Why concentrated stock is a special planning problem
Founders commonly hold large percentages of their personal wealth in their company’s equity. That concentration creates three practical risks: company-specific risk (the business fails or underperforms), lack of diversification (portfolio volatility and idiosyncratic downside), and liquidity/timing constraints (lockups, insider windows, tax consequences). A plan that ignores any of these can leave a founder exposed to both financial and emotional stress.
Practical planning starts with a diagnostic: how much of your net worth is in company equity, what restrictions apply (lockups, 83(b) elections, RSU vesting schedules, insider trading policies), and what tax lots and holding periods you control. Begin by building a simple personal balance sheet and calculating the percentage of investable assets that company stock represents—this clarifies whether you have 20%, 60% or more at risk and guides the urgency of action.
(For basics on building a balance sheet and small-portfolio diversification, see FinHelp’s guide on How to Build a Personal Balance Sheet for Financial Clarity and Basics of Diversification: Why It Matters for Small Portfolios.)
The core options: sell, hedge, hold, or transfer
Founders generally use one or more of these approaches, often in combination:
- Gradual liquidation (phased selling): selling smaller tranches over time to reduce concentration while managing market impact and taxes.
- Hedging: using options (protective puts, collars) or equity swaps to limit downside while keeping upside exposure.
- Tax-aware transfers: gifting shares to family members in lower tax brackets, donating shares to charity, or using a donor-advised fund (DAF) for immediate tax benefit.
- Retirement-plan strategies and NUA: when company stock sits inside an employer plan, consider Net Unrealized Appreciation (NUA) or rollover timing where appropriate.
- Maintain/monitor: retain stock if it meets investment objectives and you can tolerate concentrated risk.
Which path is right depends on tax rules, trading windows, insider trading compliance, and personal cash needs.
Key tax and regulatory factors founders must check
- Holding period and capital gains: Long-term capital gains treatment requires holding a lot for more than one year; short-term gains are taxed as ordinary income. Check IRS guidance on capital gains for details (see IRS.gov on capital gains).
- Insider trading and Rule 10b5-1 plans: Executives and founders should follow company insider-trading policies and consider prearranged trading plans (Rule 10b5-1) to avoid claims of unlawful trading (see SEC Rule 10b5-1 guidance: https://www.sec.gov/fast-answers/answers-rule10b51htm.html).
- Wash-sale rule: If you sell shares at a loss and buy substantially identical stock within 30 days, the loss may be disallowed.
- Employer-plan rules and NUA: Company stock inside qualified plans has special tax treatment (Net Unrealized Appreciation) when distributed. Consult plan documents and a tax advisor.
Authoritative sources: SEC, FINRA, and the IRS provide public guidance on insider plans, concentrated positions, and capital-gains rules (see SEC.gov, FINRA.org, IRS.gov).
Practical strategies and when to use them
1) Phased liquidation (recommended for many founders)
- How it works: sell a fixed dollar amount or fixed percentage of your position periodically (monthly, quarterly, or annually).
- Why it helps: reduces single-stock exposure while averaging execution price; it limits the behavioral error of trying to ‘time the top.’
- Tax note: use tax-lot accounting to select lots (FIFO vs specific ID) for optimal tax outcomes.
2) Rule 10b5-1 trading plans and blackout windows
- For insiders, a pre-specified 10b5-1 plan lets you sell on a schedule during open trading windows and helps document that trades were not timed with nonpublic information. Start plans early and follow plan terms closely (SEC guidance).
3) Hedging (protective puts, collars, equity options)
- Use when you want downside protection but still want potential upside. Collars pair a purchased put (protection) with a sold call (offsets cost), limiting both downside and upside.
- Consider costs, margin, and complexity. Options can produce unintended tax or accounting consequences for the company or individual; coordinate with legal and tax advisors.
4) Gifting, charitable giving, and DAFs
- Donating appreciated shares to charity avoids capital gains tax and typically yields a charitable deduction equal to fair market value if you itemize. A donor-advised fund offers flexible timing for charitable grants.
- Gifting to family may shift future capital-gains exposure, but be mindful of gift-tax rules and the recipient’s tax situation.
5) Using retirement accounts and NUA
- For company stock held inside 401(k) plans, Net Unrealized Appreciation (NUA) can provide favorable tax treatment on the employer stock portion when distributed and moved to a brokerage account. This is a specialized decision that may reduce taxes for large appreciated positions; coordinate with plan and tax advisors.
(See FinHelp’s related pages: How Employer Stock in Retirement Plans Affects Your Diversification and Maintaining Diversification When Concentrated Stock Is Part of Your Net Worth.)
6) Non-tax motives: liquidity and safety
- Immediate cash needs—house purchase, debt refinancing, or liquidity for diversification—may justify accelerating sales even if tax timing is suboptimal. Balance personal cash-flow priorities against tax costs.
Execution checklist for a founder
- Build or update your personal balance sheet and identify concentration percentage.
- Review company documents: option grants, RSU schedules, insider-trading policies, and post-IPO lockups.
- Determine near-term liquidity needs vs long-term goals.
- Engage a CPA or tax advisor to model tax scenarios (short vs long term, AMT exposure if relevant).
- Consider a 10b5-1 plan if you are an insider and want a scheduled exit.
- Decide on a phased selling schedule or hedging strategy; document rationale and a timeline.
- Revisit plan annually, or after material corporate events (funding rounds, M&A activity, IPO).
Example plan (realistic but simplified)
A founder with $1.2M worth of company stock and $300k of other investable assets has 80% concentration. A conservative phased plan might sell $150k of stock each year for five years. Proceeds are split: 50% to diversified ETFs (stocks/bonds), 30% to an emergency/liquidity reserve, 20% into tax-advantaged accounts or alternative investments. Over five years, concentration drops substantially while tax exposure is smoothed across years.
If the founder is an insider, sales would be executed inside preapproved windows or via a 10b5-1 plan. If volatility is a concern, the founder could buy puts for a portion of the holding to cap downside during the early exit years.
Common mistakes founders make
- Waiting too long and becoming overexposed after rapid appreciation.
- Ignoring company-imposed blackout windows and violating insider-trading rules.
- Failing to model tax consequences and accelerating sales blindly.
- Over-relying on hedges that are costly or improperly structured.
- Treating paper wealth as spendable cash without a liquidity plan.
Behavioral and governance considerations
Concentrated holdings create emotional attachment—many founders see the stock as identity, not just an asset. That bias can delay diversification. Use objective triggers (target concentration, target liquid net worth) and governance: involve a fiduciary advisor or trusted financial planner to enforce a plan.
When to get professional help
- You have >50% of investable assets in company equity.
- You are a Section 16 officer or otherwise restricted insider and need a compliant exit strategy.
- Your tax situation is complex (multiple state tax exposures, AMT concerns, or large taxable events).
- Estate or succession planning will depend on company equity value.
Consult a CFP® or CPA with experience handling concentrated equity. In my practice working with founders, collaborating early with tax counsel and legal teams avoids rushed decisions that cause unnecessary taxes or compliance risk.
Useful resources and further reading
- SEC Rule 10b5-1 explanation: https://www.sec.gov/fast-answers/answers-rule10b51htm.html (insider trading and prearranged plans).
- IRS guidance on capital gains and tax topics: https://www.irs.gov/taxtopics/tc409 (capital gains basics).
- FINRA material on concentrated positions and investor alerts (see FINRA.org) for investor-focused risks.
- FinHelp articles:
- Maintaining Diversification When Concentrated Stock Is Part of Your Net Worth: https://finhelp.io/glossary/maintaining-diversification-when-concentrated-stock-is-part-of-your-net-worth/
- How Employer Stock in Retirement Plans Affects Your Diversification: https://finhelp.io/glossary/how-employer-stock-in-retirement-plans-affects-your-diversification/
- Tax Diversification: https://finhelp.io/glossary/tax-diversification/
Final takeaways
Concentrated stock management is rarely a single action and more often a program: diagnose concentration, map constraints, pick a mix of phased sales, hedging, and tax-aware transfers, and execute under compliance rules. Start early, document decisions, and revisit the plan regularly. Small, consistent steps usually beat a risky all-or-nothing approach.
Disclaimer: This article is educational only and not individualized investment, tax, or legal advice. Consult a qualified CPA, tax attorney, or CFP® before executing trades, hedges, or tax strategies. Author experience referenced reflects years of advising founders and should be used for educational context.
