Planning for Stock-Based Compensation 

Planning for Stock-Based Compensation

By Russell Holcombe, MTx, CFP®

Making the decision to work for a startup or even a late-stage company usually means you’re sacrificing current compensation to receive partial payment in stock—with the expectation that your stock will be worth significantly more in the future. We’ve seen dozens of success stories where after years of working for less than market wages, liquidity events yielded seven-figure payouts when the company sold.

It can be a very good thing, but we have also seen the other side too: working for years on one idea that never gained traction. Although the experience often led to new opportunities, it was not without cost. Time lost is an irredeemable asset.  

Others have chosen a slower but more predictable path by working for a well-established or publicly traded company with market levels of current compensation, along with the added benefit of stock-based compensation plans. Since the company is established, significant increases in stock value are less likely, but the annual stock incentive is more certain. However, as the following table will illustrate, this is also not without risk.   

The chart below shows the 20-year returns for Fortune’s “Most Admired” companies of 1999 as compared to the S&P 500 Index, a diversified portfolio of 500 companies. On average, the stock returns of the individual companies underperformed the index by 80.5%! (1)


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Since stock-based compensation is likely going to be a significant part of your net worth, there are issues you need to reflect on from a planning perspective.

Thinking Differently About Diversification

As the old saying goes: “Don’t put all your eggs into one basket.” But in the case of company stock exposure, you don’t really have much choice. It’s part of your compensation story. Early Webvan employees had a vastly different outcome than early Facebook employees, yet both likely began their careers with equal levels of optimism. If the stars align, it can make you very, very wealthy. On the flipside, it can consume years of your life with little reward. It’s important to understand that being significantly overexposed to one idea can yield wildly different results.  

The point here is that the company you choose to work for, and subsequent performance of the company’s stock, will have a big influence on your future net worth. No matter how hard you try to guess correctly, future stock performance is unpredictable, so you must adopt a different philosophy when it comes to financial planning.

What Should You Do?

My good friend Dennis Ross wrote in a recent blog post about the uncertainties of life: Life can be a puzzle. Thankfully, there are three laws governing every puzzle. 

Law #1: The puzzle maker starts with a portrait.

Law #2: If a piece doesn’t fit, it is in the wrong place.

Law #3: There are no extra pieces.

We all begin our journey with a vision for how we want the story to end—and then life happens. The puzzle pieces end up scattered on the floor, but that does not alter the vision for your life; it just means you must put the puzzle back together using the resources at hand. 

Picking the “right” company to work for and, more importantly, knowing when it’s time to make a change need to be reflected upon at least annually, if not more often. Professional athletes rarely end their career with the team they started with, and the best of these bargain aggressively to maximize their earnings potential. Sometimes that means perseverance and sometimes that means change. 

Know Your Price?

I wish it was as simple as diversifying your portfolio to include more than just your company’s stock as a way to smooth out uncertainty. But that only works to a certain extent because every year, the concentration issue gets better, or worse, depending on your perspective. Your future wealth depends on knowing your number. There is a time to hold, there is a time to sell, and there is a time to make a change regardless of the cost of losing unvested shares. It’s important that you want to own the stock of the company where you work. It’s equally important to think about your future outside of the company.  

From a financial planning perspective, we all have a number. Although we each have different numbers, the math to arrive at that number is the same for everyone:  

Family Overhead / Cash Flow Unrelated to Effort = Financial Independence

The job of Social Security, pensions, deferred compensation plans, and your investment portfolio is to create recurring revenue that exceeds the family overhead. Once your recurring revenue exceeds family overhead, which includes your tax liability, work becomes optional. How many shares does it take at what price to become financially independent? You now have a portrait of financial independence.

Reach Out for Help

Your company’s stock is a significant part of your financial life, so it’s key to work with an experienced financial professional who can help steer you in the right direction and avoid costly mistakes. 

If you would like to discuss your concentrated stock position and how we help clients navigate the complexity, schedule a no-obligation introductory meeting to see how we can help by calling us at (404) 257-3317 or emailing

About Russell

Russell (Rusty) Holcombe is the CEO and strategist at Holcombe Financial, a financial advisory firm serving entrepreneurs and corporate executives and managers. With over 25 years of experience, Rusty spends his days leading Holcombe Financial (a firm his father founded) and providing financial services that help his clients grow and protect their wealth so they can experience financial independence. Rusty is the author of You Should Only Have to Get Rich Once, which has won multiple awards, and created Holcombe Financial’s proprietary financial planning software, which helps clients make smarter financial decisions.
Rusty earned a bachelor’s degree in business administration with a focus in finance and real estate from Southern Methodist University and a master’s degree in taxation from Georgia State University. He is also a CERTIFIED FINANCIAL PLANNER™ professional. In his free time, Rusty and his wife, Regina, tend to their personal farm and grow their own food. You can often find him pursuing his hobby of long-distance running. To learn more about Rusty, connect with him on LinkedIn.



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