Stock-based compensation (SBC) can be extremely lucrative, but there are some important risks that recipients should be aware of.

First of all, SBC should be considered in conjunction with the rest of an investment portfolio. For most employees I talk to, their SBC position is quite large compared to the rest of their stocks. Such concentrated positions are very risky. Just imagine losing 20% or more because of an undiversified portfolio. After shares vest, it becomes possible to reallocate a portfolio into several other stocks or funds.

Secondly, SBC tends to create large tax liabilities. For long-term positions, unrealized gains compound along with the tax owed on these gains. Liquidating the shares creates a taxable event, which might conflict with the need to reallocate and diversify. Ultimately, realized gains tax is unavoidable and the need for liquidity outweighs the desire to avoid tax.

Both of these problems can be solved with a specialized investment strategy. Quantitative Indexing is an approach which provides a bespoke strategy based on the investor's SBC position. The target portfolio excludes stocks that correlate closely with the investor's concentrated positions. With aggressive tax-loss harvesting, the SBC position's gains are offset against accumulated tax-losses. Gradually, the investor's portfolio flows from their SBC holding into a diversified portfolio all while minimizing gains tax.