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Integrated Wealth Management

When Should I Exercise My Stock Options or Sell My Restricted Stock?

This is a common question that our executive clients ask on a regular basis. Without proper planning, the question of when to exercise and/or sell can be very complex and there is no easy answer. On the other hand, with proper planning, the answer to this question almost always becomes effortlessly apparent to both our clients and us.

Core Capital

Proper planning essentially involves calculating how much capital you need to live the lifestyle you want for the rest of your lives - calculated with a very high degree of confidence. Richard Weaver, who has widely researched and written about executive compensation plans, calls this amount your “core capital”. Calculating it is not easy, but it must be done if you want to make a wise decision on how to handle your stock options and restricted stock.

If an executive does not yet have sufficient core capital, he or she will often decide to sell their restricted stock as soon as it vests and invest it into a more diversified portfolio. They also decide to take profits from their options on a regular basis - even if they are bullish on the future of their company. We agree with and encourage such actions until sufficient core capital has been accumulated.

Looking Ahead

We frequently tell our executive clients that they typically “have the upside covered” - meaning that if their stock was to skyrocket, they have unvested options, restricted stock, or other future compensation that will capture this appreciation. We remind them that it is the downside that we are most concerned with until they have accumulated sufficient core capital. We also suggest that they don’t allow the tax consequences of any selling dictate their actions.

Excess Capital

Once an executive has accumulated sufficient core capital, their stock options and restricted stock become what Weaver calls “excess capital” - or their financial legacy - and they can then become more aggressive in their planning. If they expect their company to outperform the broader market, they may decide to hold larger concentrated positions.

Once you have enough core capital, congratulations, you can now aspire to greater things. Hopefully your bets will pay off with your excess capital, and you can enhance your life and perhaps make the world a better place.