Equity compensation is a valuable tool. If managed properly, it can create significant wealth for executives and entrepreneurs in the tech, startup, and HR space.
If you receive equity as part of your compensation package, you’re likely already aware of the potential for significant financial gain. But you may have questions about how to manage and maximize the value of your equity awards while minimizing risk.
That’s where a 10b5-1 plan comes into play. This strategy mitigates risk and allows you to avoid a concentrated position in the stock of your company.
What Is a 10b5-1 Plan?
A 10b5-1 plan allows employees and executives with equity compensation to automatically sell company stock as it vests without being subject to insider trading rules or blackout windows. It is named after Rule 10b5, which was established by the Securities and Exchange Act of 1934 to prohibit the purchase or sale of securities based on material, nonpublic information (MNPI).
In 2000, the Securities and Exchange Commission established Rule 10b5-1, which lets employees and executives of publicly traded corporations set up a trading plan to sell their company stock. Since many employees who receive equity comp are considered to have access to MNPI, a 10b5-1 plan can help them avoid accusations of insider trading.
Who Can Benefit?
Any employee who receives equity compensation can benefit from a 10b5-1 plan, though such plans are specifically designed to address the insider trading challenges executive-level employees, directors, and officers face.
If you receive equity compensation on a regular basis, a 10b5-1 plan may be a good choice for you.
We JLFranklin Wealth Planning has decades of experience assisting executives with the design and implementation of 10b5-1 plans. Specially, we have helped clients:
- Monitor enrollment periods and trading windows
- Review plan paperwork and move through the implementation process
- Understand the plan via our custodial relationship with Schwab
The benefits of participating in a 10b5-1 plan are many, including:
- Diversification: Consistently selling company stock is an effective way to maintain diversification in your portfolio and mitigate risk. Holding onto vested shares ties your retirement savings and long-term financial security to the performance of your company. What would happen to the value of your investment portfolio if changes in management, industry regulations, or stock market volatility caused your company’s stock price to drop significantly?
- Lock in Wealth: By automatically selling your shares as they vest, you are utilizing dollar-cost averaging and selling the stock consistently. As the market goes up or down, you sell no matter what. If you wait to manually sell shares, however, you run the risk of trying to time the market and making the wrong decision. Or, potentially worse, you may get too busy to sell. With a 10b5-1 plan, your shares are automatically sold according to the terms of your plan agreement, allowing you to capture the wealth as you earn it. Additionally, you’ll avoid blackout windows, as sales can happen even when you’re not in an open trading period.
- Defense Against Insider Trading Claims: One of the biggest benefits of the 10b5-1 plan is that you don’t have to worry about insider trading rules. Since a 10b5-1 requires participants to delegate investment discretion to an independent third party, it offers an additional layer of protection against insider trading liability.
ETP vs. 10b5-1 for Googlers
- Google has two options that allow you to sell your shares at predetermined times, outside of specified open trading windows, without running afoul of insider-trading laws: Alphabet Inc.’s Employee Trading Plan (ETP) and a plan that complies with Rule 10b5-1. With either, you can automatically sell your Google shares as they vest throughout the year.
- With the ETP, your shares are automatically sold as they vest, which is sufficient for most Googlers. If you have a large quantity of shares to sell and want to incorporate strategic tools such as limit orders, the 10b5-1 plan allows for more customization.
Enrolling in a 10b5-1 plan comes with conditions and disclosure requirements, including the following:
- The plan must be subject to a written agreement and established at a time when the participant is not in possession of MNPI.
- The plan must clearly state the number of shares, the price, and the dates on which the shares should be sold.
- Participants are prohibited from providing any additional direction regarding how, when, and how many shares are sold after the plan is adopted.
- A 90-day cooling-off period is generally required between the date the plan is adopted and the first day of trading. Check the terms of your plan for specifics.
Consider your individual situation before enrolling, as you won’t be able to make modifications once a plan is in place.
Many of our clients set the duration of the plan to one year, so they have the flexibility to adjust the trading strategy periodically. You may also add specific price limits to the plan, which enables you to stay disciplined in your trading strategy rather than react based on emotional input as the stock price changes. Alternatively, you may set up your 10b5-1 plan to sell upon vest, regardless of the price at that time.
Although you can sell all your company stock using a 10b5-1 plan, you don’t necessarily have to, and you may put only a portion of your shares into the plan.
How We Help
If you are an executive at Google, Meta, or another tech company looking for guidance with your equity compensation, please reach out. Our team has over 25 years of experience helping successful entrepreneurs, individuals working in tech, and HR professionals turn their complex equity compensation into long-lasting financial freedom. Schedule a consultation to find out if we can add value for you.