What is concentration risk and how can charitable giving help reduce it?

If most of your wealth is tied to one company, a single setback can ripple through your finances and affect the charitable causes you support. For founders, executives, and employees with private company shares, that exposure can be hard to reduce because selling or transferring stock often requires permission.

And there is a charitable dimension that is easy to overlook: when most of your wealth sits in a single stock, the charitable assets you can unlock for giving — and the resulting tax benefit for you — ride on that one company’s fortunes. Donating a portion of those shares to a donor-advised fund (DAF) may reduce the donor’s concentrated personal holdings while converting the shares into charitable assets.

Understanding the risk early gives you more time to plan. If charitable giving is already a goal, it also gives you time to consider whether eligible shares could fund a DAF account while they are still highly valued.

Key takeaways

• Company stock can create substantial wealth while tying your financial future and charitable giving capacity to one business.
• Private shares add a second challenge: you may be unable to sell when you need cash.
• Contributing appreciated, concentrated stock to a DAF account can convert the contributed shares into charitable assets while potentially allowing the donor to avoid capital gains tax that could result from selling the shares first.

What is a donor-advised fund?

A donor-advised fund (DAF) is a charitable account you can open through a sponsor like Vanguard Charitable. You contribute assets, including private shares, you may be eligible to claim an income tax deduction for the year in which you contribute, and then recommend grants to the charities you care about over time. The contribution is irrevocable, but you can recommend grants on your preferred schedule.

What is concentration risk?

Concentration risk arises when a large share of your wealth is tied to one company’s stock, leaving your financial goals vulnerable to a decline in its value. FINRA describes it as the risk of “amplified losses” from substantial exposure to a particular investment or market segment [1].

For founders, executives, and employees, that exposure builds over time as ownership stakes and equity compensation grow. When the same company also provides your income and benefits, a setback can affect several parts of your financial life at once — including the resources available for the causes you care about.

For example, if company shares represent 70% of your net worth and their value falls 40%, your total net worth would drop by more than a quarter — meaning fewer dollars for the charitable commitments you have made or hope to make.

Why do founders, executives, and employees end up concentrated?

Growth companies pay a meaningful share of compensation in company stock and equity grants to align incentives and conserve cash. This can concentrate your wealth in company stock that you cannot easily sell, particularly when that stock grows much faster than other savings.

The longer you stay and the more senior your role becomes, the greater that concentration may become. A ten-year employee at a company whose stock has quadrupled may hold equity worth many times their salary. Founders and executives may experience the same dynamic on an ever-larger scale, often with additional restrictions on when they can sell.

For private shareholders, a high company valuation can make your position look especially valuable — but it doesn’t guarantee you could sell your shares, or at that price.

What does research tell us about holding company stock?

Research shows that the stock market’s long-term success does not necessarily translate into success for an individual company. Professor Hendrik Bessembinder studied nearly 30,000 U.S. stocks from 1926 to 2025 and found that only 41.2% outperformed one-month Treasury bills (a very low-risk benchmark) over their lifetimes [2].

The consequences extend beyond underperformance: J.P. Morgan Asset Management found that more than 40% of Russell 3000 companies experienced a decline of at least 70% from their peak that was not subsequently recovered during 1980–2020 [3]. These studies focus on public markets, but the lesson applies: relying on one company is risky even when the market overall does well.

Company stock may have created your wealth, but your future goals should not depend entirely on its continued success. Early planning helps you evaluate what to retain, what to diversify, and what you may want to donate to charitable causes.

How does concentration risk affect your tax benefits and charitable dollars?

Concentration risk has a direct line to two things that shape your giving: the tax benefits you can capture and the charitable dollars you can put to work. Here is how each is affected:

• Your tax deduction depends on the stock’s value today. When you contribute appreciated stock to a DAF, you may generally be eligible for an income tax deduction based on the shares’ fair market value, subject to applicable tax rules and limitations
• You can reduce capital gains tax. Selling appreciated stock triggers capital gains tax. Donating the shares directly to a DAF reduces the capital on which one would have to eventually pay tax.
• Your charitable capacity shrinks if the stock shrinks. The same decline that hurts your net worth also shrinks the pool of assets available to fund your giving: reducing your personal wealth, the potential charitable deduction, and the amount available for charitable purposes.

• A DAF lets you capture the benefit now and decide later. You take the tax deduction in the year you contribute while recommending grants on whatever timetable makes sense for you. The contribution is irrevocable, but grantmaking can unfold over months or years.

   

How can a donor-advised fund help reduce concentration risk?

A donor-advised fund offers a way to reduce concentration and create charitable impact. By contributing appreciated, concentrated stock to a DAF account rather than selling it first, the shares are removed from your personal finances and become charitable assets. By contributing some of your concentrated shares into a DAF, you reduce the portion of your personal holdings represented by that stock while dedicating the contributed value to charitable purposes.

This approach does not require an all-or-nothing decision. Donors who wish to retain a position in their company stock can contribute a portion of their shares to a DAF while holding the rest, depending on their individual circumstances, company trading policies, and lock-up terms.

For those holding private or restricted shares, some DAF sponsors have the infrastructure to accept complex or hard-to-sell assets, including restricted stock, private company interests, and other non-cash holdings, depending on the sponsor’s policies.

Frequently asked questions

Is concentration risk only an issue for founders and executives?

No. It is most acute for founders, executives, and early employees, but any investor with an outsized single-stock position, inherited shares, or a former employer’s stock faces the same dynamic.

What percentage of wealth in one stock is too much?

Though many advisors flag anything above 10–20% of net worth in a single holding as a concentration risk worth addressing, there is no universal threshold.

Are there ways to reduce concentration risk before my company goes public?

Tools such as 10b5-1 plans, secondary sales, and planned charitable contributions may be considered before an IPO, subject to company policies, securities laws, and transfer or lock-up restrictions.

Some donors contribute eligible shares to a DAF as part of pre-IPO planning, since a DAF contribution can be made while shares are still restricted, depending on the sponsor’s policies and the company’s transfer restrictions. Consult your advisors before deciding.

What goes into deciding to contribute stock to a donor-advised fund?

Donors should weigh their charitable goals, liquidity needs, time horizon, broader financial position, and consult with advisors before deciding.

This content is provided for educational purposes only and does not constitute financial, tax, or legal advice. Donors should consult their own legal, tax, and financial advisors before making charitable contributions or decisions about concentrated stock positions.