The problem with one stock
Many founders and executives hold a large part of their net worth in one company’s stock. Usually it is the company they built or work for. The position grew because the work went well. That is a good problem to have, but it is still a problem. One company can lose much of its value for reasons no one inside it controls. The same event can hit your salary, your bonus and your unvested equity at once.
There are three honest ways to handle a concentrated position. You can hold it. You can sell it on a schedule. Or you can hedge or exchange it. Each has a cost in tax and a cost in regret. None is free, and none is right for everyone.
Option one: hold
Holding is a real choice, not a failure to choose. It costs nothing in tax today, because a gain is generally not taxed until you sell. Some families plan to hold shares until death, since current law can adjust the cost basis of inherited assets. Those rules are complex and can change. Your estate attorney and accountant need to review them for your situation.
The regret cost of holding shows up if the stock falls. You kept all the risk, and the tax you deferred may be small next to the loss. Holding is easier to defend when the rest of your balance sheet could absorb a severe drop without changing how you live.
Option two: sell on a schedule
Selling on a schedule means deciding in advance how many shares to sell and when, then following through. Spreading sales over months or years can spread the tax over several tax years. It also removes the daily question of whether today is the day.
Insiders often face blackout periods and disclosure rules. Many use a pre-arranged trading plan adopted under securities rules, set up at a time when they hold no material inside information. These plans have specific requirements, including waiting periods. Your company’s counsel and your own attorney should be involved.
The tax cost is plain. You pay tax on gains as you realize them. The regret cost appears if the stock rises after you sell. That regret is the main reason people abandon schedules halfway through.
Option three: hedge or exchange
A hedge keeps the shares but limits how much the position can lose. A common structure is a collar. You buy a put option, which sets a floor on the price you can receive, and sell a call option, which caps your upside. The sale of the call often pays for much of the put. Hedges carry costs: option premiums, lost upside above the cap, reliance on the other party to the contract, and paperwork. Tax rules can treat some hedges as if you had sold the stock, which would trigger the tax you meant to defer. Your accountant must review any structure before it is signed.
An exchange fund is a pooled partnership. Several holders of different concentrated stocks contribute their shares, and each receives an interest in the combined pool. The aim is broader diversification without a taxable sale at contribution. These vehicles usually require you to stay in for years, charge fees, have eligibility rules, and leave you holding whatever mix of stocks the other contributors brought.
The regret cost here is quieter. You pay for protection you may never use, and you give up flexibility that is hard to get back.
Why decide before the price moves
The hardest part is not choosing among these options. It is choosing at a calm moment. After a sharp rise, selling feels like walking away from more. After a sharp fall, selling feels like locking in a loss. Neither moment is a good time to decide.
A written investment policy fixes the decision while the price is just a number. For a concentrated position, it can state:
- The share of net worth you are willing to hold in one company
- Which option, or mix of options, you will use
- The schedule or conditions that trigger each step
- Tax and legal constraints, confirmed with your accountant and attorney
- What would justify revisiting the plan, and who must agree to a change
The last item matters most. A policy that changes every time the stock moves is not a policy. A useful one names the events that justify a review, such as a change in your job, your family or the company itself. Price alone is not on that list.
How we approach it
We write an investment policy with every client before the first trade. For founders and executives, the concentrated position is often the first section. The rest of the portfolio is built from a diversified core, sized with the single stock’s risk in mind. Thematic sleeves are added only if the client’s policy calls for them. For someone already concentrated in one industry, the policy may call for less exposure to that industry, not more.
We are fee-only. Clients pay us, and we take no commissions or payments from any product, including hedging or exchange vehicles. Our fees are described in our Form ADV. Client assets are held at Charles Schwab & Co., Inc., an independent qualified custodian not affiliated with our firm.
This article is for informational purposes only and is not investment, legal or tax advice, nor a recommendation to buy or sell any security. All investing involves risk, including loss of principal.
This material is for informational purposes only and is not a recommendation to buy or sell any security. All investing involves risk, including loss of principal.