Most people mess up equity compensation for one reason: they treat it like a stock they chose to purchase, not like pay. The hard part isn’t understanding Restricted Stock Unit (RSU) vesting. The hard part is respecting what vesting is: your employer paying you, on their schedule, in their stock.
Start with the tax reality. RSUs are typically taxed as ordinary income when they vest. That means, for tax purposes, vest day is payday. Not “someday money.” Not “house money.” Payday. Your W‑2 will reflect it, payroll taxes will hit it, and your tax withholding will do its best (sometimes a sloppy best) to keep up.
So, the clean mental model is; when your RSUs vest, you just got a cash bonus, and you immediately chose to use that bonus to buy shares of your company. Vesting is not just a passive event. It’s an automatic purchase unless you sell. Once you see it that way, a lot of confusion disappears. People say, “But I already paid the tax, so selling feels like I’m giving something up.” No. Paying tax doesn’t make holding smart. Paying tax just means you received compensation. The next question is investment logic: if you were handed the same amount of cash today, would you use it to buy a big position in one stock—the same company that already pays your salary?
For most households, the honest answer is “not that much, not that concentrated, and not without a plan.”
This is where behavioral finance often overshadows logic. Because concentrated company stock doesn’t feel as risky as it actually is. It feels like being loyal to the company. It feels like being “part of the mission.” And then the cycle turns—earnings miss, revenue guidance gets cut, layoffs start—and people learn the hard way that career risk and stock risk often move together. The same event can hit your income and your portfolio at the same time. That’s not diversification; it is a big bet on one company.
It’s not perfectly accurate to say all options are taxed as ordinary income. Non-Qualified Stock Options (NSOs) typically create ordinary income on the spread when the options are exercised. Incentive Stock Options (ISOs) can be different (AMT and capital gains rules come into play). But the economic reality is the same, the income is compensation tied to the job and therefore you should manage it like compensation with rule-based financial planning that is aligned with your life goals—not like a high-conviction long-term investment that deserves unlimited room to grow.
A practical policy most people can live with is a “default sell” framework: On vest, sell enough to cover taxes (and understand that income tax withholding may be short). Then sell additional shares until your company-stock exposure is back inside your chosen concentration limit. Route proceeds to a pre-decided destination: emergency fund, debt payoff, diversified investment portfolio, or a goal bucket like a down payment on a home.
The magic here is removing the monthly debate. If every vest triggers a new argument with yourself, you’ll eventually lose to a narrative, a coworker’s confidence, or a hot streak on the stock chart. You need defaults because willpower is a finite resource.
What should the concentration limit be? There’s no universal number, but there is a universal process. Set a limit that respects (a) your cash flow needs for the next 12–24 months, (b) your job stability and industry cyclicality, and (c) how catastrophic a drawdown would be to your life plan.
And don’t confuse “I believe in the company” with “I can afford to hold this much value in one company.” You can believe in the company and still diversify. In fact, if you believe, you should be around long enough to benefit from it. Blowing up your plan with concentration risk is the opposite of loyalty to your future self.