There is something psychologically different about company stock.
I have talked with executives who would never dream of taking $500,000 out of a diversified portfolio and putting it into a single stock. They understand the risk immediately. But when that same $500,000 accumulates gradually through restricted stock units, or RSUs, it somehow doesn’t feel like they made the same decision. The shares were awarded as compensation, they vested over time, and the executive simply never sold them.
That distinction feels important, but from an investment standpoint, it really isn’t.
Once your RSUs vest and the shares become yours, continuing to hold them is a decision just as surely as buying them would be. The problem is that many executives never consciously make that decision. They simply keep every grant, watch the position grow and eventually discover that a surprisingly large percentage of their wealth is tied to the same company that already provides their paycheck.
So, should you sell your RSUs as soon as they vest? For many executives, selling at least some of them relatively quickly is a very reasonable default. But before deciding, I think there is a better question to ask.
If Your Employer Gave You $100,000 in Cash, Would You Buy the Stock?
Suppose $100,000 of your RSUs vest today. Instead of giving you company stock, imagine your employer deposited $100,000 of cash into your brokerage account.
Would you immediately use all $100,000 to buy your employer’s stock?
If the answer is no, it is worth asking why you are comfortable accomplishing essentially the same thing by holding the shares you just received. The fact that you acquired the stock through compensation rather than through a purchase doesn’t change what you own today.
This is what makes RSUs so interesting from a behavioral standpoint. Holding them feels passive. Selling feels active. As a result, executives can accumulate enormous positions without ever making an affirmative decision that they want that much exposure to one company.
That doesn’t mean you should automatically sell every share. You may have perfectly legitimate reasons to continue owning your employer’s stock. But I think those shares should have to earn their place in your portfolio just like any other investment.
What Happens to RSUs When They Vest?
Understanding the taxes makes the decision considerably easier.
RSUs generally aren’t taxable when they are originally granted. Typically, when the RSUs vest and the stock is transferred to you, the fair market value of those shares becomes compensation income. The IRS generally treats that value as ordinary income, and it is typically reported on your W-2.
Suppose 1,000 shares vest when your company’s stock is trading at $100 per share. You have received $100,000 of compensation, and that $100,000 is generally taxable as ordinary income regardless of whether you immediately sell the shares or continue holding them.
This is important because I sometimes hear executives say they don’t want to sell their newly vested RSUs because they don’t want to trigger the taxes. In most cases, that horse has already left the barn. The vesting itself generally created the compensation income.
Your employer will typically withhold taxes when the shares vest, often by withholding some of the shares or selling enough shares to cover withholding. But withholding and your ultimate tax liability are two different things. Particularly for highly compensated executives, it is worth making sure the amount withheld is actually sufficient given your overall income and tax situation.
Do I Pay Taxes Again If I Sell My RSUs?
Potentially, but only on what happens after the shares become yours.
Using the previous example, suppose your 1,000 shares vest at $100. You now own stock worth $100,000, and that value has generally been recognized as compensation. Your tax basis in the shares generally reflects the value that was recognized as income.
If you sell the shares shortly thereafter for roughly $100, there may be little additional capital gain or loss. If instead you hold them and eventually sell at $150, the appreciation that occurred after vesting is generally a capital gain. How long you hold the shares will determine whether that gain is short-term or long-term.
That creates an important distinction between newly vested shares and company stock you have held for years. Selling newly vested shares may create very little additional tax cost beyond the compensation tax that already occurred. Selling older shares that have appreciated substantially can create a meaningful capital gains bill.
For planning purposes, I don’t think those two groups of shares should automatically be treated the same.
Why Selling RSUs After They Vest Often Makes Sense
The most obvious argument for selling is diversification, but I think that word is used so often that it has almost lost its meaning.
The real issue is that an executive who owns substantial employer stock may have several different parts of their financial life dependent on one company. Your salary comes from the company. Your bonus may depend on its performance. Future promotions affect your earning potential, and future RSU grants may represent hundreds of thousands or even millions of dollars of additional exposure.
Then, on top of all of that, you own the stock.
I think of this as a double concentration problem. Your human capital and your investment capital are both tied to the same organization.
That can work spectacularly well when things go right. Plenty of executives have built enormous wealth because they worked for a successful company and held the stock as it appreciated. Concentration creates fortunes.
Unfortunately, it can destroy them too.
The worst-case scenario isn’t simply that your company stock falls 50%. It is that the stock falls 50% because the business itself is struggling, bonuses disappear, layoffs begin, future equity awards become less valuable and your career suddenly becomes less secure. The investment loss and employment risk can arrive at exactly the same time.
Diversification isn’t an argument that your company is bad. It is an acknowledgment that you already have a lot riding on its success.
Does That Mean I Should Always Sell My RSUs Immediately?
No. “Always sell your RSUs” is just as simplistic as “always hold your RSUs.”
There are situations where continuing to own some company stock makes perfect sense. Maybe the position represents a relatively small portion of your overall wealth. Maybe you have strong conviction in the company and genuinely want to own the shares. There is nothing inherently wrong with either of those things.
The distinction I care about is whether the decision is intentional.
Go back to the $100,000 question. If your employer paid you $100,000 in cash and you would willingly invest $25,000 of it in the company’s stock, keeping approximately that amount of your vested RSUs is entirely defensible. If you wouldn’t invest any of the cash in the stock, holding every share simply because they arrived as RSUs is much harder to justify.
There are also several planning issues that can make the answer more complicated.
Which RSUs Should I Sell First?
If you have accumulated company stock over many years, I would generally separate it into three categories.
Newly vested, high-basis shares. These are often the easiest shares to diversify because there may be relatively little appreciation since vesting. The ordinary income tax associated with vesting has already occurred, so selling relatively quickly may create little additional capital gains tax.
Older, highly appreciated shares. These require more thought. Selling may still be the right decision, particularly if the position has become dangerously concentrated, but now diversification has a tax cost. Rather than liquidating everything at once, it may make sense to develop a multiyear strategy that balances concentration risk against capital gains taxes.
Future unvested RSUs. Technically, these aren’t part of your investment portfolio yet, and vesting conditions matter. But I wouldn’t ignore them when looking at your overall exposure to the company. If you already own $750,000 of company stock and expect another $500,000 of RSUs to vest over the next three years, that future compensation should influence how aggressively you need to hold today’s shares.
This is one reason I don’t particularly like arbitrary rules that say company stock should never exceed some specific percentage of your portfolio. The appropriate amount depends on the rest of your financial life.
How Much Company Stock Is Too Much?
There isn’t a magic percentage.
Suppose two executives each own $500,000 of employer stock. The first has another $4.5 million invested elsewhere. The second has only $500,000 outside the company.
Those are dramatically different situations even though the company-stock position is identical.
I would look at company stock in the context of your total investable assets, other sources of wealth, future equity compensation and how dependent your household is on your employment income. The more of those things that point back to the same company, the less comfortable I would generally be adding even more concentration through the portfolio.
This is also why I think future RSU grants deserve more attention than they often receive. An executive might diversify today and then receive another substantial grant next year. Without a process for handling future vesting, the concentration problem simply rebuilds itself.
For many executives, the better solution isn’t a one-time sale. It is a policy.
What About Highly Appreciated Company Stock?
This is where the decision gets more interesting.
Suppose you have $1 million of company stock with a $300,000 cost basis. Selling the entire position may solve the concentration problem, but it can also create a substantial capital gain. The fact that diversification is desirable doesn’t mean taxes suddenly become irrelevant.
You may decide to sell gradually over several tax years. You may have capital losses elsewhere that can offset some gains. If you are charitably inclined, donating appreciated shares rather than cash may also deserve consideration. Depending on the circumstances, there may be other tax-planning opportunities that make diversification less painful.
The mistake is allowing the tax tail to wag the investment dog. I’ve seen investors become so reluctant to recognize a capital gain that they accept an enormous amount of single-stock risk instead. Saving 15%, 20% or 23.8% in federal capital gains taxes isn’t much of a victory if the stock subsequently falls 50%.
Taxes matter. So does risk. Good planning tries to manage both rather than pretending one doesn’t exist.
What If I’m Not Allowed to Sell My RSUs?
Executives and other insiders may face another problem: Even if you want to sell, you may not always be allowed to.
Company insider-trading policies can restrict transactions during blackout periods or when an employee possesses material nonpublic information. For executives who regularly receive information that could restrict their ability to trade, waiting for the perfect opportunity to diversify can therefore become difficult.
A Rule 10b5-1 trading plan can potentially help. These plans allow insiders, subject to specific requirements, to establish predetermined trading instructions at a time when they do not possess material nonpublic information. Trades can then occur according to the plan rather than requiring the executive to make each decision in real time. Current rules also include cooling-off periods and other restrictions, so this is an area where company counsel and securities professionals need to be involved.
The larger point is that trading restrictions should be incorporated into the strategy before they become a problem. If you know you want to reduce a large position over the next several years, waiting until you suddenly need liquidity is not much of a plan.
A Simple Framework for Deciding What to Do With Your RSUs
When I look at RSUs, I think the decision becomes much clearer if you stop asking whether you should “keep the company stock” and instead work through a few questions:
- Would I buy this stock today? If the company paid the equivalent amount in cash, how much would you voluntarily invest back into the company?
- How concentrated am I already? Look at employer stock relative to your entire investment portfolio and net worth.
- How much more stock is coming? Consider future RSU grants and other equity compensation rather than looking only at shares you own today.
- Which shares are easiest to diversify? Newly vested shares with little appreciation may be very different from stock carrying a large embedded capital gain.
- Are there tax or charitable opportunities I should use? Capital losses, charitable giving and multiyear tax planning can influence which shares you sell and when.
- Can I actually trade the shares? Blackout periods, material nonpublic information and company trading policies may require planning well in advance.
None of those questions requires you to believe your employer’s stock is going down. In fact, you can be extremely optimistic about the company and still conclude that you own too much of it.
That’s an important distinction. Risk management isn’t the same thing as making a market prediction.
The Biggest RSU Mistake Is Never Making a Decision
RSUs are a great employee benefit, and for executives at successful companies, they can become an extraordinary wealth-building tool. But the way they are delivered makes it remarkably easy to accumulate a concentrated stock position without realizing that you are doing it.
Every grant vests. The shares appear in the account. You keep working. Another grant vests. Five or ten years later, a substantial percentage of your net worth may depend on one stock, even though you never actually decided that was the portfolio you wanted.
That’s why I keep coming back to the cash question. If your employer handed you the equivalent value in cash today, how much would you use to buy company stock?
You don’t necessarily need to sell every RSU the moment it vests, and you don’t necessarily need to eliminate company stock entirely. But once those shares belong to you, they should have to earn their place in your portfolio just like any other investment. Holding them is a decision too.
Frequently Asked Questions About Selling RSUs
Should I sell my RSUs immediately after they vest?
For many executives, selling some or all newly vested RSUs can be a sensible way to prevent an employer-stock position from becoming overly concentrated. The right answer depends on your existing company-stock exposure, overall net worth, future grants, taxes and whether you would voluntarily buy the stock if you received cash instead.
Do I pay taxes twice on RSUs?
Not on the same income. Generally, the value of the shares when your RSUs vest is treated as compensation income. If the stock subsequently appreciates and you later sell it for more than your basis, that additional appreciation may create a capital gain.
What happens if I sell my RSUs right after they vest?
If you sell shortly after vesting at approximately the same price used when the shares became taxable compensation, there may be little additional capital gain or loss. That is one reason newly vested shares can be an attractive place to begin diversifying.
Should I wait a year before selling my RSUs?
Not necessarily. Waiting long enough for subsequent appreciation to qualify for long-term capital gains treatment can reduce the tax rate on that appreciation, but it also means remaining exposed to the stock during the holding period. The compensation income created when the RSUs vest generally doesn’t become long-term capital gain simply because you hold the shares longer.
How much company stock is too much?
There is no universally correct percentage. The appropriate amount depends on the size of the position relative to your total wealth, your other investments, your dependence on the company for income and the amount of additional equity compensation you expect to receive. The important thing is to make the concentration intentional rather than allowing it to accumulate automatically.
