Deciding when to sell equity compensation is a major financial decision, often driven by a mix of personal and strategic factors. Some employees and executives sell to diversify their portfolios and reduce the risks of being too heavily invested in a single company, while others seek to use equity sales to fund major life goals, such as buying a home or securing financial independence.
Whatever the motivation, selling equity requires careful planning to navigate compliance rules while pursuing a strategy aligned with your long-term financial goals.
In this Insight, we explore key considerations for selling your equity compensation at the right time for you, unique nuances for early employees, and the broader importance of keeping your personal financial plans in focus.
Just getting started learning about equity compensation? We cover the fundamentals of common equity types and how they work in this Insight.
General Restrictions on Selling Equity Compensation
Selling equity compensation is more complex than selling shares of a publicly traded stock in a brokerage account. Employees—particularly executives, board members, and other key stakeholders—often face trading restrictions and compliance requirements that dictate when and how they can sell their shares.
Some of the most common restrictions include:
- Trading Windows: Many companies enforce blackout periods, limiting when employees can sell shares to prevent insider trading risks. Sales are often restricted to pre-set trading windows, typically following earnings reports or other disclosures.
- Pre-Approval Requirements: Some employees, particularly senior executives, must obtain internal compliance approval before executing a sale to confirm they are not in possession of material nonpublic information (MNPI).
- Holding Periods and Lock-Up Agreements: Employees may be required to hold shares for a set period before selling, particularly after an IPO or grant vesting.
Navigating compliance restrictions can be overwhelming, especially for employees with significant equity holdings. A financial advisor can help manage compliance documentation and coordinate necessary approvals, ensure equity sales align with company policies, and implement structured exit strategies to minimize market impact and tax liabilities. Company insiders who need to sell equity can use a 10b5-1 plan, referring to an SEC rule that allows for pre-planned trades in compliance with insider trading regulations. We take a deeper look at 10b5-1 plans here.
Strategic Factors for Selling Equity Compensation Holdings
In this section, we explore some of the unique challenges that are likely to be unfamiliar for investors with equity compensation holdings
Minimizing Market Impact for Low-Volume Stocks
For early employees with substantial equity holdings, selling shares requires careful planning, especially for stocks with low trading volume.
Unlike highly liquid stocks, where large sales have minimal impact, selling a significant amount of a thinly traded stock (especially as a high-ranking executive) can move the price, potentially reducing returns and signaling unintended messages to the market. To avoid these pitfalls, employees can use strategic trading methods, including:
- Dark Pools: A dark pool is a private securities exchange where institutional investors can trade large blocks of stock at a pre-negotiated price (often at a discount to the current market price). This limits the market moves as your shares are traded but the market will likely decrease to the price sold once the trade is complete and is publicly available. Employees looking to sell a large portion of shares may find this option attractive as it allows for a way to guarantee an exit price.
- Volume-Weighted Average Price (VWAP) Sales: Instead of selling all at once, VWAP strategies spread sales over time in alignment with the stock’s daily trading volume. This gradual approach prevents sudden sell-offs that could drive down the stock price. You can incorporate limit prices into these strategies so that you do not sell below a certain price as well.
Equity Compensation Sales for Early Employees
Early employees at a company often accumulate a significant portion of their net worth in company stock but may have limited opportunities to sell their holdings. Private companies may provide internal sales opportunities through tender offers that create the flexibility to sell shares prior to an IPO. However, these opportunities can be oversubscribed, meaning employees may not be able to sell their full requested amount.
Early employees must decide whether to sell shares during pre-IPO liquidity events (if available) or hold for a potential public offering. Too much company stock can create concentration risk and you run the risk of a downturn in the company’s stock affecting your financial future, while selling too early could mean missing out on future appreciation.
For employees, the decision on how much to sell should center on personal financial priorities (see below), while executives may face tighter restrictions and are more likely to require a structured exit strategy. That said, executives and employees alike may feel political pressure to hold shares (particularly employees with aspirations of joining the executive ranks), which is why balancing these concerns can be such a complex challenge for personal financial planning.
Aligning Equity Compensation Strategy with Your Personal Financial Goals
Equity compensation can be a valuable part of your overall financial plan, but it is vital to have a clear approach to aligning your equity compensation strategy with your personal financial goals. Selling at the right time is important, but it is nearly impossible. Over time, what once felt like a life-changing amount of money can become lost in the natural desire to maximize your share of the company’s highest possible valuation as you continuously reset your expectations based on the current price (not how much your equity has grown).
A financial advisor may be helpful for separating the emotional aspects of this decision from concrete financial considerations to support the right outcome for your long-term priorities.
In this context, it is vital to keep sight of your own long-term financial goals, reflect on them as your wealth grows, and revisit how your own priorities would change if the company achieves its next valuation milestone. You need not be in a hurry to sell, but you also should not let the valuation story of a company (which may play out over multiple decades) govern the timeline for your personal financial plans.
Holding onto shares for potential appreciation can be appealing, but selling at the right time can help navigate a major life change, reduce risk, and may be sufficient to attain your financial goals—whether they center on an early retirement, a secure legacy for loved ones, or a major purchase like a home.
For more insights on building a strategy that aligns with your long-term goals, we invite you to explore our Equity Compensation Guide or book a meeting with our team to discuss your options.
