I’ve recently commented that the stock market appears to be on a diverging path from the real economy, and we need to keep two things in mind: stocks reflect expectations of current and future economic activity, and the effects of recession can vary widely among different parts of the economy.
In the face of a fairly dark economic outlook, stocks have rebounded sharply and the tech sector has been among the larger contributors. During this period, many startups have been hard hit while their larger, publicly traded counterparts are in (comparatively) better shape.
Some of this is expected
At first glance, it isn’t surprising that tech is doing well right now as it is almost never delivered to an end customer as an in-person service. To the extent that new technology enables automation, remote capabilities, or cost efficiency, the value proposition remains intact. Additionally, having already embraced remote work, tech firms were better prepared than most for all employees to work from home.
Consumer-oriented tech is highly affected
Among firms that are closely tied to consumer activity (restaurants, retail, and travel), layoffs have been particularly severe. This would imply that they don’t expect consumer behavior to return to normal in the near term. In the U.S., consumer spending accounts for nearly 70% of our economy, so few are completely insulated from recession.
Startups are growth-dependent
Many startups have lofty growth targets, and are not yet profitable, so the expectation is often that they will have to raise new funding to sustain themselves. That means when growth slows, they may need to reduce expenses faster than larger firms, as they don’t want to raise new money in a “down round” (i.e. reduced valuation, implying a negative return to earlier investors).
What if you’re one of the (few) lucky ones?
Concentration in employer stock tends to increase as people receive new stock grants, and this can quickly become an issue if your firm’s stock has rapidly appreciated.
Remember, the purpose of employer stock is to tie compensation to company performance, not tie your financial fate to your employer. Why? Because people with large amounts of stock have a lot to lose, and financial stress negatively affects job performance.
How do I deal with this?
When it comes to employer stock, it’s important to implement a plan to monetize your stock over time, rather than all at once. The key is to find balance among tax efficiency (paying the lowest rate), investment value (selling at an attractive price), and managing liquidity (the cash outlay to buy your stock options). Too often, people make the mistake of solving for one at the expense of the others.
More often than not, people make the mistake of solving for one at the expense of the others. But it isn't their fault either. Why? Because employers rarely educate employees on company stock, and in most industries it is prevalent only at the senior executive level.
If you’d like to speak to a professional investor, contact us for a free phone consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.