Employer stock and RSUs: when loyalty becomes concentration risk

If part of your pay arrives as company stock — RSUs, ESPP shares, options, or 401(k) matching in company stock — you face a problem index fund investors never do: your salary, your benefits, and a growing slice of your net worth all depend on the health of a single company. It feels like loyalty. Financially, it's concentration risk stacked on top of career risk, and it has burned employees at some of the most admired companies in history.

The forms equity comp takes

• RSUs (restricted stock units): shares granted on a vesting schedule. On each vest date, the shares are yours and their value is taxed as ordinary income — exactly like a cash bonus paid in stock.
• ESPP (employee stock purchase plan): you buy company stock through payroll at a discount, often 15%, sometimes with a 'lookback' that makes the discount even bigger.
• Stock options (ISOs/NSOs): the right to buy shares at a fixed price. More common at startups; comes with genuinely tricky tax rules.
• Company stock in the 401(k): some employers match in their own shares. You can usually diversify these — many people never do.

The key insight: a vesting RSU is a cash bonus

The day RSUs vest, you owe ordinary income tax on their full value whether you sell or not. Holding after the vest gives you zero tax advantage on that income — it only starts a new capital-gains clock on future movement. So the honest question isn't 'should I sell my RSUs?' It's 'if my company handed me this bonus in cash, would I use it to buy company stock?' Almost nobody would. Holding vested RSUs is making exactly that purchase, every vest, by default.

A sane playbook

1. Default to selling RSUs at vest and redeploying into your diversified portfolio. Since vesting is the taxable event, selling immediately usually costs little or nothing extra in tax.
2. Max the ESPP if there's a discount and you can float the payroll deduction — then sell promptly. A 15% discount is a 15%+ return in months; capturing it doesn't require holding.
3. Cap deliberate company-stock holdings at 5–10% of your investable net worth. If you want upside exposure, that's plenty.
4. Diversify company stock inside your 401(k) — most plans allow it any time.
5. If you're sitting on a large appreciated position, unwind it over 1–3 years: set a schedule of regular sales (and stick to it), harvest losses elsewhere to offset gains, and consider donating shares if you give to charity anyway.
6. Watch trading windows and blackout rules — and if you're senior enough to have material nonpublic information, a 10b5-1 plan automates sales legally.

The psychology working against you

Everything about employer stock recruits your biases. Familiarity makes it feel safer than 'random' index funds. Endowment makes granted shares feel precious. Anchoring makes you wait for a former high before selling. And workplace optimism is practically a job requirement. None of these change the math: you already have enormous exposure to your employer through your salary. Your portfolio's job is to hedge that, not to double it.

The bottom line

Take the equity comp — it's real pay. Then convert it into diversified wealth on a schedule instead of letting it pile up by default. Sell RSUs at vest, capture the ESPP discount, cap the total at a single-digit slice of your net worth. If your company thrives, your career will pay you for it. Your index funds will be fine either way — and that's the point.

The tax mechanics people get wrong

Two tax misunderstandings drive most bad RSU decisions. First, holding vested shares does not avoid the tax — you were already taxed at vest, on the full market value, as ordinary wage income; the only question holding answers is what happens to the after-tax money next. Selling immediately therefore triggers little or no additional tax, because your cost basis equals the vest-day price. Second, the default withholding is often too low: many employers withhold a flat 22% federal on RSU income, while a well-paid tech employee's actual marginal rate runs 32 to 37% — producing a nasty surprise bill each April for anyone who did not set aside the difference. Check your withholding against your real bracket in the first year of a grant, and remember that selling at vest also keeps your tax records trivially clean: one lot, basis equals proceeds, no spreadsheet archaeology a decade later.

If your plan involves ESPP shares too, the same discipline applies: capture the discount — typically 15%, which is nearly free money — then sell on the schedule your tax situation allows, rather than letting yet another tributary of company stock quietly deepen the concentration you were trying to drain.