“Skyrocketing Stock Price” – Planning for Concentrated Stock - Casey & Sarah Harrison
Casey Harrison was recruited by a rapidly growing technology firm. To entice him to leave his former job, a director level position at a large software company, his new company gave him a large amount of restricted stock and qualified stock options as a recruitment bonus. After five years of strain, stress, long hours and intense efforts, the company is suddenly an overnight success. The company has been invited to list on the NASDAQ, the share price has soared, and they have become a darling of the investment community.
Their Financial Lives
Casey’s shares are now worth a substantial amount. After years of intense labor he is ready and motivated to harvest some of the value he helped create, and try and protect some of his new found wealth. He has been at his company long enough so that his original stock grants and options are all vested. The company shares are at an all-time high, and have increased many times Casey’s original grant price. The stock might continue its upward trajectory based on their great technology and unique applications and could be a possible takeover candidate – but there is also a very real danger that a larger competitor might try and muscle into their niche or come up with a superior technology.
Their Goals and Desires
Casey is not ready to leave just yet, but he is a little weary from the battle and occasionally thinks of taking some time off, or perhaps using some of his talents in the non-profit sector at a little slower pace. Retirement is not in his plans, but he would very much like to have the option of not having to work for money, at least for a while. He is also keenly aware of how rapidly things change in the tech world and feels an urgency to try and protect some of the wealth reflected in the high price that his company stock has recently climbed to.
Casey & Sarah very much wanted to achieve two important life goals; pay off their home, and fully fund their children’s future college costs. Casey also wanted to secure a pot of money that was large enough for him to take some extended time off if he wanted to.
Casey and his wife met with their financial advisor and together set some goals to address their concerns and needs.
Their Questions and Concerns
- Casey and his wife set their top family priority as creating the ability for Casey to take some time off in the future without compromising their financial security. They felt that there were three objectives they needed to achieve to help accomplish this.
- Set up a college education fund for their three young children.
- Pay off their home mortgage.
- Establish a “Walk Away Fund.”
- They wanted to know what steps they might take to reduce some of the tax sting in selling stock.
- They also were concerned about the impact of a possible drop in price of the stock, and wanted to take steps to try and proactively minimize the damage that a scenario like that would cause. They wanted to explore strategies to try and minimize the impact of a drop in the share price.
The Gevers Wealth Management Team took Casey and Sarah through a planning process specifically for those who have highly concentrated stock based on many years’ experience working with families and individuals in these circumstances. Over the course of several meetings they offered objective advice for their questions, and endeavored to provide a balanced perspective with both benefits and disadvantages of the many decisions they were facing. The team also provided written notes with a summary of each meeting, along with an overall plan
Implementing their Plan
Once Casey & Sarah had a plan in place for their concentrated stock holdings that they were comfortable with and confident in, they took a number of steps to reach their goals.
- Casey and Sarah and their advisor set up a selling plan to rapidly liquidate enough shares to meet the three objectives from above. As the stock’s current price was hovering near an all-time high, they decided to sell these shares almost immediately.
- Casey was still optimistic about the company’s future and would still own enough shares, even after the sales, to participate nicely in any future stock price increases. He was concerned about the possibility of a sudden drop in the price of his remaining shares so he,
- Set up a stop/loss strategy for some of the shares which would automatically trigger a sale of shares if the stock price dropped below a predetermined floor. He also bought some puts on some of the stock as a form of insurance.
- Proceeds from the initial sale of stock, and future sales were re-positioned into a broadly diversified and professionally managed portfolio of high quality and low expense investments.
- Casey and his wife had been generous in giving to their church and community causes. Their advisor suggested that they estimate how much they typically give each year, and consider making one large in-kind gift this year equal to and for their next five years’ worth of gifts – in order to create a larger deduction to try and offset some of the tax from the planned sales. They planned to meet with their CPA to see if the tax-savings from this idea were significant, and to review any other applicable income tax savings opportunities.
- Casey and his wife also took the proceeds from the sale of some of the shares to pay for a significant life goal, a trip to Europe for their entire family!
- A college saving portfolio was set up and funded based on the projected costs of their children’s future schooling.
An account set up and review meeting was held right after the new portfolios were established to go over their statements and to review the rollover and transfer process and their new investments, and answer any of their questions. (Click here to read more about our Investment Management Services)
Casey and Sara were also scheduled on a pro-active meeting schedule to get together twice per year to review progress with their concentrated stock and their diversified portfolio, discuss the economy and the markets, and help with any planning needs that they might have. They also were set up on an age based calendar that identified many of the time-sensitive financial decisions that they may need to take care of in the future. Casey and Sarah were also set up with comprehensive web access to their account, along with regular statements, and an aggregated portfolio and asset allocation view of their entire financial situation. The Gevers Wealth Management team also connected with their CPA and attorney to help coordinate and facilitate any financial information or assistance that their other professionals might need. (Click here to read more about our Wealth Management Services)
With a mortgage paid off, their children’s college costs funded, and a “walk away” pot of money diversified into a lower risk mix of investments, Casey and his wife felt more relaxed and comfortable with their financial future. Casey also felt like his years of hard work and sacrifice had been transformed into a wonderful blessing for he and his family. They also felt good that they had a long-term partner to help them along the way with advice, guidance, and to manage their retirement assets.
This example is a case study for illustrative purposes and are not actual clients. The principles and strategies and advice are based on our years of experience working with families with similar circumstances. To request a consultation please contact us at email@example.com.