Diversifying Wealth When Most of It Is Tied to Company Stock

As a late-stage startup employee or founder, having most of your wealth tied to company stock presents both tremendous opportunity and significant risk.

While your equity may represent years of hard work and potentially create life-changing wealth, concentrating your financial future in a single asset is risky. This blog explores strategies for thoughtfully diversifying your wealth while navigating the complexities of startup equity.

The Trap of Concentration: Understanding the Risk

Your equity type and restrictions significantly impact your diversification options. Whether you hold RSUs, options, or founder shares, each comes with different tax implications and selling restrictions that will shape your strategy. Your vesting schedule establishes the timeline for when your equity fully becomes yours, often creating natural decision points for diversification planning.

Startup equity often feels personal. You know the company. You believe in the vision. You may even have helped build it. Overexposure to a single asset (especially a volatile one) is the financial equivalent of living on a fault line. This emotional connection makes diversification both financially essential and psychologically challenging.

The liquidity risk cannot be overstated. If you can’t access your wealth when it matters most, whether to cover a tax bill, buy a home, or ride out a market downturn, you’re operating without a safety net. For those holding pre-IPO or post-acquisition shares with restrictions, this can become a real problem that compounds during market volatility.

Building Your Tax-Efficient Exit Plan

Before selling a single share, bring in a financial advisor who understands equity nuance: QSBS exclusions, AMT planning, 83(b) elections, and liquidity staging. Your first move should be to understand what’s taxed, how much, and when.

The qualified small business stock (QSBS) exemption represents a potentially transformative tax advantage if your shares qualify. The exemption may allow you to exclude up to $10 million in gains or 10 times the taxpayer’s cost basis in the stock from federal taxation if specific holding period and company criteria are met. This single strategy can preserve millions in wealth that would otherwise go to taxes.

Timing becomes a critical element of tax efficiency. Selling over a multi-year horizon to avoid stacking taxable income can significantly reduce your effective tax rate. For example, spreading $5 million in gains over three tax years rather than recognizing it all at once could reduce your tax burden by hundreds of thousands of dollars.

For those with incentive stock options (ISOs), strategic exercise timing that considers the alternative minimum tax (AMT) impact can mean the difference between a manageable tax bill and a crippling one. The AMT trap has surprised many executives, forcing emergency equity sales just to cover unexpected tax obligations.

Start Selling—Even If You Still Believe in the Company

One of the most powerful approaches is what some advisors call “playing with house money.” When your equity position has appreciated significantly, consider selling 15-25% for meaningful life goals. This gives you liquidity for plans like education, home purchases, or even a sabbatical while maintaining substantial exposure to future company growth.

Remember: “You’re not giving up on the company; you’re just protecting your win.” This mental reframing is key to overcoming the psychological barriers to diversification. Not to mention, if your compensation plan includes ongoing grants or performance shares, you’ll likely rebuild your position over time anyway.

The alternative (holding on for dear life) places an enormous bet on everything going perfectly. While the upside potential remains, so does the risk of “one missed milestone, regulatory delay, or company pivot” changing everything. History is full of companies whose trajectories seemed unstoppable until they weren’t.

Implement a Barbell Portfolio Strategy

Once you begin diversifying, the barbell strategy provides a sophisticated framework for balancing security and growth potential. Rather than placing your assets in moderate-risk investments across the board, this approach intentionally creates a bimodal risk distribution.

On one end, allocate a substantial portion (perhaps 70-80%) to safe, highly liquid assets: U.S. Treasuries, money market funds, and low-cost index ETFs. This core provides stability, preserves capital, and helps ensure you have accessible resources regardless of market conditions.

On the other end, maintain exposure to asymmetric growth opportunities with 20-30% of your portfolio. This might include thematic ETFs in sectors you understand, venture funds with exceptional managers, or new private investments that leverage your industry expertise. The key is that these investments should have a return potential significantly higher than public markets to justify their inclusion.

The barbell approach acknowledges both your need for security after achieving significant wealth and your desire for meaningful growth. It creates what many successful founders describe as “the freedom to take risks without the need to.”

Get Intentional with Liquidity Planning

Liquidity isn’t just about having cash. It’s about strategic alignment with your life goals. Start by establishing a robust safety net of two to three years of living expenses. This buffer provides breathing room and decision-making power without forcing panic sales during market downturns.

Beyond this foundation, create purpose-driven liquidity allocations:

• Education Funding: Fully fund 529 plans or other education vehicles for children or grandchildren.
• Strategic Debt Elimination: Pay off high-interest obligations while potentially maintaining low-cost debt.
• Experience Accounts: Pre-fund major life experiences like sabbaticals, extended travel, and passion projects.
• Philanthropic Vehicles: Establish a donor-advised fund that provides immediate tax benefits while allowing for thoughtful giving over time.

By assigning specific purposes to your liquidity, you transform it from a passive safety measure into an active enabler of your life vision. This intentionality helps overcome the inertia that often keeps wealth concentrated in company stock long after diversification would be prudent.

Advanced Tax Optimization Strategies

Multi-Year Installment Sales: For substantial equity positions, consider using installment sales to spread capital gains over multiple tax years.

This move involves selling your equity to a buyer who pays you over time rather than all at once. The tax benefit comes from only recognizing gain in the year payment is received, potentially keeping you in lower tax brackets over several years rather than pushing all income into a single high-tax year.

This approach requires careful structuring and documentation but can result in hundreds of thousands or even millions in tax savings for significant equity positions.

Charitable Remainder Trusts: For those with both philanthropic intentions and significant unrealized gains, charitable remainder trusts (CRTs) offer a powerful combination of benefits. By transferring appreciated equity to a CRT before a liquidation event, you can:

• Receive an immediate tax deduction for the present value of the eventual charitable gift
• Avoid immediate capital gains tax on the appreciation when the assets are sold
• Receive income from the trust for a specified period (up to 20 years) or lifetime
• Support charitable causes important to you with the remaining assets

This strategy works particularly well for founders or early employees sitting on substantial paper gains who also have charitable inclinations.

Strategic Asset Location: Beyond deciding what to invest in, sophisticated diversification includes optimizing where those investments are held. Different account types receive dramatically different tax treatment:

• Taxable brokerage accounts offer flexibility but tax exposure.
• Roth IRAs provide tax-free growth for qualified distributions.
• Traditional IRAs or 401(k)s offer tax-deferred growth.
• Health savings accounts (HSAs) can provide triple tax advantages.

By strategically allocating specific investment types to the most tax-advantaged locations for that asset class (e.g., high-growth investments in Roth accounts, income-producing assets in tax-deferred accounts), you can significantly enhance after-tax returns without changing your investment mix.

Reinvest with Purpose, Not Ego

Post-liquidity, it’s tempting to dive headfirst into angel investing, venture funds, or building the next big thing. However, reinvesting should serve your strategy, not your ego.

Ask yourself hard questions: Does this investment align with your life goals? Are you investing for returns or reputation? What would happen if it all went to zero? By keeping high-risk assets capped at a reasonable percentage of your portfolio (perhaps 5-10%), you help ensure that no single bet can shake your financial foundation.

Many successful founders find that their knowledge and network create exceptional angel investing opportunities. However, approaching these with a disciplined framework rather than emotional enthusiasm improves outcomes dramatically.

Consider creating an annual allocation for high-risk investments, developing clear investment criteria, and treating these activities as a portfolio rather than a series of individual bets.

Plan for the Life Beyond the Exit

This isn’t just about money. It’s about space. Space to think, explore, and design what’s next, without urgency or financial pressure.

Your diversification strategy should reflect your personal goals, whether that means funding time for sabbaticals, travel, mentorship, or simply being present with family. You want to structure the portfolio to generate the cash flow and security needed to support these objectives without requiring continued employment or company performance.

The most successful founders and executives recognize that true wealth isn’t measured just in dollars but also in options. It’s the freedom to choose how you spend your time, energy, and talents. Effective diversification creates those options in a way that concentrated equity simply cannot.

Conclusion: Diversification Is Liberation

Startup equity is how you built your wealth. Diversification is how you keep it.

It’s not about walking away from your company. It’s about securing your future, protecting your family, and creating space for what comes next. Whether that means selling now, holding tight, or implementing a sophisticated combination of strategies, the most powerful move you can make is an informed one.

The most successful executives and founders recognize that diversification isn’t just a financial strategy. It’s a form of risk management that ultimately enables them to continue taking bold professional risks from a foundation of personal financial security.

By implementing these advanced strategies with appropriate professional guidance, you can help transform a concentrated equity position from a potential vulnerability into an enduring foundation for multigenerational wealth.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.