Company stock skyrocketed, need advice

[Retch The Grate]

Posting here because this is more about the decision making process than about analysis of my company's prospects in particular.

So I am generally an index funds only person, being shaped by the Motely Fool FIRE board since the mid 90s and then here. But I have a bunch of company stock that was granted when we were acquired by our current parent company. Said parent company is AppLovin, an ad tech company that is up so much since our earnings came out last week that if I sell it and pay 50% of it in taxes, it now represents 37.5% of our household net worth (not including the house which I always feel weird about including, the house moves it to 29.6%).

I'm struggling with what to do. It could drop back to the $13 a share or so low from a couple years ago (it is at $290 now). Or it could muddle along at roughly the current value, or it could conceivably double again if our revenue grows as crazily again or people just decide they want to pile in now that we entered the NASDAQ 100. I'm trying to do Bayesian reasoning on it but I can't even come up with reasonable guesses for percentage likelihood of those scenarios.

Including house value in our net worth, selling the company stock now would put us close to what I consider escape velocity where as long as my wife keeps working till she hits retirement age, we'd definitely be able to retire with a lifestyle similar to what we live currently. I still have my job (and weirdly if they lay us off the stock might jump since my part of the business is a drain on the performance even if we are wildly successful), and like making video games, so I expect to keep working myself too, though ageism may impact that whenever I do have to hunt for a next job.

So taking the profits now locks in that somewhere in the 10-20 year range we are all set. Hanging on might mean in a quarter or two we are all set, or it might mean we are pushed back 5-10 years from being all set... :/ Risk, reward. I don't have to sell everything, so I could sell all the stuff that qualifies for LTCG, but that's only about a third of it (2/3 of it is unexercised options, 1/6 is exercised options I've held for a couple years and 1/6 is ESPP purchases that mostly are qualifying after the 22nd of this month).

I really hate owning individual stocks, though this is the first time it has been a problem in a very good way. Any advice or perspective for helping me make a decision would be great.

 

[walkinwood]

I won't tell you what to do, but here is one data point - a set of one, so take it for what its worth. A friend who worked in a high flying internet company had enough vested options to comfrotably retire in 1999. He didn't sell. He finally retired in 2020.

High flying stocks tend to be very volatile.

 

[MC Rider]

High flying stocks tend to be very volatile.

Yes, and considering that I think I would cash in some of it.

 

[Texas Proud]

It is a difficult decision as it has been very good to you... I have a similar problem but only at 19% and not as high a gain...

If I had that much I would sell down to at minimum 20%... 38% if too high..

As mentioned by someone else... I used to work at a bank back in the 80s and it was going up all the time... then it hit the banking problems back then and failed... some people had over $1 mill in their account and lost everything... and that was a mill way back then...

Diversification is the name of the game...

NOW, an alternative option... IF you have enough with the rest of your stash then this is just a bonus and you can ride it is you want... but do you think it will continue to grow as fast?

 

[Scrapr]

I would SELL Mortimer. 37% of your net worth in anything is too much. I'd be comfortable at 5-8% of my net worth. And you are saying it could collapse at any earnings report? And your job is dependent on this company? Let's just spitball this:

Company finds out Jimmy in Accounting has made up some numbers​

Company fires Jimmy​

NASDAQ delists the company​

Stock becomes OTC & price collapses to $3/share​

Layoffs ensue​

Your portfolio loses >30% of value​

You can only get a job at 60% of your previous salary​

And this might not even be worst case scenario

 

[38Chevy454]

I will agree with the others, take some profit off the table. Play a bit with the house's money. Put the money you take off into a wide diversified fund that is consistent with your AA. If that's all equities, fine with me as you are essentially talking about unearned money being invested (less taxes of course). Having 37.5% of your nestegg in one company stock is too much risk.

 

[Closet_Gamer]

Rule 1: Don’t let the tax tail wag the investment dog.

I once found myself in a similar situation and built lots of fancy spreadsheets looking at tax implications. Then the stock went from $80 to $60. Of course stock options are a levered investment so the pain was much greater than 25%. I guess the good news is I didn’t pay so much in taxes. Bad news is I also lost a boatload of money!

Depending on when your shares/options were issued, you may be able to sell older shares without giving up a lot of upside. For example, let’s say you have options struck at $10, $30, $50 with the stock currently trading at $100. Assume you have 10 options at each price.

If the stock goes up $1, you gain $30.
If it drops $1, you lose $30

Your current position:

$100 - $10 x 10 shares = $900
$100 - $30 x 10 shares = $700
$100 - $50 x 10 shares = $500

So you’re $2100 in the money.

If you sell the $10 options, you take $900 or 42% of your gains off the table. But you’re only giving up 33% of your upside because you still have the other 20 options in play.

When I was getting options annually and the stock was appreciating year over year, I usually discovered I could take 75% of my gain off the table while only sacrificing 15% of the upside … and the company was going to reload my options anyways each year at the new, higher strike price.

I sold like that every year and re-invested.

I have many friends who said they would never sell their options until they were forced to. The stock recently dropped by 30% and shows no signs of coming back. Some were forced to sell because they got laid off in the cost cutting and therefore had to sell within 90 days. It turns out that they lost the ability to be in charge of when they sold.

Net: I think being disciplined seller is the right way to go.

YMMV. Good luck!

 

[Al18]

You have too much company stock - this is concentration risk. If it was me, I would probably sell 20% of your stock - but I don’t know your whole financial picture. I wouldn’t worry as much about taxes. The alternative is waiting for your stock to drop in value 90% - then you won’t owe any taxes. Which is the better ‘problem’ to have?

 

[Koolau]

I agree with Texas Proud. If you don't "need" the money for retirement, you have the choice to cash out some or all and lock in the profits OR just let it ride in hopes of a bigger pay day.

If you want to insure enough money for FIRE, you might consider selling some or all to lock in your gains for that reason.

Good problem to have.

 

[Retch The Grate]

Thanks all, yes, my own natural inclination is to take the win and go "wow, thanks former CEO for negotiating such an awesome stock package for us when you got this rocketship to buy us". And yes, right now this is a things are so good

And yes, I agree with you @Scrapr , part of why I'm now like "argh, what should I do" is the overnight tripling took it from "ok, I can let that sit and see what happens" to the current feeling outlined above. Amusingly, while my job is dependent on the company, I expect that if they lay us off, it is a win for the company and the stock might go up even more. They bought us for our data, our revenue contribution even if we succeed wildly won't move the needle significantly for the company as a whole, the other part of the business is where all the margins are.

@Texas Proud I honestly can't tell. I'm shocked that we spiked as much as we did, but the other part of the business posted great expectation exceeding results. Could that happen again, sure, we could be poised to grow even more massively because we really do have products that are that much better performing (the company's primary business is ad tech. My portion is video games). Also, looking at ad tech companies, while we are 5x the P/E of ad companies like google and facebook (makes sense, they are so huge it is hard for them to make exponential gains anymore), we are 1/2 the P/E of The Trade Desk (at about 2x the market cap), so it is plausible that next quarter we blow away expectations again, or a bunch of investors get bullish about us and take us to an insane P/E multiple. Or Both. Or it could all crash down again. I'm trying to apply Bayesian Reasoning, but I honestly have no good feel for the odds of the various outcomes, so...

@Closet_Gamer In this case I don't expect them to ever refresh us because we aren't in the core ad tech portion of the business. So a one time occurrence. My original mindset on them was "I can afford to hold them 3-5 years through the coming recession and see how they do" but now they DID. Your point about the timing on the unexercised shares is solid. The difference between our strike price (less than $10) and our current price (over $280) means all of the shares are VERY in the money, again, great problem to have, but why I am paralyzed by "if this doubles I'm done!" though I'd keep working making games because I love it as an activity, vs "take it now and things are set for the long term" because really that is already true, just more long term.

I could definitely see taking all my tax advantaged stock and selling it (the ESPP purchases that become qualifying in 10 more days, the exercised long term hold stock now) and keep the options as the upside...

 

[Retch The Grate]

@Al18 yeah I'm definitely feeling too concentrated. This wasn't a big deal when the stock was worth a tiny portion of our networth, it is entirely being caused by the spike on Thursday and Friday that took it up to that very significant chunk. I'm definitely not worried about the taxes, I'm just tracking how much I expect to have after paying them so that I can accurately model what the value is to my portfolio as right now I don't include the company stock in my net worth because it felt way too speculative.

 

[Retch The Grate]

Freaking amazing problem to have @Koolau. First company I've worked for where stock options have been worth anything significant. Only the 2nd company I've worked for where options have even been above water (I think I got $17k from the first company, back around 2000, so it was nice, but not at all life altering).

 

[Kings over Queens]

You mentioned selling just enough as LTCG, so why not do that, and then reconsider in 6 weeks when the new year resets the tax clock? You can capture some of that profit now and if the stock is still flying high you can sell more then. and if it isn't, you can pat yourself on the back for pulling some chips off the table when you did.

Bottom line, you've got a high concentration of one stock, which can be problematic. are you really comfortable with the company's fundamentals?

 

[GrayHare]

I'd certainly sell some to bring down its portion of total assets. Might be a good tax year to also sell something else with a capital loss so as to offset the cap gain.

 

[Cortina]

Can't give advice (I'm not that smart) , but I have a fair idea of what I would do (remember .... some people are buying the stock at that high price , and are convinced it's the correct thing to do !).
I would sell a percentage (be it 20 or 30 or 40 or 50 %) , and lock in the profit. Review the situation in say a years time ..... if it's gone up considerably / reasonably ... do the same again. If it starts going down dramatically over an extended period ... then it might be time to bale out (but then again it might not ?)
I have the same issue , and I'm trying to reduce my exposure to that one stock ... trouble is , it just keeps going up ... and although I have less shares of it now ... the total value is starting to get really silly !
Nice "problem" to have ...................

 

[PlayinwithFIRE]

Working in Bay Area Tech- I met a lot of paper millionaires , of that group I know many less actual millionaires. Take some profit or all of it , if it makes a meaningful difference in your quality of life or whatever metric you feel important. Don't fret over it being more, if its already enough.

pwf

 

[Route246]

Nobody should tell you what to do with your assets. It is a personal decision.

I plan to sell beginning January 2025 25%-40% of our equity assets in order to diversify out of our 95% (it varies based on market) equity position. In California this puts us into a bracket to be in the 38% marginal for LTCG and I want to take the hit in a single tax year. Already have multiple spreadsheets setup to make an orderly sequence of many trades to convert to cash. Talked it over with my wife and she is not really interested in sausage making so she told me to do whatever our CPA approves of. Some or most of the cash will be used to move to a nicer home in a much nicer neighborhood so this is partially an asset allocation decision, albeit tax costly.

Agree with Closet_Gamer about not letting the tax tail wag the investment dog.

Equities have had such a good run now for so long that I'm satisfied with the gains and am no longer in saver mode.

My advice is the think about setting up a plan with an orderly sequence of actions (trades) that will be executed in a pre-determined time-frame and execute it. Do not look back at what could have been and do not concern yourself about remorse, be sure to get past that point and make a commitment and stick to it.

I know about greed and it is a powerful deterrent to doing the optimal thing. It sometimes tears me up inside trying to reconcile that my greed (avoiding taxes) is what got us to this point but it is time to give that up now. We've been good friends for too long.

 

[frank05]

I am in a similar situation. The stock of my old company is around 300. While working the stock appreciation approached 50% of worth so I stepped up my sales to approach half my salary, almost all went into after tax brokerage accounts. After I retired, I decided that I could use is stock sales to satisfy my living expenses until I would collect my SS. Fortunately, it has continued to appreciate so I now sell more than my living expenses to keep its part of my net worth around 30%. I long ago cashed in stock to more than exceed the stock purchase price.

An advisor suggested I purchase options to protect appreciation but I now treat the stock as house money. It has funded my after tax accounts and I treat the stock as a my single risky investment.

A great benefit of this highly appreciated stock, I can continue to contribute to my Donor Advisor fund stock whose purchase price is under $5.

 

[pjigar]

Do you own the stocks outright? Have you owned them for more than 1 year? If answer is yes to both the questions then you wouldn't pay more than 20% of the gain. How did you come up with 50% tax?

https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

If I were you, I will sell NOW. Too much concentration risk for someone who has lived internet boom and bust.

 

[MichaelB]

You have to do whatever it takes so you can sleep well at night.

When I owned company stock and it was a very high % of my total net worth I sold it in lots over a couple of years and used the funds to rebalance our portfolio. I think it was 4 or 5 lots over 2 years. The taxes were stiff but the risk was just too high for my comfort.

 

[OldShooter]

One rule common to professional trustees is that anything over 15% of a portfolio is an imprudent concentration of assets. I would take advantage of the fact that we are near year-end and sell half of the over-concentration this tax year and the other half next tax year. If most of this is LTG that is frosting on the cake.

From that point I would maintain the concentration at or under 15%, maybe checking quarterly and watching/delaying timing to maximize LTG where possible.

 

[Texas Proud]

Yes, OldShooter has a good option of spreading the gain over two years since it is close to year end...

I agree that you should sell the OVER concentration but keep the percent that you feel comfortable with holding... be it 10, 15 or 20...

But if the stock skyrockets again do not feel bad that you sold... it was for a very good reason... but if it does you will probably be in the same situation next year where you have an over concentration in one company...

 

[HarveyS]

Be sure you understand if there are any restrictions on when you can sell. In a former life I was limited to 4 multi-week trade windows per year, each occurring about 4 weeks after the earnings release dates.

 

[Retch The Grate]

Working in Bay Area Tech- I met a lot of paper millionaires , of that group I know many less actual millionaires. Take some profit or all of it , if it makes a meaningful difference in your quality of life or whatever metric you feel important. Don't fret over it being more, if its already enough.

pwf

It's right at the edge of enough. If it doubles again, that's it, goal reached. But I have no sense of the odds of that, it seems plausible that it could, but also plausible that it evaporates. Hence the waffling, but yeah, I think I'm coming to terms with taking the win and just adding to my VTSAX pile.

Working here in the Bay as well I've seen people get burned in Dot Com crash, etc. so yeah, definitely aware. This doesn't change the millionaire status, it just moves things along nicely towards the goal number.

 

[Retch The Grate]

Be sure you understand if there are any restrictions on when you can sell. In a former life I was limited to 4 multi-week trade windows per year, each occurring about 4 weeks after the earnings release dates.

Yup, fortunately the website we manage our options and ESPP on covers the blackout dates, in our case earnings were thursday morning, and the blackout ended at friday at 11:59pm. I angsted all weekend and couldn't decide so I'm posting here for more voices of sanity.