What I Tell Founders About Diversifying Out of Concentrated Stock

Why concentration is the risk nobody plans for

Most founders spend years focused on a single risk: whether the company succeeds. Then it does, and a different risk shows up - almost all of your net worth is now sitting in one stock. I've watched founders who were disciplined about company risk for a decade make no plan at all for personal concentration risk, because nobody told them it was a separate problem.

Here's the short version of what I tell clients: the plan for diversifying out of a concentrated position should exist before the liquidity event, not after. Waiting until after a sale or IPO limits your options and usually costs more in taxes.

What are my actual options for diversifying concentrated stock?

There isn't one right answer - it depends on whether the stock is public or private, how large your capital gain is, and whether you have charitable intent. The three tools I use most often:

Exchange funds. You contribute your concentrated position into a pooled fund alongside other investors' concentrated positions, and receive a pro-rata interest in the diversified pool. You don't trigger capital gains on the contribution, and after a required holding period (typically seven years), you come out with a diversified basis. This works well for founders who want diversification now without a current tax bill, and who are comfortable with the multi-year lockup.

Charitable remainder trusts (CRTs). You contribute appreciated stock to a trust before selling it, avoid immediate capital gains recognition on the contribution, receive an income stream from the trust for a term of years or your lifetime, and take a partial charitable deduction. For founders with real philanthropic intent, a CRT is often the most tax-efficient exit structure available - it's not a strategy I'd recommend purely for tax reasons, but when the charitable intent is genuine, the math is compelling.

Systematic sales under a 10b5-1 plan. If you're at a public or soon-to-be-public company and subject to trading restrictions, a 10b5-1 plan lets you set up a pre-determined selling schedule that executes automatically, regardless of what you know at the time of each sale. This is the most straightforward option and the one that requires the least structural complexity, but it spreads your tax bill over time rather than solving it in one step.

How much of my position should I actually diversify?

I don't think there's a universal percentage, and I'd be skeptical of an advisor who gives you one without knowing your situation. What I do think is true: once a position exceeds somewhere around 10-15% of your net worth, you're carrying company-specific risk that isn't being compensated by extra expected return - you're just exposed. For founders who've just been through a liquidity event, I usually start the conversation by asking what dollar amount of loss, in a bad scenario for that single stock, would actually change their life. That number tells you more than a percentage rule does.

When should this planning start?

Before the transaction, not after. QSBS eligibility, the choice between structures, and even which diversification tool makes sense can depend on decisions made 12 to 24 months before a deal closes. Advisors who engage at closing are working with fewer options than advisors who engage earlier - not because they're less capable, but because some of the best tools are only available before certain dates and events, not after.

If you're sitting on a concentrated position and haven't built a diversification plan yet, a 30-minute discovery call is a reasonable place to start.