Going to jail for insider trading is no good. Thankfully, though, there are ways you can legally buy and sell stock in the company you work for to build wealth without going rogue.
Trading windows give insiders an opportunity to sell their shares without worrying about violating insider trading laws or dealing with the limitations surrounding insider trading.
There are four trading windows per year, and they usually occur one to two days after each quarterly earnings call. They typically last between four and six weeks.
Here’s what you should know about these opportunities — and how to make the most of them as a tech employee who may receive stock options and a chance to grow wealth from a recent IPO.
Trading Windows Around IPOs
When a company goes public, there’s typically a lockup period that employees need to adhere to. During this time, you can’t take action on or sell any of your shares. Your lockup can last anywhere from three to six months, but the exact timing can be a bit of an unknown.
What you should do after your lockup depends on your options. For example, if you have restricted stock units (RSUs), you’ll want to sell them as soon as possible after they vest.
If you have other stock options, you’ll want to exercise them early in your trading window.
In some instances where you have RSUs along with other options, you may be able to do what’s called the “sell to cover strategy.”
Here’s how it works:
- Sell your RSUs.
- Exercise and sell some of your non-qualified stock options (NQs) on the same day.
- Use the funds from your RSUs and NQs to cover the cost of exercising your incentive stock options (ISOs).
In any case, it’s important to consider the costs involved. Specifically, you’ll want to know the cost to exercise your options and the cost of the extra alternative minimum tax (AMT) generated from exercising your ISOs.
Most actions you take around your stock options will trigger some kind of tax consequence, and evaluating your options to determine which tax bill you’ll get is the most favorable can get complicated.
Consider enlisting the help of a financial and tax professional who can help you navigate the complexities of AMT and anything else you should consider around taxes. Making mistakes in this area can cause you to give a whole lot of your newfound wealth to the IRS.
Either way, you could find yourself exercising your stock options during a trading window. If this is the case, then the sooner you execute, the better. Don’t procrastinate and end up missing your opportunity.
Let’s Use Tesla’s Trading Windows as an Example
The cost of that missed opportunity can be real and massive. Unfortunately, we saw that first-hand from a client who made some mistakes before coming to us.
They worked at Tesla, and in the past, they exercised and sold a combination of stock options to cover the cost of exercising all of their vested ISOs.
Our client then held the ISOs, and planned to continue doing so for one year to qualify for long-term capital gains. Exercising and holding those ISOs created an alternative minimum tax bill of roughly $100,000.
The ISOs were exercised on March 15, 2017 toward the very end of that trading window. This year, the trading window following the Q4 earnings call ended on March 16. The ISO shares needed to be sold on March 16 to qualify for long-term capital gains…
…but unfortunately, March 16th turned out to be a very busy day at work for this employee. By the time our client logged in to sell the shares, the market was closed. The trading window closed along with it and they couldn’t sell their shares.
To add insult to injury, between that day and the next trading window, the company’s shares declined 11%. And in the meantime, all $100,000 of their AMT bill came due on tax day this April.
This is one example of why it is so important to have a coordinated strategy with your employee stock options. One part of that strategy is making sure any exercise of ISOs occurs early in the trading window.
What You Need to Think About When Planning Around Trading Windows
It’s not just opportunities you risk missing by failing to put a strategy and plan in to place, and then ensuring you can act on that plan. You put yourself at risk of incurring serious costs by missing your trading window, even by a single day.
If you’re considered an insider and have to deal with trading windows, exercise early in your windows. Doing this will give you the time to take all the actions you need to make for your strategy.
Additionally, you’ll want to exercise ISOs early in the year. By doing this, you give yourself more time to come up with the cash you need to cover your AMT bill the following April.
(You can read a more in-depth post that covers this specific strategy here.)
Don’t forget to evaluate if a 10b5-1 plan is right for you as well. While this used to be just for executives, more and more tech employees are finding it useful as it allows “insiders” to create written plans of when they will buy or sell shares at a predetermined time to avoid potential issues with insider trading.
If you’re not sure you can handle all of this on your own, work with a financial advisor who has expertise and experience with these specific situations can walk you through the process.
A good advisor will teach you how to make educated decisions with your options and help you avoid potential pitfalls while maximizing opportunities for building wealth when they come your way. Click the button below to set up a consultation so we can start making the best trading window plan for you.