Most operators we meet in the six months following an IPO have the same problem framed in two different ways. Their discount broker calls it "diversification." Their CPA calls it a "tax-efficient sale." We call it what it is: an opportunity to correctly transform a life-changing concentration in wealth and risk into a long-term strategy without taking undue risk or sacrificing future growth. Casting a solution for a single-stock concentration is a fact-based analysis that must be undertaken by a team of professionals, yes a (team) of professionals. Correctly addressing a concentration requires at a minimum seasoned wealth managers, sharp legal minds, and world-class accountants who operate in unison to further the key person's goals. Meet our senior practitioners.
The trap of paper wealth
On the day the lockup expires, the operator's net worth is at a point of no-return as the decisions they make over the following days can either make or break them. A decision to hold or sell the stock they believe in, a single missed earnings target, or a noteworthy advance can result in a life-changing net-worth increase or a lifetime of regret and subsistence. In this case, emotions must be checked at the door, and professionals must enter the room.
Our first move on every concentrated-equity engagement is the same: we strip the company name off the position. If the key person did not already own this stock and we handed them the cash equivalent today, would they buy stock in the company and if so, how much?
Why "diversify slowly" isn't a strategy
"Sell 10% a year for ten years" is a plan one could expect from a discount brokerage or an AI bot. The "sell x amount for x years" plan ignores everything that matters: the tax consequences, potential loss of growth, the actual risk analysis within the portfolio. The taxes, company trajectory, and risk analysis are the three guests of honor in any fact-intensive analysis of how to approach a single-stock concentration.
A real plan starts with a fact intensive analysis of the key person's goals, the position's composition, and the path forward will become clearer as to what steps must be taken to achieve the key person's goals without sacrificing opportunity or over-exposing the key person to unnecessary risks.
Four Sails
While there are many strategies for addressing a single-stock concentration, there are four general courses of action or "sails" that may be hoisted to move the concentration down the path of highest value to the key person. The four sails are fundamentally different being timing, structure, jurisdiction, and vehicle, but most all are hoisted at one point or another in response to the findings in relation to the tax posture, company trajectory, and risk analysis associated with the key person's single-stock concentration.
1. Timing
Optimizing the timing is one of the most important "sails" which may be raised to move the single-stock concentration toward a successful conclusion. Federal long-term capital gains, the 3.8% NIIT, state-level capital gains treatment, and any AMT carryforward all behave differently at different income levels. The marginal cost of selling the first $5M and the next $5M may likely not be the same — and it is rarely the same in two consecutive years. The most effective way to "hoist" the timing "sail" is to model the timing in respect to any proposed action and form a plan that compares action(s) over a period of months or often even multiple tax years.
2. Structure
The second "sail" which may be hoisted in furtherance of correctly addressing a single-stock concentration is likely to be a structural evaluation resulting a structural shift. The method in which shares are held often matters more than most would presume. Shares may be initially held individually, but it may be advantageous to restructure ownership to hold the shares in a trust or some other estate-centric structure to minimize overall tax exposure. It may also be more effective to pay some taxes in the present and then save even more taxes in future years.
For example, structure is most often associated with estate tax which can consume a high percentage of one's net worth in the future if assets are allowed to grow unchecked. Therefore, it may be appropriate to pay some gift tax in the present to move an asset which is expected to highly appreciate outside the estate into some species of irrevocable trust to mitigate future estate taxes if the asset's value should continue increasing.
3. Jurisdiction
The third "sail" that can likely be hoisted is of great importance depending on which state the income (stocks) originated (sourced) and where the key person resides at the time of IPO. For key people who relocated to a no-income-tax state during or after the IPO, the question of when sourcing severed is not a trivial concern. Some states, particularly California, New York, and Massachusetts are likely to assert continued sourcing on equity earned during in-state work, even years after the move. The most effective way to evaluate the jurisdictional exposure is through modeling the state income tax exposure on each tranche of stock individually as opposed to generally evaluating the single-stock concentration in aggregate. Because it may be that a particular tranche of stock is taxable in one state from a sourcing standpoint while a similar later tranche would be deemed to be sourced in another more favorable state.
4. Vehicle
The fourth "sail" which is likely to be hoisted after exhaustive analysis will most likely be comprised of one or more of the following: direct sale, 10b5-1 systematic divestiture, exchange fund contribution, prepaid variable forward, and/or a charitable contribution. The foregoing is not interchangeable, and the key person who defaults to the one their discount broker prefers for one reason or another, may be doing so at the sacrifice to some upside potential.
What we model before we move
For a $40M concentrated position, our standard pre-execution package runs roughly 90 days and includes: a per-lot basis schedule, a three-year federal/state projection at three sale velocities, an AMT-with-and-without scenario for each year, a QSBS qualification memo on the founder lots, and a charitable-contribution overlay modeled against the operator's actual giving plan. This analysis is conducted through our tax strategy practice. We do not begin executing until every number in that package has the team's buy-in and the key person's approval.
Calibrating the lockup window
The first 180 days after lockup are not a deadline to liquidate. They are a window to install the machinery that will run for the next three to five years or a dress rehearsal for a lifetime of regret if the wrong decisions are made. A well-built 10b5-1 plan, paired with an exchange fund commitment and a calendared review cadence, removes the operator from the day-to-day decision of whether to sell — which is almost always the source of the worst outcomes.
We also strongly encourage key people not to announce their plan publicly or even informally. Filed 10b5-1s are a matter of record; verbal commitments to colleagues are not. The latter creates social pressure to deviate from the plan exactly when discipline is most valuable. Simply, it is better to avoid speculation and say nothing than to say something and foment uncertainty.
Stacking 10b5-1, exchange funds, and direct sale
10b5-1 for the recurring core. Roughly 50–70% of the planned liquidation, executed on a price-and-time formula, largely eliminates the insider-trading risk and removes key person's discretion.
Exchange funds for the tax-deferred tranche which may comprise roughly 5–40% of the plan. Where the key person has more than a seven-year time horizon and is willing to accept a modified basket of equity positions, an exchange fund contribution defers the gain entirely, provides immediate diversification, and defers the tax decision to a future year.
Direct sale for tactical windows. We find it prudent to reserve 10–25% of the plan for opportunistic liquidations — windows after positive earnings, before known dilution events, or coordinated with a charitable contribution that absorbs the gain.
What this looks like in practice
For one key-person we worked with over a year ago — a post-IPO position equivalent to roughly 90% of household net worth — we sequenced a three-year unwind that combined an exchange-fund contribution, a rolling 10b5-1, a charitable remainder unitrust seeded with a portion of the lowest-basis shares, and a coordinated domicile change that severed California sourcing on the back half of the position. The all-in effective tax rate on the diversified portfolio came in roughly 1,100 basis points below the "sell quarterly and pay the bill" default the key person had in mind before we engaged.
While 1,100 basis points are not exotic, this is a conservative example of what can happen when the correct "sails" are hoisted in the right order. The mistake is treating the "sails" as if one sail will be enough, and frankly, in most cases at least two or three "sails" should likely be out in the wind to achieve the best possible result.