Three strategies to help newly wealthy Silicon Valley techies diversify and avoid huge tax bills

An unprecedented wave of wealth is washing over Silicon Valley, and many tech employees will soon face a problem most people would love to have: what to do with company stock that has become worth a fortune.

SpaceX’s IPO has created thousands of new millionaires, and many centimillionaires. Other private tech companies, including Anthropic and OpenAI, have filed for IPOs, and big public tech companies such as Nvidia have made workers rich as their stock prices soared in recent years.

This kind of wealth comes with a catch. Many tech employees are not sitting on piles of cash. They hold company stock. If they sell those shares, they can face a huge capital gains tax bill. If they don’t sell, they may have too much of their money tied to one company.

Smartly handling this situation is one of the core jobs of wealth managers in Silicon Valley.

Enter Joey Carney, partner and private wealth advisor at Nerd Nation Financial in the heart of Silicon Valley. As SpaceX went public, I asked Carney how tech employees can best handle this lucky — but tricky — situation.

He described three strategies that can help, and suggested one that’s likely the most appropriate for most people.

Exchange funds

An exchange fund lets tech employees put their highly appreciated company stock into a shared investment pool. Other investors do the same with their own concentrated stock positions. In return, each investor gets a piece of the broader pool, rather than being tied to just one company.

The appeal is simple: the investor may be able to diversify without immediately selling their stock and triggering a big capital gains tax bill.

Carney says this strategy is best suited for a narrow group of people: those who are already very wealthy and do not need to use the money during their lifetime.

Imagine a theoretical tech employee, Jane, who was awarded $1 million in equity years ago. That stock is now worth $10 million. If she sells, she could owe tax on the $9 million gain. Instead, she contributes the stock to an exchange fund and receives a more diversified investment.

If Jane later sells that investment, she may still owe tax. But if she holds it for the rest of her life, her children may inherit it with its tax value reset to what it is worth when she dies. If the kids sell soon after, the $9 million tax bill that existed during Jane’s lifetime may be reduced or even disappear.

That is why exchange funds can be powerful for estate planning. But they are not easy or flexible. Investors often must keep their money in the fund for at least seven years. The fund may not accept every stock, especially popular stocks that many people are trying to contribute. Current employees may also be blocked from contributing stock in the company where they still work.

Carney’s view is that exchange funds can work well for ultra-wealthy families focused on passing money to the next generation. For many tech employees who want more flexibility, they may be too restrictive.

Tax-managed long-short

This is more complex. In plain English, it’s an investment account designed partly to create losses that can help offset gains from selling company stock.

That may sound strange. Why would anyone want losses? Because losses can sometimes be used to reduce taxes on capital gains elsewhere. If an employee sells some of their highly appreciated company stock, gains from that sale may be offset by losses created in another part of the portfolio.

Carney describes this as a kind of “loss factory” running in the background. The investor gradually sells their concentrated stock over several years, while the managed portfolio aims to generate losses that soften the tax bill.

This strategy is not for everyone. It involves the hedge fund technique of buying some stocks and betting against, or shorting, others. It may also use borrowed money, which can increase both gains and losses. That makes it more complicated and potentially riskier than a plain investment portfolio.

It can also be expensive. Carney says it usually makes sense only for people with large positions, often in the many millions of dollars, and for investors who understand the risks.

Direct indexing

The third option is direct indexing, which Carney sees as the broadest fit for many tech employees.

Direct indexing is like building your own version of an index fund. Instead of buying one fund that tracks the S&P 500, for example, an investor owns hundreds of individual stocks directly.

The goal is still to get broad market exposure. But owning the individual stocks directly creates more tax-planning opportunities.

Even when the overall market is up, some stocks inside the basket will usually be down. Those losing stocks can be sold to create tax losses. The investor can then buy similar stocks to stay invested. Those losses may help offset capital gains tax from selling your original company stock.

Direct indexing also lets investors customize what they own. An employee with a large stake in one tech company can avoid buying even more of that company in the rest of their portfolio. They can also reduce exposure to a sector where they already have too much risk.

Carney says direct indexing often makes sense when at least two of three things are true: the person has a concentrated stock position to sell, they plan to keep adding money for several years, or they want to avoid certain stocks or sectors.

It is not free, and the tax benefits can fade over time. But compared with the other strategies, it is easier to understand and more flexible.

Life plan first. Strategy next.

Carney’s larger point is that no single tool should drive the whole plan. A strategy that looks great on a tax spreadsheet may be wrong if the person needs cash soon, wants to buy a home, plans to leave money to children, or is uncomfortable with risk.

For newly rich tech workers, the best first step may be boring but important: build a full plan. Figure out what money is needed for life, what can be invested for the long term, how much company stock is too much, and how taxes fit into the picture.

Only then should the strategy come next.

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