Employees at companies that offer equity compensation have the opportunity to grow significant wealth, but it also comes with considerable risk.
Having too much of your net worth tied up in a single company makes you vulnerable to volatility and both short- and long-term losses, depending on the firm’s success.
I’ve seen many employees with concentrated stock positions at tech companies and in other industries who feel conflicted about selling their shares. They may have an emotional attachment to the company or even feel disloyal selling off their shares.
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Not to mention that selling all your shares at once can leave you with a large tax bill.
With a thoughtful approach, investors may be able to address the risks associated with a concentrated stock position over time, seek tax efficiency, and remain invested in their company and industry while managing potential downside exposure.
Stock concentration isn’t always bad, but it needs a plan
Having a concentrated stock position isn’t inherently bad. For many clients, that stock concentration is exactly how they built their wealth in the first place. The goal is simply to make sure your exposure is intentional and appropriate for your situation.
There’s no set rule of thumb for how much of your portfolio your company stock should make up. I generally prefer people to keep their single stock concentration to less than 40% of their portfolio, but many advisers take an even more conservative approach, recommending closer to 10% or 20%. The younger you are, the higher percentage of your portfolio it can make up.
It also depends on your other assets. If you have substantial liquid assets, that 40% may be appropriate. But if you have real estate and other illiquid assets, a lower percentage is likely better.
Here are five strategies to manage your concentrated stock position:
1. Understand what you’re working with
Stock compensation comes in several forms, including incentive stock options (ISOs), non-qualified stock options (NQSOs) and restricted stock units (RSUs). Each type comes with a different tax treatment, which affects your strategy.
Before you plan your next steps, you need a clear understanding of what you own, when it vests and how you’ll be taxed on it.
2. If your company is still private, build your tax-loss bucket now
If your company is heading toward an IPO, you could have several years to start preparing for the large tax bill. Start creating a tax loss bucket in advance.
You can start harvesting your tax losses by selling losing positions in your investment account, capturing those losses, and reinvesting in a comparable security.
You’ll slowly build up a reserve of losses you can use to offset the gains you’ll earn when you eventually sell your IPO shares.
High earners with sufficient investable assets can also explore specialized investment strategies, such as direct indexing vehicles, to give you more control and help you create tax losses to offset your future gains.
3. You don’t have to unwind everything at once
Many employees take one of two extremes when their company IPOs: They either sell everything right away, or they don’t sell anything at all. Neither is necessarily the right option.
First, you’ll typically be subject to some sort of lockup period, usually 180 days, during which you won’t be allowed to sell any of your shares. But you can still use this time to prepare.
Once the lockup period ends, consider a staged selling strategy rather than selling everything all at once. You can spread your sales across multiple tax years to lower your tax bill, reduce the impact of net investment income taxes and, ideally, avoid bumping yourself into the next tax bracket.
By staging your selling over several years, you can significantly lower your tax burden and remove some of the emotional pressure that comes with trying to perfectly time your sale.
4. Consider an exchange fund for long-held stock positions
If you have a highly appreciated stock position worth at least $500,000 to $1 million, an exchange fund can help you diversify it without a large tax consequence. You exchange your concentrated stock position for a private diversified portfolio of securities contributed by other investors.
This strategy isn’t appropriate for everyone, as it requires a large investment and a seven-year holding period before you can exit the fund with your holdings — an earlier exit puts you at risk of financial penalties and taxes.
However, if you’re a candidate for this strategy, it can be a powerful tool to save a significant amount in taxes.
5. You can diversify without abandoning your industry
A common sentiment among employees with highly concentrated stock positions, especially in the tech industry, is a desire to remain heavily invested in the sector.
The bottom line: There’s no one-size-fits-all plan, but early planning is key
Stock concentration is common among employees at post-IPO firms or companies that offer equity compensation packages.
There’s no one right strategy to address this situation, as it depends on your age, liquidity, risk tolerance and other key factors.
If your company is still pre-IPO, time is on your side, as you have plenty of time to plan your strategy. And if you work for a public company, you have options to exit your concentrated position with less of a tax impact.
Concentrated stock can create life-changing wealth; it’s just important to have the right strategy in place to manage it.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. #2026-12426
