What to do with company stock

Some employees receive company stock as part of their total compensation package. Here’s what you want to do with it (and why).

Note: This is not financial advice. Please see my disclosure policy for details.

If you’re fortunate enough to have a salary these days, you may have noticed that companies can get pretty creative with their compensation.

Of course, there’s your actual salary, but your non-salary benefits can account for around 30% of your total compensation package. Health insurance is a big component of that.

Then you have to factor in whether or not your company participates in a 401(k) or other retirement package. Whether or not they offer a match, just being able to contribute to a 401(k) is a massive potential compensation lift, as I learned the hard way when I worked for a company that didn’t offer one.

But another way that companies pay their employees is in company stock.

Company stock can go by many names: “RSUs” “stock options”, “restricted stock”. While the details vary on how these items are treated, the basic premise is the same: a compensation that is tied to the value of the company where you work.

Let’s talk about how you want to handle this part of your compensation.

Sell

In most cases I can think of, I would sell your company stock at the first reasonable moment.

Harsh, I know, but hear me out.

One of the very first posts I ever wrote was called “Who is responsible for your income?” It was meant as an ode to entrepreneurship, but it primarily noted that, in most cases, it is the company you work for who is responsible for your income.

No company, no money. It’s as simple as that.

But once you are paid, you have free reign to take those dollars (or whatever currency you’re dealing with) and use it for any purpose you want. Buy a house, pay off debt, go to Las Vegas, whatever, it’s your choice.

You can also invest that money. Contribute to an IRA, buy a mutual fund, that sort of thing.

But when you’re paid in company stock, all you have is, well, company stock.

My hot stock tip

A good rule of thumb in unsure situations is to ask yourself: If I wasn’t in this situation, would I put myself in it?

As in, if I didn’t own this stock, would I buy it?

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Company stock is not really any different from any other stock. The only difference is that you happen to work at the company.

So, remember my one hot stock tip: don’t buy individual stocks.

Buying a stock is risky. No one knows what will happen with a company, and so that price could go up or down, fairly significantly.

This is true with mutual funds too, of course, but because they are baskets of stocks, the risk is reduced through diversification. Rarely are all or the stocks going to go down all at the same time, and the value certainly won’t go to zero.

So I treat stock the same way I treat any gambling or speculation: only use money you’re prepared to lose.

Don’t stop believin’

But what if you love the company you work for, and believe that it’s going to be the next big thing?

Well, that’s why you’re working there, isn’t it?

Your job, the hours and months you put it, that is your investment in the company.

So even if you love your company, you can put your all into your job, and will earn a return on your investment that way.

Company stock is overkill at that point.

Watch your timing

There’s just the small matter of timing.

(Well, there’s also the matter of whether you’re even able to sell your stock, but if that’s not the case, then all this is moot anyway.)

Even if you want to sell your stock today, you want be wary of rules surrounding how long you’ve held the stock.

The rules differ depending on the specific type of security that we’re talking about, but assuming it’s a standard-issue stock, it’s treated differently if you’ve held for more or less than a year.

If you’ve held a stock for less than a year, and you sell, you need to pay short-term capital gains taxes on the earnings, which is equal to your income tax rate (somewhere in the 20-25% range).

But if you’ve held a stock for longer than a year, you will pay long-term capital gains taxes, which for almost everyone is 15%.

If I were you, I’d make sure that I wasn’t paying long-term short-term (Ed: pretty important typo) capital gains taxes. Whether or not holding on to company is a bad idea or not, a little patience will save you some real money here.

Which is kind of true of everything in this space, isn’t it.

Remember Enron

I’m not saying that your company will go down like Enron. But while we’re talking about it, don’t forget that employees of Enron had their 401(k) contributions matched with company stock, which they were unable to transfer to different assets.

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And the share price eventually went from a high of $90.75 to $0.26.

It’s just good to keep this in mind. That’s all I’m saying.

Get some real money

If you’re joining a company who is offering you company stock, and you have the ability to negotiate, I would push back on their offer. Ask for more money instead.

If they balk at that, I consider that interesting enough in its own way. Maybe they value company stock less than the equivalent of real money too. Hmm.

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