You’ve done everything right. You’ve stayed at your company, performed, accumulated equity over years of vesting cycles. Your company stock has grown ten-fold. So much so that it sits at the center of your net worth — large, low-basis, and concentrated.
You should diversify. You know it.
And yet, blackout windows limit when you can sell. Selling feels, somehow, like a betrayal of the company you’ve helped build. The position hasn’t hurt you yet. And the tax bill on an outright sale is uncomfortable enough to justify one more quarter of waiting.
This describes the financial situations of many, many senior executives. Because the structure of executive compensation and the psychology of ownership conspire to keep them there. Let’s explore what to do about it.
How Executives End Up With Concentrated Company Stock
Concentrated positions are the natural outcome of how executive compensation is structured. RSUs vest over years. Stock options accumulate. ESPPs add to the position each offering period.
The endowment effect, our tendency to value things we own more than equivalent things we don’t, is particularly potent with company stock. The shares weren’t purchased; they were earned. They represent years of work, alignment with the company’s mission, and in many cases a heartfelt belief in what’s being built. Selling feels different from selling any other investment.
There’s also a professional wrinkle. In many corporate cultures, executives who sell significant amounts of company stock attract attention. The optics can be uncomfortable regardless of the legal and financial rationale.
The result is a position that grows larger, lower in basis, and harder to address with each passing year — until a life event, market conditions, or a financial advisor finally forces the conversation.
The Cost of Concentration
The most immediate concern is the double-whammy scenario. If the company runs into financial difficulty, both your investment portfolio and your employment income are exposed to the same underlying risk.
A study analyzing Russell 3000 returns over a 40-year period found that 40% of stocks experienced a peak-to-trough decline of 70% or more at some point. The companies that produced those declines weren’t all poorly managed or obviously troubled. Many of them looked, from the inside, exactly like the company you work for today.
If you’re nearing retirement, a concentrated position also introduces sequence-of-returns risk — the possibility that a significant drawdown early in retirement permanently impairs your retirement plan. A diversified portfolio can recover from a bad year. A portfolio that is 70% allocated to a single stock and experiences a 50% decline in year two of retirement faces an existential crisis.
The good news is there are several well-established tools for addressing concentration deliberately.
10b5-1 Plans: A Practical Tool for Systematic Diversification
The 10b5-1 plan is a practical starting point. During an open trading window, you establish a written plan that specifies the parameters of future stock sales: how many shares to sell, at what price or on what schedule, over what time period. Once the plan is in place, trades execute automatically according to those parameters (including during blackout periods) without requiring any further decision or action from you.
The legal protection that makes 10b5-1 plans valuable is the affirmative defense they provide against insider trading claims. Since the plan was established before any subsequent material nonpublic information was known, trades that execute under the plan are presumed to have been made without that information as a basis.
The SEC tightened the rules around 10b5-1 plans in 2023 — changes that are worth understanding before establishing one. Executives must now observe a mandatory cooling-off period of 90 days (or the next open trading window, whichever is later) before the first trade under a new plan can execute. Only one active plan is allowed at a time in most situations. And at plan adoption, you must certify that you’re not aware of material nonpublic information and that the plan is being adopted in good faith.
A few design considerations worth implementing from the outset:
- Parameters should reflect actual diversification goals — a plan that sells a token number of shares each quarter while the position grows isn’t reducing risk adequately.
- The selling schedule should be coordinated with your overall tax plan to avoid income spikes in a single year.
- Modifying or terminating a plan triggers additional cooling-off requirements.
Exchange Funds: Diversification Without Immediate Tax Consequences
If you have very large, very low-basis positions, the tax liability on an outright sale can be significant. An exchange fund is one of the few structures that enables diversification without triggering that tax event immediately.
The mechanics work like this:
- Multiple investors contribute appreciated shares to a partnership.
- Each investor receives a pro-rata interest in the partnership — which holds a diversified pool of assets — rather than owning their original stock.
- Because contributions to a partnership are generally not taxable events, no capital gains are recognized at contribution.
- The investor effectively exchanges a concentrated position for a diversified one, with the tax deferred until they eventually withdraw.
That said, there are rules and tradeoffs.
Contributions typically require a minimum of $1 million or more. The fund must hold the contributed assets for at least seven years before a diversified portfolio can be withdrawn and the IRS requires that at least 20% of the fund’s assets be illiquid investments to qualify for the tax deferral. Management fees apply throughout.
The primary tradeoffs are the illiquidity as well as the resulting portfolio not being customized to your specific financial plan. And the tax deferral eventually ends — once you withdraw, the embedded gain follows you out. But if you have a long time horizon, a pressing need for diversification, and a large low-basis position, exchange funds are a fairly tax-efficient path.
Charitable Strategies for Highly Appreciated Positions
If you have charitable intentions, a concentrated stock position presents an opportunity.
Donor-advised funds. Contributing appreciated shares directly to a DAF avoids recognizing the capital gain. You receive a deduction at full fair market value in the year of contribution, the DAF sells the shares tax-free and reinvests the proceeds in a diversified portfolio, and you direct grants to qualified charities over time on your own schedule.
Practically speaking, you’ve reduced the concentrated position, generated a meaningful deduction, and funded your philanthropic intentions — all without paying capital gains tax on the appreciation.
Charitable remainder trusts. A CRT allows you to contribute appreciated stock to a trust, which then sells the shares and reinvests in a diversified portfolio. In return, the trust pays you an income stream — either a fixed amount or a percentage of the trust’s value — for a defined period, after which the remaining assets pass to charity.
The tax benefits are layered: no capital gains at contribution, a partial charitable deduction in the year of funding, and a stream of income that may be taxed more favorably than an outright sale would have been.
DAFs are simpler, more flexible, and appropriate for executives who want to make a charitable contribution and move on. CRTs are more complex and more expensive to establish, but they generate ongoing income while diversifying the position — making them relevant if you want to convert an appreciated position into a cash flow stream.
Other Tools for Diversification
A few additional strategies that may be relevant depending on your specific situation:
Protective puts and collars. Options strategies can limit the downside of a concentrated position without triggering an immediate sale. A protective put gives you the right to sell at a specified price, capping the loss. A collar combines a protective put with a covered call, funding the cost of downside protection by giving up some upside. These strategies are complex, carry their own costs, and are subject to constructive sale rules — if a collar is too tight, the IRS may treat it as a taxable sale even without an actual transaction. Explore with both a financial advisor and a tax professional before implementing.
Tax-loss harvesting. Losses elsewhere in your portfolio can be used to offset capital gains from company stock sales, creating tax-efficient windows to reduce the position. The selling schedule has to be coordinated with your broader portfolio though.
Gifting to family members. Transferring appreciated shares to family members in lower tax brackets who then sell can reduce the overall tax liability on diversification. Subject to gift tax rules and the kiddie tax for minors, but worth considering.
Estate planning integration. For executives who don’t need the liquidity during their lifetime, holding appreciated company stock until death allows heirs to receive a step-up in basis — effectively eliminating the embedded capital gain. This is a legitimate planning strategy for a specific situation, but it requires confidence in both the position and the estate plan, and it trades tax efficiency at death for concentration risk in the interim.
The Behavioral Side of Concentration
Every tool described above has one thing in common: a decision.
And decisions about concentrated company stock are unusually hard to make.
The potential pain of selling before a further run-up feels more vivid than the protection gained by diversifying. Overconfidence in the company’s prospects (which is natural when you’ve spent years contributing to its success) makes the risk feel manageable. And the sunk cost fallacy is ever-present with equity that was earned rather than purchased: selling feels like undoing something, instead of a rational portfolio decision.
A systematic approach removes the recurring decision point. That’s the planning work we do with C-suite executives at Five Oceans: designing a diversification strategy that accounts for your tax picture, insider trading constraints, and timeline.
But the financial structure is only part of it. Underneath the concentrated position are usually equally important questions: how much of your identity is still tied to this stock?
What does financial security look like once the position is diversified?
What is this wealth for?
Those are Life Strategy questions. If you’d like help answering them, I’m here.
