Are You Playing Roulette with Your Company Stock?

Are You Playing Roulette with Your Company Stock?

 Consider a 10b5-1 Plan. Here’s why. In the casino game roulette, gamblers bet on where a ball will land on a spinning wheel with numbered slots. Players may choose to place bets on either a single number or a range of numbers, red or black, or if the number is odd or even.

A well-placed bet is a diversified bet – one that benefits from various outcomes.

Executives, especially those who just participated in an IPO, often have most of their net worth tied up in their company’s stock. They are doing the investment equivalent of going to Vegas and betting $10 million on black. Of course, gambling and investing are not exactly the same, and there are some good reasons for executives to concentrate their assets in one place. In fact, many of them gained their wealth because they concentrated their assets – in a sense, they won big on a risky bet. The problem arises when executives continue to bet everything on the company even after they have enough assets to be financially independent.

Selling company stock, while an obvious solution, can be difficult for five main reasons:

1) Politics – selling stock is public information for certain insiders, and can be viewed negatively by shareholders or employees.

2) Insider trading – How do you know when you have material non-public information (MNPI)? Trading on this information is considered insider trading, which is illegal.

3) Relativism – pressure of keeping up with colleagues.

4) Tax implications – Some executives receive stock by exercising incentive stock options (ISOs), which provide a tax benefit it you hold on to the stock for at least one year following exercise.

5) Emotions – Inertia, ego and personal feelings may cloud judgment.

As an executive, how do you diversify your investments and secure your financial independence with less heartburn? You can reduce your concentration of company stock by selling during open trading windows.  This gives you the ability to be nimble and have more control.  However, this approach comes with a host of drawbacks, such as:

  • Constantly assessing whether you have insider information can be stressful.
  • Trading windows are only open for a short time following earnings releases, which may not be the best time to sell.
  • Selling company stock can be an emotional and financial decision – executives are often personally invested in their work and can fail to see the bigger picture.

One option to consider is a preapproved sales plan, referred to as a 10b5-1 plan.  These allow executives to establish flexible sales plans for their company stock.

A 10b5-1 plan allows you to specify the number of shares to sell, when you want to sell, and the price at which you are willing to sell.  A 10b5-1 plan can also spread out the sales over time and may include future “blackout dates,” often before earnings are released where executives are not allowed to do any personal trading.  Executives can put as much or as little of their stock in the plan as they choose, which allows the flexibility to sell additional stock (outside of the 10b5-1 plan) during open windows. There is one catch – the plan has to be set up during an open trading window, and when the executive has no material non-public information.

One of my clients has used this type of plan for many years.  When he started, he had well over 50% of his net worth tied up in company stock, and he had reached a point of financial independence.  However, this independence relied on the company’s performance.  He was also concerned with the political implications of selling, and didn’t want to worry about whether he was inadvertently running afoul of insider trading rules.  Navigating the tax maze was also daunting.

By leveraging a 10b5-1 plan to sell his stock, he was simply diversifying his investments rather than appearing as having a negative outlook on the company.  Instead of worrying about MNPI each time he sold his stock, he worried about it just once. Even the tax implications could be accounted for in advance.

Most importantly, the plan imposed discipline. He was able to liquidate company stock on a regular schedule, and his emotions were removed from the equation.  Today, this client is truly financially independent. Not only did the 10b5-1 plan help him achieve the financial outcome that mattered to him and his family, it provided peace of mind along the way.

I’ve seen too many executives bungle their company stock investment by being overly confident or overly negative about their company. 

One bad day at the office can lead to an irrational stock sale.  Inertia, procrastination, relativism are other forces that can disrupt dreams.  Often, the best strategy is a combination of selling during open trading windows and using a 10b5-1 plan.  This provides the benefit of discipline and structure while keeping some flexibility.



The information and opinions expressed herein may not be suitable for all investors and should not be construed as specific investment, tax, or legal advice or as an offer or recommendation to purchase or sell securities of any kind. As Highland does not provide tax or legal advice, please consult your tax and legal advisors for the specific tax treatment of transactions in your account(s) and the impacts on your personal circumstances.







Ben Johnson
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