How to Make Decisions About Stock-Based Compensation

Just over a year ago, I published an article titled “How to Prevent Regret After RSUs Vest” in collaboration with a fellow financial advisor. In that article, we encouraged readers to view stock-based compensation through the lens of their financial goals and to make decisions ahead of vesting day to avoid undue risk and stress. Although they appreciated the advice, we noticed that some clients found themselves second-guessing their choices when the big day arrived. So, in this post, I wanted to share a math-based framework for analyzing decisions about stock-based compensation and answer some of the questions that surface in these moments.

What is Stock-Based Compensation?

As a reminder, stock-based compensation (also known as equity compensation) is a non-cash “award” granted by an employer that comes in the form of company ownership, typically as part of the employee’s overall compensation package.

Stock-based compensation comes in several forms, with restricted stock units (RSUs) being the most common. With RSUs, companies grant restricted shares annually, but make them subject to a vesting schedule. In other words, on the grant date, they promise the employee a set number of shares, which they will receive over time, presuming they stay with the company. Once shares vest, employees can sell them immediately. Shares typically vest quarterly or semiannually, creating regular decision points about whether to hold or sell.

Equity compensation often feels abstract (many clients call it “pretend money” or “funny money”). Yet with proper planning, its impact on your net worth can be very real. Most people simply ignore their vesting dates, letting the default process handle everything: 22% to 37% of shares get sold automatically for taxes (depending on whether income exceeds $1,000,000), and the rest of the shares sit in a brokerage account. While there’s nothing wrong with this hands-off approach, being more intentional about equity compensation typically leads to better outcomes and fewer regrets.

Other popular types of stock-based compensation include the following:

• Incentive stock options (ISOs): An opportunity to purchase company shares later for a set “strike price” (a.k.a. “exercise price”), typically subject to an expiration date. ISOs are not taxed until employees sell their shares.¹
• Non-Qualified Stock Options (NSOs): NSOs also allow employees to purchase shares in the company at a set price within a specific period of time. However, the employee must pay ordinary income tax on the difference.¹ For example, if the fair market value is $200 on the exercise date (the date they assume ownership) and the set price is $100, they owe ordinary income tax on the $100 spread, known as the bargain element.
• Employee Stock Purchase Plans (ESPP): The option to purchase company stock at a discount (typically 15%).

Since tax treatment varies for each type of incentive (and RSUs are more common), we will focus on RSUs in our analysis.

Why Do Companies Give Stock as Compensation?

Stock compensation benefits both employers and employees. For companies, it’s an effective way to incentivize employees without draining cash flow, leaving more funds for business investment. It also encourages employees to “think like an owner,” motivating them to help the business succeed while discouraging turnover (since leaving means forfeiting unvested shares).

As an employee, stock ownership creates a stronger connection to your company and its goals. If the stock performs well, you benefit financially. However, like all investments, there’s risk. The stock may never gain value or could decline. You also risk losing unvested shares if you leave the company.

That’s why we encourage proactive risk management. Some people are willing to bet everything to get rich, while others prioritize steady, long-term growth with better odds of success. Regardless of your approach, planning is essential since daily life can easily cause you to “forget” to act on your equity holdings.

A Step-By-Step Process for Making Decisions

Even people who develop a plan sometimes struggle to follow through when their vesting period arrives. Below is a process for thinking through your options and doing the math to see the potential impact of your choices. These steps assume you have stock about to vest or recently vested, but you can also apply them to stock you already own.

1. Determine the necessity of selling the stock when it vests.
   
   • Is the stock a bonus, or is it meant to augment a lower salary?
     If your employer granted you stock to supplement lower base pay, selling might be necessary to cover your expenses or maintain a sensible savings plan. If you need the money, don’t overthink it, just sell the shares. 
   • Would holding the stock expose you to concentration risk?
     This is where working with a financial advisor becomes essential. We help clients determine exactly how company stock fits their investment and financial plan, calculate how much they can safely keep, and create a strategic timeline for selling and diversifying funds. Getting this wrong can put your entire financial future at risk.
     
2. Do the math to see the potential risk or reward of remaining invested in one stock.
   
   If the stock is truly a bonus, ask yourself: If I had received this money in cash, would I have used it ALL to buy my company’s stock? Because that’s essentially what happens when RSUs vest. Most people would say “No.” But sometimes, even though we know something logically, we still need to see the numbers.
   
   Therefore, we prepared a simple spreadsheet to analyze the potential impact of holding that stock for one year or more vs. selling it and investing the money in an index fund. We encourage you to experiment with the various inputs to explore all possible scenarios. The spreadsheet is accessible by clicking the button below. Here is what you will need to complete this exercise.
   
   • The current stock price.
   • Your cost basis.
     With RSUs, the cost basis is the stock’s market price on the day the stock vests. You should receive a communication documenting that figure. However, other types of stock-based compensation can differ. For instance, if you are granted stock options at a promised “option price,” that could be lower or higher than the current share price. Therefore, our spreadsheet is only for analyzing shares you officially own (either through RSUs, an option exercise, or an ESPP).
   • The number of shares remaining after vesting.
     When RSUs vest, companies typically sell a portion of the shares to pay taxes before issuing the remaining shares to you.
   • Your state’s income tax rate (if any).

Also, here is an example of what the analysis looks like with fictitious numbers.

Your analysis will depend on your situation, but seeing the information in black and white will help you be realistic. 

3. Examine your results, then ask yourself the following questions.
   • How confident are you in the possibility of your company’s stock price increasing vs. decreasing?
   • How comfortable are you with the real risk of betting that this company will significantly outperform the index?
   • Is the potential gain worth the increased risk (and stress) of remaining invested in one stock? In other words, the stock value could skyrocket, but it could also tank. Are you willing to risk losing the entire value of that stock, or would you prefer to diversify? To show you what we mean by this, consider the following.

Real-World Example: Amazon vs. Vanguard Growth ETF (VUG)

Let’s look at how concentration versus diversification has played out with Amazon stock compared to the Vanguard Growth ETF (VUG) over different time periods ending May 21, 2025:

1-Year Performance: Amazon returned 9.58% while VUG returned 16.14%. In this short timeframe, diversification won by a meaningful margin.

5-Year Performance: Amazon delivered 61.03% compared to VUG’s 120.96%. Again, the diversified approach provided nearly double the returns of holding just Amazon.

10-Year Performance: Here’s where the story flips dramatically. Amazon returned 848.99% versus VUG’s 306.19%. The single stock crushed the diversified portfolio by nearly 3-to-1.

Source: StockAnalysis.com

The Key Takeaway

These numbers perfectly illustrate why equity compensation decisions are so challenging. Amazon happens to be one of the most successful stocks of the past decade, but notice how unpredictable the outcomes were across different periods. Even with a winner like Amazon, there were extended periods where you would have been better off diversified.

That is the fundamental tension with company stock concentration. You could have life-changing returns if your company becomes the next Amazon. But you could just as easily watch your concentrated position underperform for years, or (worse) lose significant value if the company struggles. The range of potential outcomes is simply much wider with a single stock than with a diversified portfolio.

Another Factor to Consider

Amazon’s explosive 10-year returns raise an interesting question about company life cycles. Amazon is now a massive, established company with a $2.2 trillion market cap, and it continues to be amazingly inventive, constantly expanding into new markets and technologies. Earlier-stage companies with smaller market caps may have different growth trajectories than large, mature companies. Some investors believe smaller companies have more room for dramatic growth, while others prefer the proven innovation track record and resources of established players.

If you work for a newer, smaller company, your equity compensation might follow a completely different path than Amazon’s. The potential outcomes could be higher, lower, or follow an entirely different timeline. This uncertainty is exactly why the concentration versus diversification decision is so personal.

The math shows no “right” answer, other than an approach that aligns with your risk tolerance and financial goals.

At Golden Road Advisors, we help tech professionals navigate complex equity decisions, exactly like these, every day. We will analyze your situation, model different scenarios, and create a personalized strategy that balances growth potential with wise risk management. 

Stock-Based Compensation Decision Time FAQs

Of course, even when we think we have everything figured out, more considerations can arise. Here are some of the common questions we get at this stage.

1. I was planning to sell my stock when it vested, but the price dropped before I did so. Does the quarterly vesting cycle cause that (i.e., does the market react to each vesting date)? Should I hold it for a few days until the price comes back up?
   
2. I wanted to keep my stock, but the price shot up right when it vested. Should I take my money and run?
   
3. What if my stock vested just before my company issued dividends? Should I modify my timing in any way? Doesn’t a company’s stock drop when it pays dividends?
   
4. My company’s stock price was stagnant, but now it is climbing. Should I hold it when it vests, even though I had planned to sell it?

5. How do I know if I own “too much” company stock?

These are all perfectly logical questions from people experiencing market conditions or messaging, but my answer is always the same. We know how hard it is to make a move sometimes, but stock prices go up and down, and you simply cannot predict what will happen. Don’t let your emotions take control.

If your goal is to build wealth over time, and you had planned to sell, stick to your plan – time in the market beats timing the market. However, if you have done the work and decided to take the risk of keeping this stock, stay the course. That is the entire point of planning. You can always revisit that plan and make a different choice after the emotions of this moment have passed.

Don’t let the complexities of equity compensation keep you up at night. Let’s build a plan that works for your unique circumstances. Feel free to contact us with any questions.

¹Footnote

ISO vs. NSO Tax Treatment

Incentive Stock Options (ISOs): An ISO is an option granted by a corporation to an employee to purchase the stock of that corporation at a future date at a set “exercise price.” When the employee exercises their right to buy the stock at the set exercise price, the difference between the exercise price and the stock’s fair market value is not taxable as income. 

It should be noted that for exceptionally high-income earners, the difference between the exercise price and the fair market value is potentially includable in a separate tax called the Alternative Minimum Tax (AMT). When the option is exercised, the exercise price becomes the cost basis of the stock, and the difference between the two is taxed at advantageous long term capital gains rates, as long as the stock was held for more than 2 years from the option grant date and more than 1 year from date of exercise. 

Non-Qualified Stock Options (NSOs): NSOs are also options granted by a corporation to an employee to purchase the stock of that corporation at a future date, but they lack certain tax benefits that ISOs possess. When an NSO is exercised, if the fair market value of the stock is greater than the exercise price, the difference between the two is taxed as ordinary income. The stock’s fair market value at exercise then becomes the cost basis of the stock going forward. 

Alternative Minimum Tax (AMT) applies to everyone, but it does not create additional tax for everyone, and it will not increase an unaffected taxpayer’s tax liability. Each taxpayer must compute their tax liability under regular income tax and AMT, then pay the greater of the two potential tax liabilities. AMT differs from income tax in several ways, with one key difference being that specific adjustments must be made to income, such as adding to income the difference between the exercise price and fair market value of an ISO.

Disclosure: The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.