Q. Dan, I enjoyed your article on the coming SpaceX IPO. As a SpaceX employee, would it make sense to sell some on opening day especially if there is a “pop” as you described? Paul in Merritt Island
A. Paul, your logic is sound. If there is a lot of hype and the price rises quickly on its first day of trading (pops), selling some could be a good move. However, it isn’t that simple for employees. Most Initial Public Offerings (IPO) come with a “lock up” period during which insiders and employees cannot sell their shares. SpaceX is in a regulatory quiet period and has not announced particulars, but the industry standard is to prohibit employees from selling shares for 180 days after the IPO.
It is common for the share price of a company stock to drop quickly once the lock up period ends because employees sometimes flood the market with sales. Beyond the lockup period, employees often face blackout periods during which they cannot sell shares. These blackouts typically happen quarterly around earnings reports.
IPOs are liquidity events and can have major tax implications, RSUs, ISOs, non-qualified options, and ESPP plans all generate different types of taxes based on different triggering events.
To fully maximize the value of employer stock, options, and other equity-based compensation plans, an accurate prediction of the share price at specific points in time is required. Making such a prediction is so unlikely, most people would be better off thinking identifying the truly “best” time to execute a transaction is impossible. A better objective is to try to make the best decisions given the information available at the time.
Don’t forget that as an employee, you rely on the company for your job which funds your current lifestyle. If you have too much money in the company stock, you are making a bet that the company will also fund your future lifestyle.
With so much on the line, it is important to understand that owning the stock once it goes public can present some stress points. First, throughout one’s employment, the shares have only been valued periodically, which can give employees a false sense of stability. Once publicly traded, the price of the shares changes every second. That can feel very different.
‘What do you want your money to do for your family?’
Further, while most people understand that investing in a diversified array of stocks over the long term has been quite profitable despite short-term fluctuations, few understand that the long-term performance of individual companies is much less reliable. According to a Dimensional Funds study, over any 20-year period since 1927, on average only 18% of the stocks at the beginning of the period were still in existence and outperformed the market. Most of that 18% did not outperform by much. Markets have been driven by a small number of stocks. When you hold a large percentage of your assets in company stock, you are making a bet that the stock will be in that small cohort of meaningful outperformers.
All of these issues beg for a plan that coordinates at a minimum, investment, tax, risk tolerance, and family factors. A good starting point for formulating that plan is to take a step back and assess your personal financial goals from a high level. What do you want your money to do for your family?
If you need say $2 million to retire and you have $2 million in SpaceX stock, you have the proverbial bird in hand. Maybe more effort should be spent on how to intelligently diversify to reduce your risk level than spent trying to predict if the stock will be an outperformer.
The $2 million example is hypothetical but if/when the SpaceX IPO comes to fruition, there are many employees who will have holdings valued that high and higher. I’m a fan of SpaceX and what it has done for our area, but I don’t know what the stock will do. It certainly could be one of the few that outperforms but before anyone gets wrapped up in the stories about why it will do well and makes a big bet on that outcome, I strongly recommend they consider the consequences if the stock underperforms as the stock of most companies do.
No one owns stock in their company thinking it won’t work out great, but history shows an overconcentration in employer stock is very risky and often costly. Have a plan that suits you.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him at dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, ext. 101.
Originally published on FloridaToday. Read the original article here.