not good advice. "Wealth managers" are totally useless and exist just to charge you fees and create complexity. I really like mgummelt's comment above; it doesn't have to be more complicated than that!
  - jayess 9y ago
    Exactly. From personal experience, "wealth managers" are a scam. They're just below the scam scale from mortgage brokers and real estate agents.
    - zapita 9y ago
      You're thinking of people who charge you a management fee and try to "beat the market". I'm talking about people who charge you by the hour to explain to you how to manage your money. Maybe "financial advisor" is a better term? Either way qualifying any form of professional counsel as "a scam" seems a bit excessive, and also bad avice.
      - TeMPOraL 9y ago
        "By their fruits you'll know them". One has to be careful, because there is a lot of professional-looking scam artistry going in this space. Also, you mention the term "financial advisor". I urge people to remember that there are different kinds of those, including those who know shit and care even less, and all they want is to sign you up to some financial MLM scheme. Source: I know some of the latter kind personally.
        zapita 9y ago
        Yes, you have to watch out for unprofessional and dishonest people when selecting a service provider. That's very different than saying all providers of financial advice are automatically dishonest by virtue of their profession.
  - 9y ago
mgummelt 9y ago
If you had $1MM in cash, how much of it would you use to buy the company's stock?
- baron816 9y ago
  Correct
- YZF 9y ago
  This is absolutely the right way to think about this. However if you have options the situation is different. There may also be tax considerations. Another variable is whether your personal effort materially affects the outcome for the company. If you think your work will dramatically increase the value of the company you may want to own more stock ... presumably though if this is the case it's already reflected in your compensation (and maybe part of that is stocks/options as well). The way I tend to think about this is that if you're working for the company you're already invested in it to some degree so from a diversification perspective I'd tend to want to own less stock of the company I work for.
  - abalone 9y ago
    > Another variable is whether your personal effort materially affects the outcome for the company. Well no, the question supposes you work for the company in either case. If you held $1M in cash, would you invest it all in the company you work for because maybe you can affect the outcome? If not then probably you shouldn't hold onto $1M in equity... if you're perfectly rational that is.
    - jjeaff 9y ago
      There is one reason that it might behoove you to keep everything invested in the company you work for. It may be that you have insider information that no one else knows.
      - abalone 9y ago
        That's fine. The question is not "are there good reasons to invest in your employer." It's "are you rational enough to treat $1M equity and $1M cash the same." Also, it is uncontroversially a bad idea to invest "everything" you have in one company.
mavelikara 9y ago
https://blog.wealthfront.com/sell-employee-stock/ https://blog.wealthfront.com/sell-employee-stock/
rpedela 9y ago
I had a friend who chose the latter during the dotcom boom, and he lost everything when the market crashed. When the company we were working for got acquired, he couldn't believe he was getting a second chance and kept telling me to cash out so I didn't end up like him. If you really believe that the company's stock price will do well in the future, go ahead and keep some shares. But I would still put a significant percentage in safer investments.
toast0 9y ago
Quite often, someone in this situation is going to also have more shares vesting over time. Even if you sell all you can on day 1, you will likely participate in future gains.
dbcurtis 9y ago
An age-old question. If you look at Larry Ellison or Bill Gates, they would not be where their are without holding a whole lot of stock when the could have sold. Personally, in the case of your first liquidity event, it is a great time to take enough off the table to never have to worry about money again. Beyond that, it is a matter of risk tolerance and what you find entertaining. Here are the wise words from the CEO of the first start-up that I worked at, which went public (but I was too junior to make much money): "Remember, at an IPO, the people that know the company best think that it is a very good time to be selling stock."
- deleted 9y ago
  [deleted]
walshemj 9y ago
Not sure a wise investor would 100% use "index" funds especially one with such a large > 1M portfolio. At that level you would need to look at diversification both on a geographical and sector level. In the UK I would of course sell enough to use up my CGT allowance - you can also move up to 20k£ into an ISA to put the shares beyond tax for CGT and Dividend Tax
- rpedela 9y ago
  Index funds are already diversified. When you invest in one, you are betting that the entire economy or a sector of the economy, depending on the index fund, will increase in value.
  - walshemj 9y ago
    Yes but take Enron for example or any other value trap an index fund must buy those. And the Massive buying of indexes bids up the price of shares like FANG's beyond the shares real value.
    - rpedela 9y ago
      On average, one company in the portfolio going bankrupt isn't going to make much of a difference assuming the portfolio is large enough. Most index funds have a large enough portfolio.
sharemywin 9y ago
Not really a binary question. So it might be better to think about it as what mix of stocks(including the one I work for) should I own with my portfolio? Especially since my job is tied in with XYZ company. Anything less than 50% in the broad market would be very risky. In fact you might want to think about aghast some % bonds.

frisco 9y ago

It’s not all or nothing. Selling 25% probably makes sense. Selling 100% probably doesn’t. The right balance depends on what % of your total net worth that $1M represents. I also think it highly depends on your answer to “how excited are you about the company’s roadmap for the next few years?” and “do you feel like you / the company have more to do on the topic?”

encoderer 9y ago
Yes exactly. For somebody really looking to optimize, research Kelly criterion.

zapita 9y ago

The short version is: retain a competent wealth manager to advise you. EDIT: not all wealth managers are scam artists. If you suddenly earn lots of money and don't know what to do with it, find a professional paid by the hour to advise you. Do not listen to the people telling you that anyone charging you for advice is automatically a scammer. Also don't listen to people telling you that it's "not that hard" without any context on your experience and understanding of finance. They have nothing to lose by looking smart and confident on the internet while discussing your money. It depends on your overall net worth. If the stock represents the majority of your net worth, you might want to diversify across different types of assets - your newly introduced tech stock being on the high-risk end of that spectrum. If on the other hand you have "enough" of your savings in lower-risk assets, then it can make sense to keep all your stock.

frisco 9y ago
> The short version is: retain a competent wealth manager to advise you. This is not good advice. "Wealth managers" are totally useless and exist just to charge you fees and create complexity. I really like mgummelt's comment above; it doesn't have to be more complicated than that!
- jayess 9y ago
  Exactly. From personal experience, "wealth managers" are a scam. They're just below the scam scale from mortgage brokers and real estate agents.
  - zapita 9y ago
    You're thinking of people who charge you a management fee and try to "beat the market". I'm talking about people who charge you by the hour to explain to you how to manage your money. Maybe "financial advisor" is a better term? Either way qualifying any form of professional counsel as "a scam" seems a bit excessive, and also bad avice.
    - TeMPOraL 9y ago
      "By their fruits you'll know them". One has to be careful, because there is a lot of professional-looking scam artistry going in this space. Also, you mention the term "financial advisor". I urge people to remember that there are different kinds of those, including those who know shit and care even less, and all they want is to sign you up to some financial MLM scheme. Source: I know some of the latter kind personally.
      - zapita 9y ago
        Yes, you have to watch out for unprofessional and dishonest people when selecting a service provider. That's very different than saying all providers of financial advice are automatically dishonest by virtue of their profession.
- 9y ago

mgummelt 9y ago

If you had $1MM in cash, how much of it would you use to buy the company's stock?

baron816 9y ago
Correct
YZF 9y ago
This is absolutely the right way to think about this. However if you have options the situation is different. There may also be tax considerations. Another variable is whether your personal effort materially affects the outcome for the company. If you think your work will dramatically increase the value of the company you may want to own more stock ... presumably though if this is the case it's already reflected in your compensation (and maybe part of that is stocks/options as well). The way I tend to think about this is that if you're working for the company you're already invested in it to some degree so from a diversification perspective I'd tend to want to own less stock of the company I work for.
- abalone 9y ago
  > Another variable is whether your personal effort materially affects the outcome for the company. Well no, the question supposes you work for the company in either case. If you held $1M in cash, would you invest it all in the company you work for because maybe you can affect the outcome? If not then probably you shouldn't hold onto $1M in equity... if you're perfectly rational that is.
  - jjeaff 9y ago
    There is one reason that it might behoove you to keep everything invested in the company you work for. It may be that you have insider information that no one else knows.
    - abalone 9y ago
      That's fine. The question is not "are there good reasons to invest in your employer." It's "are you rational enough to treat $1M equity and $1M cash the same." Also, it is uncontroversially a bad idea to invest "everything" you have in one company.

mavelikara 9y ago

https://blog.wealthfront.com/sell-employee-stock/ https://blog.wealthfront.com/sell-employee-stock/

rpedela 9y ago

I had a friend who chose the latter during the dotcom boom, and he lost everything when the market crashed. When the company we were working for got acquired, he couldn't believe he was getting a second chance and kept telling me to cash out so I didn't end up like him. If you really believe that the company's stock price will do well in the future, go ahead and keep some shares. But I would still put a significant percentage in safer investments.

toast0 9y ago

Quite often, someone in this situation is going to also have more shares vesting over time. Even if you sell all you can on day 1, you will likely participate in future gains.

dbcurtis 9y ago

An age-old question. If you look at Larry Ellison or Bill Gates, they would not be where their are without holding a whole lot of stock when the could have sold. Personally, in the case of your first liquidity event, it is a great time to take enough off the table to never have to worry about money again. Beyond that, it is a matter of risk tolerance and what you find entertaining. Here are the wise words from the CEO of the first start-up that I worked at, which went public (but I was too junior to make much money): "Remember, at an IPO, the people that know the company best think that it is a very good time to be selling stock."

deleted 9y ago
[deleted]

walshemj 9y ago

Not sure a wise investor would 100% use "index" funds especially one with such a large > 1M portfolio. At that level you would need to look at diversification both on a geographical and sector level. In the UK I would of course sell enough to use up my CGT allowance - you can also move up to 20k£ into an ISA to put the shares beyond tax for CGT and Dividend Tax

rpedela 9y ago
Index funds are already diversified. When you invest in one, you are betting that the entire economy or a sector of the economy, depending on the index fund, will increase in value.
- walshemj 9y ago
  Yes but take Enron for example or any other value trap an index fund must buy those. And the Massive buying of indexes bids up the price of shares like FANG's beyond the shares real value.
  - rpedela 9y ago
    On average, one company in the portfolio going bankrupt isn't going to make much of a difference assuming the portfolio is large enough. Most index funds have a large enough portfolio.

sharemywin 9y ago

Not really a binary question. So it might be better to think about it as what mix of stocks(including the one I work for) should I own with my portfolio? Especially since my job is tied in with XYZ company. Anything less than 50% in the broad market would be very risky. In fact you might want to think about aghast some % bonds.