What to do with an IPO windfall

I joined my colleague Ben Carlson on his weekly YouTube show, Portfolio Rescue, this morning to answer questions from viewers. I answered a question about what to do with a windfall from stock compensation in a company that goes public.

In my experience, stock-based compensation can be both a blessing and a curse. That’s because we second guess the timing of our stock sales in hindsight. We can always go back and do the calculation for what the shares would be worth today if we hadn’t sold. But since we don’t know the future, I suggest a measured approach of selling some stock immediately, some over the course of several years, and earmarking a portion to hold on to forever.

Easy money can be lost just as easily. I think it’s important to envision the worst-case scenario for holding on to company stock past the vesting date or lock-up period. The current environment for IPO stocks is brutal. Some of the top IPOs from 2021 are down 40% or more. Robinhood is 64% below its peak, Rent the Runway is down 65%, and Coinbase is down 41%. The public markets have not been kind to this most recent class of IPOs.

Top IPO stocks from 2021

There is no greater regret than achieving a net worth milestone only to watch it fade away. I recommend picking a threshold at which you never want to drop below and selling that amount of shares as soon as you are able. Employees are often subject to lockup periods and/or blackouts dates when they are not allowed to sell shares. At the same time, segregate a pile of shares that you plan to hold on to forever. This is your ticket on the rocketship and ensures you will participate in outsized gains from the company. Keep in mind that if you still work for the company, you may be receiving new stock and/or option grants annually. Deciding when to sell shares is likely to be a quandary for you for years to come.

With the remaining shares, plan a calendar-based approach to selling these over time. If you are eligible for long-term capital gains tax treatment after a 1-year holding period, start selling after that date. Divide the shares into segments and sell at various dates throughout the year. This helps you avoid selling on any particularly unlucky day.

There’s no perfect answer, but regret minimization should be the top priority. You can view more of my answer and see the rest of our conversation below.



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