To sell or not to sell (your RSUs)? Consider these key factors.

A simple framework for deciding whether to sell RSUs immediately,hold your shares, or do a little of both.
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What you'll learn

Editor’s Note:EquityFTW consulted on the creation of this article. We highly recommend their blog as a strong resource for managing stock compensation effectively.

A large part of your compensation is in your employer’s stock. Given that more than 80% of publicly-traded companies offer stock compensation to their employees, you’re not alone in figuring out what to do with your Restricted Stock Units (RSUs) after they vest. 

While some employees sell their stocks immediately after they vest, others sell none at all. The conventional wisdom among internet pundits is to sell all of it when it vests: Since both your portfolio and your livelihood are dependent on the performance of a single company’s stock, hanging onto RSU shares can add a lot more risk to your financial picture.

But we think the right answer isn’t binary – and that it’s worth taking some time to understand your options. No two people have the same financial situation, so what’s worked for MemeLord72 on Reddit may not be the right thing for you.

Reductionist thinking doesn’t help, and it is likely that the person who sold all their stocks on vest at Nvidia is remorseful. At the same time, there’s a popular story about a company where employees held 30% of the outstanding stock and never sold on vest. That company is Lehman Brothers, and its abrupt bankruptcy wiped out billions in wealth for company employees.

These Nvidia and Lehman examples illustrate the most extreme outcomes. Without knowledge of the future, however, it’s important to achieve the right middle-ground for your own financial path. Here’s how to make a thoughtful decision about the best way to manage your RSUs.

Shouldn’t you just sell RSUs immediately?

There are a few competing considerations – and we’ll lay out a framework to follow – but it’s worth acknowledging the interests you have to balance in deciding how much of your RSUs to hold or sell:

1) Do you want the money right now? 

When RSUs vest, the shares you receive are taxed just as if you are receiving cash of the exact same value. So, if you were to receive cash instead of RSUs, would you choose to invest it all in your company’s stock? Also, will you need cash to cover the tax bill? And do you have any other pressing financial needs – like paying off debt, making a down payment, or paying for college?

EquityFTW put together a good article to help you understand potential tax implications – including the possibility that withholding won’t cover your tax burden – but if you need the liquidity in the short term, you should probably sell more than you hold.

2) Are you exposed to concentration risk?

If your company’s stock makes up less than 10% of your net worth and you’re optimistic about its future, it may not be a very risky bet to accumulate more stock. In fact, you may want to accumulate more company stock to make sure you enjoy a good run.

However, if your portfolio is already concentrated in company stock, a decline in its price could have a major impact on your financial outlook. Worse, if the company faces financial issues, you could lose your salary and the value held in stocks.

Even if things seem rosy, you can’t know with certainty what’s going to happen. It may be the wiser move (and safer) to spread out the risk, even if it means giving up on some potential gains.

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Some employees with RSUs prefer to put all their eggs in one basket – and places like Reddit’s WallStreetBets certainly contain many examples of investors who have been successful with these “Yolo” or “Diamond Hands” strategies

Over the long term, however, broad market indices have tended to outperform most individual stocks, and you are likely to earn a better return on a risk-adjusted basis. For example:

Individual Stocks vs. Nasdaq-100  |  2001 to 2023

Source: Cache, Bloomberg
This analysis is based on the returns of individual stocks in the Nasdaq-100 index from January 1, 2001, through September 25, 2023. Our analysis includes securities with different lifetimes in the index since securities are added and removed from the Nasdaq-100 over time. For the purposes of comparison, each security’s return is measured over its lifetime in the index.

History doesn’t necessarily dictate the future, but you should definitely understand the risk you’re exposing yourself to if you become concentrated in your company’s stock. Our detailed concentration risk article takes a closer look at the potential risks and rewards of concentrated positions.

3) When are you allowed to sell?

Keep in mind that you’re probably restricted from selling shares during certain windows.

Companies typically have month-long trading windows that open a day or two after they release their quarterly financial data to the public. It’s during this window that employees can freely buy or sell company stock. If your RSUs vest when the window is closed, you may not be able to sell immediately. It is important to be aware of your company's policy before you sell as some differ.

4) What does your gut say?

Once you’ve taken all the logical and practical considerations into account, you should check in with your hopes and dreams. Do you want to bet that your company will be worth a lot more in the future? And, even if your guts tells you to continue holding a large position in your company, how concentrated do you want to be?

There are many investors, employees, and company  insiders (CEO, CFO, board members, etc.) that remain bullish on their company and also take some risk off the table as part of managing their concentrated stock position.

If you’re lucky enough to work for the right company, you can strike gold and get far better returns than if you had diversified. But if the company does really poorly, keeping all your eggs in one basket can deal you a devastating financial blow. 

For every Tesla, Nvidia, or Advanced Micro Devices investor who held their stock through the roller-coaster ride to turn their RSUs into millions, there’s an employee at a company like Dropbox, Cisco, or Snowflake who has seen their stock underperform the market.

Only you can determine how much risk you’re comfortable taking.

How to “sell” the stock from your RSUs

When it’s time to liquidate or diversify your shares, simply placing a sell order with your brokerage may not be the optimal way to move forward. For tax purposes, you should pay close attention to which shares you sell, and you may want to consider alternatives to an outright sale.

Looking at cost basis

When you sell your stocks, more highly appreciated shares – which are commonly the ones you’ve been holding the longest – will have a lower cost basis. Thus, selling them will lead to a higher tax bill, leaving you with less principal to reinvest.

This cost of diversification is called tax drag:

This image assumes a 35% effective capital gains tax rate when selling appreciated META stock to reduce concentration risk. At a 10% annual return, it would take almost five years for a diversified portfolio to recoup the taxes that were paid.

You can avoid some tax drag by selling shares with a higher cost basis first. For a stock that has been going up in value, that usually means selling the shares that have vested most recently.

To identify the best tax lots to sell, it may help to talk to an accountant or a financial advisor.

Time out

Want to see some options for choosing which tax lots to diversify?

Cache offers several ways to manage concentrated positions effectively, including a free feature that presents multiple tax lox scenarios your desired liquidity amount. Just tell us a little about your situation to access them:

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Alternatives to selling RSUs

The sale of stocks triggers a taxable event, but there are a few ways to diversify or gain liquidity without a sale. Here are a few options to consider:

  • Exchange funds: Diversify and defer taxes by swapping your stocks for a share of a diversified exchange fund. You’ll reduce concentration risk immediately. And after seven years, you can withdraw a diversified basket of stocks from the fund. No capital gains taxes are due until you decide to sell, if you wait the the severn years. Learn more – or see how it works with an exchange fund simulator.
  • Collar advance: Also known as a prepaid variable forward contract, this strategy lets you borrow against the value of your shares at relatively low rates, with in-built protection against stock value declines. You unlock cash for major purchases while hanging onto your shares. Learn more.
  • Direct indexing: After purchasing a basket of stocks that resembles a diversified index fund (instead of ETF or mutual fund shares), you’re able to offset the gains in your stocks each time a loss is recognized in the portfolio. Over time, you’ll be able to diversify out of a concentrated position while offsetting some of the tax burden. Compare with exchange funds.
  • Charitable vehicles: Donor Advised Funds (DAF) and Charitable Remainder Trusts (CRT) both involve donating concentrated stock to charities, but they can be structured to let you unlock the value of appreciated assets during your lifetime. 

These strategies are all for sophisticated investors, but you may want to explore them if you’re looking for a better way to manage your vesting RSUs. 

So will you sell your RSUs? 

The decision is ultimately yours, but we hope we’ve given you an actionable framework (plus a few useful alternatives to selling). Managing your RSUs wisely can add hundreds of thousands – or even millions – to your portfolio, so it’s great you’re giving it so much consideration.

To continue your exploration, check out a set of RSU scenarios from EquityFTW or join our Investment Team for a live Q&A about exchange funds.

<div class="blog_disclosures-text text-weight-semibold">Material presented in this article is gathered from sources that we believe to be reliable. We do not guarantee the accuracy of the information it contains. This article may not be a complete discussion of all material facts and risks. All content is for general informational purposes only and does not take into account your individual circumstances, financial situation, or your specific needs, nor does it present a personalized recommendation to you. It is not intended to provide legal, accounting, tax or investment advice. Cache does not make investment recommendations; investors are responsible for their own investment decisions. Diversification seeks to reduce risk by spreading risk across multiple investments however, Investing involves risk, including the loss of principal.</div>

<div class="blog_disclosures-text text-weight-semibold">Securities are offered through Cache Securities LLC, FINRA/SIPC. Investment advisory services are offered through Cache Advisors LLC, an SEC-registered investment advisor. Cache Advisors and Cache Securities are wholly-owned subsidiaries of Cache Financials Inc “Cache” Cache and EquityFTW are unaffiliated entities. More details about how Exchange Funds work, including the risks and benefits associated with them, is available at: https://usecache.com/product/exchange-funds</div>

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