“Hey sports finance guy, have a question for you. The majority of my compensation at my current job is in equity I got at joining, which vests over a 5 year window (i'm 3 years in).
Last year the company went public, enabling me to sell my stock easily, which led to the question of whether I should sell my stock, or have diamond hands and go long on the company.
More context: the company was impacted right after IPO by the devaluation of most tech companies, losing 70% of its value. There's reason to believe the price could increase dramatically over the next few years, as it converts from a high-growth but no-profit stock, to consistent, large profits stock (if things continue to go well - it's already clawed back half of that drop in the past year).
Do I drink the kool-aid and hold the line, or hedge hard?
Caveat - I actually am hedging fairly significantly, especially since my bonuses are lots of stock.”
- Ben, Mexico City
If you don’t pay attention to finance, the first ever Mound Visits scenario might be described as rambling and incoherent, like a Billy Madison academic decathlon response. Let’s try to make some sense of it.
Receiving company stock can be one of the best wealth building tools if properly managed and you get a bit of luck. But it can also be a huge pain. And Ben nails it with his question, “do I drink the kool-aid or hold the line, hedge hard?” Deep down, the question he wants the answer to is: should I sell my stock or should I keep my stock? This is what anyone with company stock wants to know.
I’ve witnessed some people have massive swings in the value of their company stock over the past few years. I know one CEO at a publicly traded company who had his total stock value go from ~$185,000,000 to ~$20,000,000 in 6 months. And another C-Suite executive’s stock value go from ~$22,000,000 to ~$2,000,000 in the same time frame1. The emotional toll from those swings in net worth is unimaginable.
If you are not C-Suite level, the value of your company stock is likely much less. But the same emotional damage occurs if your company shares go from $500,000 to $50,000.
Here’s the dilemma:
Let’s say you have $500,000 in company stock. You can’t sell it for six more months. Over the next six months the price of your company stock declines by 75%. Now your stock is worth $125,000. Now you’re allowed to sell your stock.
If you sell here, you’d pocket ~$125,000 cash (you might also owe fees and taxes). It doesn’t feel great because you had a lot more six months ago.
What if after you sell, the stock quickly rebounds to its price from six months ago? If you had just held, you’d be $375,000 richer on paper. And that stings too.
A book I highly recommend for anyone with stock options is Considering Your Options by Kaye Thomas. I’m aware nobody reads anything longer than 280 characters anymore2, but the paperback is less than $10 and the book gives you a great framework for making (potentially million dollar) decisions around your equity compensation.
With that said, here are some questions that Ben should ask himself:
If my stock compensation was magically turned into cash, would I invest that cash in my company stock? Or something else?
Where does my stock compensation fit in with the rest of my financial picture?
What would happen to my financial life if the stock went to zero? Or went 10x?
As a financial planner, I know there are important details that Ben left out of his question that would provide further context3.
No one can perfectly predict what will happen to your company stock over any time frame. Seeking to understand your personal financial situation and creating a plan for everything involving your money is the best way you can make a decision about your equity comp4.
Strike one….
“Do I have to pay tax on cash back credit card rewards?”
- Elise, Maryland
This is like when you need a new pair of jeans but don’t have the energy to go to five different stores. You proceed to order 12 pairs online for $800 to try on at home. You choose the pair that fits you best (or whichever pair your favorite influencer is promoting) and return the other 11.
When you get your money back on the other 11, you don’t get taxed on that since it’s like a rebate on your spending. And sadly your credit card company knows you made returns, so they take away the extra rewards points from your account 🙁 .
A cash back credit card reward is treated like a rebate on spending, which is not taxed. That reminds me, fall is coming up and I probably could use a new pair of jeans.
Strike two….
“How do I get rich quick??”
- Ryan, California
Ahh, the question humans have tried to figure out since the days of trading seashells and rocks. The answer depends on what your definition of “rich” is and what your definition of “quick” is5.
There is also an unspoken part to this question. The real question is “How do I get rich quick without doing any work?”
In the truest sense, there are only two options:
Being born into wealth or given it
Winning the lottery jackpot
Born This Way
The quickest way to get rich is to already be rich. Whether your grandparents were Manhattan real estate scions or your parents sold a tech company in 1999, you were born at the right place at right time to the right people.
Or maybe you know someone who struck it big and they want to help you out by giving you a few million dollars. When athletes sign big contracts, they often face a ton of social pressure to help out friends and family (paying bills or buying cars/houses). Although you will have to put in years of friendship, and that sounds like a lot of work.
You Gotta Be In It To Win It
The other way is to win a lottery jackpot. All you have to do is pay two dollars for a set of numbers and you could win millions or billions of dollars. Someone in Florida just won the $1.55 billion Mega Millions jackpot, it happens! Problem is, hitting those exact numbers is not easy. If it was easy, it would not be a great business model.
But hey, someone always wins it eventually. So if you weren’t born wealthy or know someone who is wealthy who has helped you out, this might be your only option for speedy wealth. Too bad the odds of winning the jackpot are 1 in ~300 million.
If Ryan is willing to wait a little longer, there are many ways to get “rich”. But they usually include putting in some work and providing value to the world. Barry Ritholtz recently published a great piece about this.
Three strikes and we’re out…
If you want your questions answered in a future Mound Visits, send me an email at nick@nineinningfinance.com with your name, location and a question/scenario.
Nothing in this email is intended to serve as financial advice. I don’t know your personal circumstances and would never provide financial advice through this medium. This newsletter is intended to be educational and entertaining. Please consult a financial professional and do your own research before making any changes to your portfolio.
Since they are in the C-Suite, the amount of company shares they own is publicly available.
Based on the total view count of my writing, this is true.
I’m dying to know what he means by “hedging hard.” It could mean ANYTHING.
I created my guide “Where to Start With Money?” to help people think about setting up their money systems and to get started creating a financial plan.
I also recommend trying to figure out what the definiton of “I” is.