Sell your employer's stock

Many of you will get company stock (RSUs or options) as part of your total compensation.

I urge you to sell it as soon as it vests - automatically if possible. And here’s why:

Your job is already heavily exposed to your company

Your job already provides returns that are correlated to your employer.

If your employer is doing very well and growing, your responsibilities and salary are likely to grow. Your job is also very secure.

If your employer is struggling, your salary is likely to stay frozen and fall behind inflation. Your job is also likely to be lost.

Therefore holding onto the stock of your employer doubles that risk. If you win, you win big, but if you lose, you can lose your job and your assets can decline all in the same year.

Don’t take that bet, because:

Diversification is the only free lunch

Diversification is the only free lunch in investing, and by holding a doubly concentrated position in your own complyer, you’re taking on uncompensated idiosyncratic risk.

To be specific - if you believe in the Capital Asset Pricing Model, it says that idiosyncratic risk is not compensated by extra returns, because it can be diversified away. Only systematic risk (cannot be diversified away) is compensated.

Don’t take risk without compensation. CAPM is just an approximation, but it’s useful in this case to explain my point.

But my coworkers made more by holding

You may notice that your coworkers have made above-market returns by holding onto the company stock. That’s likely to be true, because you’re more likely to be hired by a growing company than a shrinking company.

In other words: The mere fact that you were hired into your current role suggests that your company has done well recently. It’s doing better than its peers that are not growing.

A weird mental trick to think about it.

Here’s one trick to think about it. If instead of RSUs or options, you received an all-cash compensation from your company, would you choose to go out to your broker and buy your company’s stock with that money?

If not, you should sell your employer’s stock as you receive it. Don’t be fooled by the endowment effect.

Then why do founders hold all their stock?

Founders with over 10% of the company may hold onto their own stock. But they do so for a few reasons.

  1. They have to - They pretty much cannot sell a very significant part of their stock without signaling to the market that they’ve lost confidence in their own company, which would tank the value of their remaining shares. In that way, they are kind of trapped in holding their company shares. Don’t feel bad for them, because:

  2. They borrow against their stock at low rates. These guys have access to margin loans against their own stock at VERY favorable rates. It’s as good as selling it.

  3. They can’t sell it without realizing epic capital gains taxes. They’re forced to keep holding their stock, because selling it would cause a large percentage to vanish to the taxman overnight. It’s more efficient for them to keep holding it.

  4. They have actual control over the company. Their company stock allows them to keep voting control over the actual company, which is important to them. They also don’t have to worry about some bonehead messing up their investment, because they are the bonehead.

So the founders and high level executives have good reasons to hold their own company’s stock. But you don’t. So sell it.

Avoid investing in tech in general

In general, if you’re a technology employee, it’s not worth it to also invest in technology companies. There are a number of reasons why you may be tempted to:

  • It’s fun.
  • Your coworkers are bragging about making a killing doing it.
  • You’re in the Valley so that’s what everyone’s talking about.
  • You know a lot about technology and think you have an edge.

Those are all valid reasons, and if you choose to do it, treat it as an expensive hobby with your “play money”. But let me give you a few reasons why it’s not a good idea prudentially for you and your family. But remember:

  1. You’re already over-exposed to tech. - If you’re employed in the tech sector, the value of your skills on the open market are already correlated to the overall tech market. Do you really want to increase that concentration by making tech-sector specific investments?

  2. You don’t really have an edge. - You’re a tech employee and you think you have an edge? If you really do have an edge you should probably become a full time venture capitalist or hedge fund manager. Those guys have the direct phone numbers of company C-suites.

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