It’s extremely common to meet executives (or early employees) with a huge portion of their net worth tied to the company they work at.
And while that concentrated position may have helped build serious wealth, it can also become one of the biggest financial risks they face.
If this is you, here’s the truth: concentration creates wealth, but diversification preserves it.
Let’s talk about how to manage this position and minimize tax as you diversify out:
A concentrated position in my mind means more than 25% of your net worth is tied up in one stock.
For many executives, it’s much higher—sometimes 50-90% or more.
This usually happens through:
It can feel like a golden ticket, but here’s the issue: when your career, income, and net worth are all tied to the same company, you’ve stacked a lot of risk in one place.
Many stay concentrated because they are so worried about taxes, so here are a few strategies that can be used to help you diversity out:
One common strategy people use is direct indexing.
Why?
Direct indexing allows you to generate losses so you can then sell out of the stock with less taxes by using those losses to offset the gains. One of the best ways to do this is through long short direct indexing.
This means you go long and go short around the index as well to generate even more in losses.
This is a strategy we have found works very well to minimize tax on the sale of concentrated positions.
This is a more complex strategy, but one that I really like for the right person.
A prepaid variable forward essentially works like this:
When we leverage this, we use those funds to direct index or long short direct index
This allows you to diversify into way more positions, but also generate losses for when you want to actually sell out of the stock.
This strategy is a lot more complex than this, so work with a qualified advisor who can walk you through it all.
Another option here to minimize tax is to donate some of the shares.
If you donate the shares, you get:
This could be done via:
This is a great way to take care of charitable giving for years to come while also minimizing tax.
Not a strategy I typically recommend, but it exists.
Exchange funds basically allow you to trade your concentrated stock position for a piece of a more diversified portfolio—without having to sell your stock and pay taxes right away.
Here’s how it works:
Over time (usually 7+ years), you can exit the fund and get a mix of different stocks—spreading out your risk and delaying capital gains taxes until you sell those new shares.
This one is less about taxes and more about managing the position. Sometimes people still want to hold the stock, but they want to protect the downside.
Using a collar you basically put a cap on the floor and the ceiling.
This can be good since it protects you, but it also limits the top in exchange for receiving income.
You can then use this income to buy other positions and diversify.
This is also not my favorite, but it is an option that some choose to leverage.
You can also just keep things simple and pick a certain amount of gains you are willing to receive each year.
This could be all your losses + up to $x in gains.
Or it could be something as simple as “ I want to be down to 10% of my portfolio in my company stock within 4 years.” Then you know how much you need to sell each year to get there.
At the end of the day, you have to take the time and think through how you are going to manage your concentrated position. You want to take the right amount of risk, but not too much.
Make sure you're aware of taxes but also make sure that taxes are not the only lens you are looking through.
Financial Advisor