What is a 10b5-1 Plan — And Should I Participate in Mine?

by | Nov 12, 2017 | Financial Independence, Stock Options, Tech Industry

What is a 10b5-1 Plan — And Should I Participate in Mine?

by | Nov 12, 2017 | Financial Independence, Stock Options, Tech Industry

Restricted stock units (RSU), incentive stock options (ISO), and nonqualified stock options (NQ) are all nice to have. Trading windows and lock-out periods, though? Not so much.

10b5-1 plans can help you set up a trading plan that is not limited to set trading windows. These plans allow shareholders like execs and company insiders to trade a predetermined amount of shares at a set time and/or price parameter.

It’s a good option that more and more people in various roles have an opportunity to consider — from the C-suite to other leadership roles like managers and senior team members.

But before you elect to participate in your company’s 10b5-1 plan, you’ll want to fully understand what it is along with all the benefits and potential pitfalls.

What Is a 10b5-1 Plan?

The Securities Exchange Commission (SEC) established Rule 10b5-1 to help insiders avoid accusations of insider trading while still allowing executives and other leaders within an organization to participate in the market with company stock.

With a 10b5-1 plan, insiders can create a written plan of when they will buy or sell shares at a predetermined time. An executive may choose to sell a certain amount of shares every other Thursday, for example.

Plans vary in features and structure. But, the rules allow a lot of flexibility around how and when you can sell so long as the decision to sell is determined in advance. That decision cannot be reversed once the plan is in place.

This ensures trades are scheduled when the insider doesn’t have access to material nonpublic information (or MNPI). So even if you’re aware of MNPI at the time of the actual trade, you’re protected because the trade was already scheduled.

Not Just for Executives Anymore

It used to be that 10b5-1 plans were most often used by executives. But today, we’re seeing more and more employees be offered a 10b5-1 plan.

Employees at the director level, those with vice president positions, and even engineering leads are increasingly taking advantage of this tool.

Is it right for you? If you have access to MNPI, you can participate in the company’s 10b5-1 plan — but let’s look at the pros and cons first before deciding.

Advantages of 10b5-1 Plans to Know and Use

There are several benefits of using a 10b5-1 plan. Here are just a few:

Hands-off approach: Many insiders already have enough on their plate. With a 10b5-1 plan, you can set up automatic trades and save time. It’s much less stressful than trying to trade manually.

Practical investing: You’ll get the benefit of dollar-cost averaging when you schedule your trades to happen at regular intervals. That can lower the risk that comes with trying to time the market.

It takes the emotion out of the equation: You’re the most volatile factor in your investment plan, especially if you react to market fluctuations. You’ll avoid playing around with shares on your own with a 10b5-1 plan, which will likely result in a better investing outcome for you.

What to Consider Before Diving into a 10b5-1

While there are clear advantages to using a 10b5-1 plan, the biggest drawback is the cost. We’ve seen an average fee of $0.03 or $0.04 per share on 10b5-1 plans.

But do take these costs with a grain of salt. In cases where you’re eligible for a 10b5-1 plan, it’s important to think more in value and less in cost.

Let’s say you have $0.04 per share on 250,000 shares. That’s a total cost of $10,000. But 250,000 shares at $20 per share is $5,000,000 total value.

In other words, your $10,000 cost is at 0.2% of total value.

Consider, on most days the price of your stock will increase or decrease by more than 0.2%.

That means for nearly every day you hold those 250,000 shares, the estimated cost ($10,000) of the 10b5-1 plan is paid for via the rise in value of your stock. Or, lost when $10,000 flies off the computer screen as the stock price moves down.

You may need to challenge your mindset and consider your finances from different perspectives when dealing with such large sums of money. A $10,000 fee is pennies when you’re planning for millions of dollars.

Don’t Forget the Tax Implications

The best advice we can give for those looking into a 10b5-1 plan: plan ahead! Know that when you sell, you create a tax situation. You’ll want to know what your bill will be ahead of time.

To prepare, set aside the cash now. Evaluate if paying your state income taxes this year can lower your total tax bill by increasing your itemized deductions.

Also, pay attention to any carryforwards or carryovers that may apply. You’ll want to consider factors like capital loss or the alternative minimum tax credit.

Next Steps: Investing Cash from Your 10b5-1 Plan

Your 10b5-1 will automatically sell shares. Remember, that’s a good thing because it removes the risk of human error from the equation.

But when the sale happens, your 10b5-1 will create piles of cash. That’s not so good.

In fact, it can be downright bad if you don’t know what to do next.

You must have a plan for how to invest the cash long before the trade. How you invest will depend on your risk profile and time horizon.

Working with a fee-only financial advisor can help you find the right investments for your situation and give you the objective perspective you need.

Since passing the Certified Financial Planner (CFP) exam in November 2009, Landon has dedicated himself to the needs of busy young professionals. Before joining KB Financial Advisors in 2012, Landon founded Cumberland Wealth Planners in 2010 to serve clients in Nashville, TN. Landon took over the On Your Way to Wealth program in 2014 to help KB Financial Advisors further expand their work with young tech professionals in San Francisco who have stock options.

When he’s not on a plane to San Francisco, Landon lives in Nashville, TN with his wife Melissa and their three children.


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