There are many reasons why employees don’t sell company shares. The 2 biggest ones are:
- FOMO
- Taxes
There are many other rationales for accumulating a large number of company shares, but for the purpose of this article, let’s explore the two biggest motives.
FOMO
Let’s walk through some scenarios. Let’s say that you make a plan to liquidate your company stock. You put the plan in place and then the same two things always happen.
The stock price goes down. The stock price goes up. When the stock price goes down, why sell? You obviously want a higher price. When the stock price goes up, why sell? It’s only going to go higher.
It’s a dilemma, perhaps a Catch-22 if you will.
So what to do? Well, everyone’s situation is different. Your thoughts, needs, and relationships with money are unique.
Think about why you sold certain shares or options in the past. How do they fit in with your plan, needs, and wants?
Taxes
When you sell your company shares, you will have to pay taxes – short term or long term capital gains – depending on the holding period. Many individuals don’t want to pay additional taxes, so they probably continue to own company shares.
But what if the stock price decreases dramatically and the stock price never recovers? You could miss out on a small fortune. And when you sell the decreased shares, you will have a lower tax bill, unfortunately.
A Plan for Your Company Shares
So what about a systematic plan over several years to sell your shares. Remember that not all shares have the same risk/reward profile. Here’s a basic framework:
- Start by selling the least powerful shares
- Hold onto the most powerful shares
- If it’s taxed like cash, treat it like cash
These 3 points will guide you through what shares to sell and in what frequency. These 3 points are a long discussion with your financial planner. We do not have enough space or time to walk through all of the scenarios in this article.
One last point. Don’t do what your peers are doing or succumb to pressure from them. This is not a great way to make 7 figure financial decisions. You are not them and they are not you.
Instead of wondering about why employees don’t sell company shares, would you like to put a plan in place?