If a large share of your net worth sits in one stock – through restricted stock units (RSUs), stock options, an employee stock purchase plan (ESPP), or founder shares – you’re not alone, and you’re not wrong to feel stuck. Selling triggers a tax bill. Holding concentrates your risk in a single company’s outcome. Most executives postpone the decision until an event forces it: a blackout window lifts, a vesting cliff hits, or the stock drops and the decision makes itself.
Key terms
- Restricted stock units (RSUs): Company shares your employer promises to deliver once you meet a vesting schedule, usually a period of continued employment or a performance goal.
- Stock options: The right to buy company shares at a fixed price, called the strike price, for a set period. This article covers non-qualified stock options (NQSOs), the most common type. Incentive stock options (ISOs) follow different tax rules and are not covered here.
- Employee stock purchase plan (ESPP): A program that lets employees buy company shares through payroll deductions, often at a discount to the market price.
- Founder shares: Stock issued to a company’s founders or early employees, often at a very low cost, which can leave a large built-in gain.
- 10b5-1 plan: A written trading plan, set up in advance under SEC Rule 10b5-1, that lets a company insider buy or sell shares on a preset schedule or formula. New plans carry a waiting period before the first trade.
Why concentration creeps up on you
It rarely happens on purpose. Annual RSU grants layer on top of each other, an ESPP quietly buys shares every paycheck, and options that seemed speculative when granted become a meaningful position once they’re in the money. Five or ten years in, what started as a benefit has become an unmanaged, undiversified bet on your employer.
The playbook is different for RSUs, options, and ESPP shares
Not all equity awards behave the same way at tax time, and treating them all identically is a common and costly mistake.
- RSUs: taxed once they vest, not at sale. Restricted stock units are taxed as ordinary income the moment they vest, based on the share price that day, regardless of what you do with the shares afterward. Your cost basis resets to that vest-date price, so selling shortly after vesting typically triggers little additional gain or loss.
- NQSOs: the spread is ordinary income at exercise. Non-qualified stock options create a taxable event when you exercise, not when the option is granted or when you eventually sell the shares. The gap between your strike price and the market price at exercise is taxed as ordinary income, and any further appreciation after exercise is taxed separately as a capital gain.
- ESPP shares: the discount and the holding period both matter. Employee stock purchase plan shares carry a purchase discount that’s taxed as ordinary income, but whether the remaining gain qualifies for capital gains treatment depends on how long you hold the shares after purchase and after the offering period began. Selling too early can turn what looked like a gain into a larger ordinary-income tax bill than expected.
A concentrated position creates more than market risk
When the concentrated position is your employer’s stock, it ties a large part of your investment portfolio to the same company that pays your salary, your bonus, and possibly your identity. If the business has a bad year, you can face a pay cut, a smaller bonus, and a portfolio decline at the same time. That correlation, everything moving the same direction at once, is a more serious problem than ordinary volatility. Any single holding that grows to dominate a portfolio, even a widely held company, carries concentration risk. Employer stock adds this second layer, which is why this article focuses on it.
Why the moment never feels right
There is rarely a comfortable time to start trimming a concentrated position, which is exactly why concentration is allowed to build for a decade before anyone addresses it. If the stock is rising, selling feels like giving up future gains. If it just dropped, selling feels like locking in a loss at the worst possible moment. A strong quarter makes you feel loyal. A weak one makes you want to wait for a rebound before you sell. Every one of these reactions is understandable, and we believe every one of them is also a reason a phased plan, decided in advance and followed regardless of what the stock happens to do in a given month, tends to hold up better than waiting for the right moment to arrive.
A framework for diversifying without a tax surprise
- Sell on a schedule, not all at once. A multi-year diversification plan spreads gains across tax years and may keep you out of a higher bracket in any single year.
- Use losses elsewhere in the portfolio to offset gains. A tax-managed account built alongside the concentrated position can generate losses that offset some of the tax cost of trimming it.
- Know your trading windows and 10b5-1 plans. If you’re an insider, a pre-arranged 10b5-1 trading plan lets you diversify systematically without the timing questions that come from discretionary sales.
- Consider hedging for restricted or illiquid shares. Where outright sales aren’t possible, strategies exist to reduce downside exposure while you wait for a liquidity window.
- Revisit ESPP participation itself, not just the shares you already hold. If the discount is what drew you in, selling shares immediately after each purchase period can let you capture that discount without adding to your concentration in the first place.
Two executives can hold identical grants and end up in very different places. One waits for the right time and eventually sells everything in a single stretch after a product recall knocks the stock down forty percent in a quarter. The other has a written plan that sells a fixed number of shares on a set schedule no matter what the price is doing. The mechanics of RSUs, options, and ESPP shares matter, but the discipline to follow a plan through both good quarters and bad ones is what we believe actually decides the outcome.
Where to start: bring your vesting schedule and your last two years of grants to your next planning conversation. A phased diversification plan is only as good as the assumptions behind it, and those assumptions are specific to your company, your tax bracket, and your timeline.
Important Disclosures
Investing involves risk, including possible loss of principal. Investment decisions are subject to market, currency, economic, and business risks and will not always be profitable. There is no guarantee that risk can be successfully mitigated or otherwise avoided.
Past performance is no guarantee of future results.
Nothing discussed in this material should be considered an offer to buy or suggestion to sell securities.
Statements using “if,” “may,” “can,” “should,” “will” or similar may be forward looking and are not intended as an opinion, projection, or estimate regarding the market, Cookson Peirce, or its products.
Cookson Peirce & Co., Inc. is an SEC registered investment adviser. Registration does not imply a certain level of skill or training. See Form ADV at adviserinfo.sec.gov.
Risk Disclosures
Market Risk. The price of a security, bond, or mutual fund may drop in reaction to tangible and intangible events and conditions. This type of risk is caused by external factors independent of a security’s particular underlying circumstances. For example, political, economic, and social conditions may trigger market events.
Business Risk. These risks are associated with a particular industry or a particular company within an industry. For example, oil production companies depend on the lengthy process of finding, extracting, transporting, and then selling oil before they can generate a profit. As a result, an oil production company carries a higher risk of profitability than an electric utility company, which generates its income from a steady stream of customers who buy electricity no matter what the economic environment.
Equity (Stock) Risks. Common stocks are subject to general stock market fluctuations and to volatile increases and decreases in value as market confidence and perception of their issuers change. There is also a certain level of company or industry specific risk that is inherent in each investment. There is the risk that the company will perform poorly or have its value reduced based on factors specific to the company or its industry.
Concentration Risk. Holding a large portion of a portfolio in a single security, company, or industry increases exposure to the risks specific to that holding. A decline in a concentrated position can have a greater effect on overall portfolio value than the same decline in a diversified portfolio.
Liquidity Risk. Restricted shares, unvested awards, and shares subject to trading windows, lockups, or blackout periods may not be sold when desired, or may only be sold at an unfavorable price.
Hedging Risk. Hedging strategies involve costs, may limit potential gains, may not fully protect against losses, and may have tax consequences.
About CooksonPeirce
CooksonPeirce is a Pittsburgh-based, 100% employee-owned registered investment adviser founded in 1984, with more than $3 billion in assets under management.
