Equity compensation is not a new concept, but it is an increasingly prevalent one. As of 2024, 76% of companies are offering some form of equity compensation–an 11% increase from last year. It makes sense, considering 97% of HR managers and 80% of employees cited it as a key driver for employee motivation.
Few industries are more driven by equity compensation than pharma and life sciences. Every firm is chasing the next scientific breakthrough, milestones reflected in their stock prices.
This is why equity compensation is a frequent conversation with our clients. It has the potential for substantial upside in your financial plan, and with a proportionate amount of risk.
During a recent interview, I shared the two most common mistakes I see executives making when it comes to when to sell equity compensation. In both cases, the decision to sell is detached from a complete picture of your financial plan.
Mistake 1: Selling Immediately After Vesting
I’ve met enough executives who, for whatever reason, prefer to immediately sell as soon as their stock vests. Sometimes, selling immediately might be the best decision on an individual basis. That said, it’s not a strong policy.
This is usually because you feel a sense of risk associated with holding your company’s stock. Why you feel that way may vary, but the outcome is the same: sell, sell, sell.
I will tell you that in my experience in this area, I see employer equity as one of the most influential tools you have to accelerate your wealth. While we’re not in the business of predicting the future, this is a consistent trend we see for executives.
Of course, we want to realistically gauge how each individual decision plays into your financial plan:
- What is our sober assessment of your company? How is it doing financially?
- How is your sector doing? Are there any common performance trends?
- How would selling your position immediately affect your liquid cash needs?
Questions like these help us gather an informed perspective both of your company and your own financial situation.
Mistake 2: Waiting Too Long To Sell
The other mistake we see more frequently is holding too long. This frequently happens when the company stock has done really well. Maybe there's a rumor of a buyout, and the stock has gone astronomical. People think it's for sure going to go just a little bit more.
Chalk it up recency bias, which we’re amazing at seeing when it’s someone else’s stock that’s on a run. We see the stock market went up 15% last year, so we expect it to go up 15% this year. The stock doubled, so people plan as if it will double again.
I have had clients with eight-figure net worths fire me after arguments over refusing to sell that stock. With all humility, I don't have an example where that's ended well.
Again, we’re not in the business of predicting the future of a company, but there may be signs that it’s time to quit while we are ahead.
We always want to participate in the upside, but the risk escalates depending on how concentrated you are. If you have a $10M net worth, you may be more comfortable risking a 20% position to ride an upside.
The problem is that I’ve seen executives ride a massive run, and now their employer equity is nearing 80% of their net worth. At this point, it’s not just about the quantity you stand to win or lose. It’s about how destabilizing a negative outcome would be to your life and plans.
Making the Right Decision For You
How confident do you feel in your plan for your equity compensation? Do you have a clear, informed decision process for when to sell and when to hold?
The decisions at hand are more about your financial plan than your company’s future. We need to look at questions like:
- Risk tolerance & portfolio concentration
- Your timeline for financial independence
- Tax events triggered by selling equity positions
- Alternatives to holding your company stock
When used well, your equity compensation can be a phenomenal tool for accelerating your wealth. Use it wisely and reap the fruit.
If you have questions about your equity compensation–and how it fits into your broader financial plan–I would welcome the conversation. We’ve been helping clients with this exact question for over 20 years.
We’d be honored to help you.