In August 2017, I started my first full-time job. I had landed my dream job as a software developer and I was excited. The company was prestigious and the pay was good. I felt validated.
The offer letter I’d accepted some months prior broke down my pay into two parts: salary and Restricted Stock Units (RSUs). At the time, I hadn’t given this much thought. Now that I was starting, I gave it another look to try and understand it.
Salary, a fixed sum per year, was easy to understand. I worked and the company paid me. Simple.
RSUs were a bit more complex. As part of my compensation, I’d be receiving stock in the company over a period of years.
The offer letter stated I would receive 66 shares over the course of four years. If I left the company during this time, I’d forfeit any shares I hadn’t yet received.1
On my one-year anniversary with the company, I received my first 3 shares. On my second anniversary, I received another 10. Then, every six months, I received another 13, until my fourth anniversary, when I received my final 14 shares, for a total of 66.2
Throughout this time, I’d also received some extra shares as part of the annual performance review. Based on the employee’s rating, the company granted more RSUs, which, like the RSUs in the initial offer letter, would vest over a few years.3
On the day you receive your RSUs, you have three options: sell all, sell to cover, and sell none.
Sell all means that the shares are automatically sold and you receive the cash proceeds minus taxes. For example, if each share was worth $1,000 on my first anniversary, I’d have received $3,0004 minus taxes.
Sell to cover means that enough shares are sold to cover taxes and you receive the shares that remain. For example, when I received my first 3 shares, one share was sold to pay for taxes, leaving me two.
Sell none means that no shares are sold and you’re responsible for paying the tax due on the shares out of pocket. This is done by transferring money to the stock broker ahead of time so that it can be used when the shares vest.
Sell to cover is the default and it’s what I stuck with—which is how I ended up with 61 shares by early 2022.
From 2017 to 2021, the company’s stock did very well, growing twice as much as the S&P 500, and I didn’t think much about my decision to “sell to cover” instead of “sell all”.
Clearly the company was doing something right. Why not hold on to these fast-growing shares and let them take me all the way to the moon?
It was only when shit hit the fan in 2022 and the value of my shares started dropping like a stone that I realized the folly of my ways.
My 61 shares are now down about $52,000 based on their value at the time I received them.
To rub salt into the wound, VTSAX is up almost $8,000 during the same period. Had I decided to “sell all” rather than “sell to cover” and used the proceeds to purchase VTSAX, I’d be $60,0005 richer and I wouldn’t have so much of my net worth tied up in one company.
Yes, hindsight is 20/20.6
But even if 2022 had transpired differently, my decision to “sell to cover” instead of “sell all” would have still been wrong, in the same way that driving at 100 miles per hour is dangerous even if you never get into an accident.
Let’s go over a couple reasons why.
1. Concentration risk
It’s risky to concentrate one’s net worth in a single company. If that company falls, it’ll take your net worth with it, unlike in a diversified portfolio where the fall of any one component will have a limited impact.
This risk is doubled when the company you’re betting on is your employer.
Think of the 300 or so FTX employees when the company blew up in November of 2022. In a matter of days, these people lost their jobs and their income. Those who had stock in the company lost even more as the value of their shares quickly dropped to zero.
And the fall of FTX affected not only FTX, but the entire crypto industry.
Crypto.com, who paid $700 million in 2021 for the naming rights to the Los Angeles’s Staples Center, was heavily affected, as were their 4,000 employees.
Coinbase, the largest crypto exchange in the U.S., was hurt too. Their stock is down 85% since going public in April 2021—affecting their 3,730 employees.
BlockFi, once worth $3 billion, filed for bankruptcy after disclosing it had “significant exposure” to FTX—affecting around 1,000 employees.
And the fall of FTX isn’t unique.
The fall of Enron in 2001 (20,000 employees), Worldcom (80,000 employees) in 2002, and Lehman Brothers (26,000 employees) and Washington Mutual (50,000 employees) in 2008, along with countless others through the years, were all bigger than the demise of FTX.
But the company I work at is legit and trusted and well-established, you might protest. They wouldn’t pull this crap!
That may be. And it’s possible that you get to participate in the company’s boom years and are lucky enough to sell before any decline.
So are you willing and able to take this risk without losing sleep?
2. You’re already exposed to your company
So if your employer is going to grow 1,000% and come to dominate the world, you can enjoy the upside, and limit the downside, by owning the company through a total stock market mutual fund.
As a general guidance, if any single company accounts for more than 5% of your net worth, you’re mighty exposed to concentration risk.
Besides, if the company really is firing on all cylinders and doing a tremendous job, you’re already enjoying the upside through your raises, promotions, perks, and benefits.
Don’t get greedy.
3. RSUs are not “free money”
One of the reasons I ended up with about 20% of my net worth tied up in my employer’s stock is because I misunderstood RSUs.
In my mind, RSUs were somehow “free money” rather than an integral part of my compensation.7 Besides, I liked my company and believed in its future. And it had done so well in the past. Why not bet on it?
Additionally, I was ignorant as to the tax implications of RSUs. I thought there was an additional tax to be paid if I sold the shares when I received them, which is incorrect—there’s no capital gains tax if you “sell all” as the proceeds are counted as ordinary income.
Here’s how I should’ve been thinking about RSUs instead.
Let’s say that on my first anniversary, my employer had given me $3,000 in cash rather than 3 shares.
Would I have taken those $3,000 and bought stock in my employer?8
I would have taken that money and bought VTSAX because I knew, even back in 2017, that it was risky to buy individual stocks.
When thought of this way, it becomes clear that “sell all” is the right choice.
Sell to cover was the default choice and I didn’t think enough about the situation to make a change.
How do I fix this?
I have too much of my net worth tied up in my employer’s stock. That’s the unfortunate fact.
As an analogy, I have a bowl of water with too much food coloring. To make the water more clear, I can either extract the food coloring or add more water to lessen its concentration.
Removing the food coloring is analogous to selling the shares in my employer’s stock.
Adding water is analogous to buying shares of a total stock market mutual fund to slowly lessen the concentration.
I’ll need to use both of these approaches.
The second approach is easy. I’ve switched from “sell to cover” to “sell all” so that I don’t acquire any more of my employer’s stock and I’m investing into a total stock market mutual fund every month.
The first approach is a bit harder, mostly due to the psychological pain of having to bite the bullet and accept that I shit the bed.
If I was robot, I would ignore the fact that I’ve lost $60,000 and would sell all my company shares.
Especially since there’s no guarantee that the shares will increase in price over the next few years. In fact, they could continue to go down! Maybe it’s all downhill from here.
But the thought of that turning that “paper loss” into a real, stone-cold loss gives me the sweats.
So, while not the optimal approach, I’ll be slowly selling my shares over the next couple of years while keeping my fingers crossed for a rebound that reduces my losses.
As I said earlier, you can drive at 100 miles per hour and never get into an accident. This doesn’t mean doing this isn’t risky. It just means you’re lucky.
Likewise, it’s possible to hold a large percentage of your net worth in your employer’s stock and have it work out. But it’s a big risk to take.
If asked for advice, I’d say the following:
First, don’t pull all your eggs in one basket. Especially if you depend on that basket for your livelihood. This means owning a diversified portfolio, free of concentration risk.
Second, don’t forget that health and peace of mind are worth more than money. A diversified portfolio will make you wealthy over time. More importantly, though, it won’t keep you up at night.
And third, have an intimate understanding of your finances, your compensation, and the risks in your portfolio. Know how you’re getting taxed and how your assets affect your taxation. Reevaluate your understanding periodically to ensure you’re still headed where you want to go.
Mistakes were made. And more are on the way. But as the Japanese proverb goes, fall down seven times, stand up eight.10
That’s all we can do.
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This is partly why companies use RSUs: to encourage employees to stick around and not miss out on their shares. ↩
3 + 10 + 13 + 13 + 13 + 14 = 66 ↩
RSUs are granted and then they vest. I was granted 66 shares as part of my initial offer, but I didn’t actually gain possession of them until they vested over the years. ↩
3 shares x $1,000 per share = $3,000 ↩
This is actually a slight underestimate because the shares of VTSAX would’ve also paid dividends unlike my RSU shares. I calculate I missed out on another $5,000 in dividends (post-tax) over the years. ↩
In Argentina, this saying is “con el diario del lunes”, which means “with Monday’s newspaper”, since it’s easy to know what one should have done differently after the event unfolded. It’s similar to the American phrase, Monday morning quarterback. ↩
I’m sure others make this mistake with their annual bonus. ↩
A coworker tried to explain this to me back in 2018 and yet I still didn’t get it. It was only after hearing this a few times that it clicked. So if you understood this from the start, congratulations—you’re wise. And if you didn’t, at least you’re not alone. :) ↩