If you currently hold an executive level position at a public company, the odds are good that your legal team has recommended that you set up a 10b5-1 plan. In fact, they may even require it.

Building a proper 10b5-1 plan may seem intimidating at first, but after reading this article, you’ll be equipped with more than enough basic information to build a 10b5-1 plan that is a good fit for you.

What is a 10b5-1 Plan?

10b5-1 plans or 10b5-1 trading plans exist to communicate exactly how employees (aka, insiders) of the company want to buy or sell their company shares without breaking insider trading laws.

Most public companies have trading windows in which their employees can trade freely, but a 10b5-1 plan replaces this timeframe to trade and instead, sets a schedule in which you can buy and sell company shares.

10b5-1 plans usually last at least 12 months, prohibit you from having multiple plans running at the same time, forbid trading outside of the plan, and dictate that the first trades within the plan can’t take place for 30 to 120 days after the creation of the plan (referred to as a “cooling off period” and varies by level of employee).

Why Would You Want a 10b5-1 Plan?

Nobody enjoys being forced to do anything; however, even without being forced to do it, there are a number of reasons why setting up a 10b5-1 plan may be a wise move:

#1 - A 10b5-1 plan allows you to trade without breaking insider trading laws.

The primary purpose of 10b5-1 plans is to create a defense against allegations of insider trading. (Which, as you know, is against the law.)

Since employees/insiders (especially those at an executive level) often have information that the public is not privy to, the legal teams at most companies will advise employees that they cannot trade company stock due to the information they possess. 

A 10b5-1 plan lays out predetermined actions that you want to make in the future with regards to your company stock.

Implementing a 10b5-1 plan allows you to say, “Hey, I said I wanted to buy/sell stock a long time ago, I couldn’t have predicted where the company would be now.” Thus creating an important defense against insider trading allegations.

#2 - A 10b5-1 plan allows you to trade outside of trading windows.

After the “cooling off period” of 30-120 days, you can set up transactions to happen whenever you’d like. You won’t have to limit your trading to open trading windows. 

#3 - A 10b5-1 plan allows you to sell RSUs after vest and ESPP shares after purchase.

In the same vein as #2, it’s common for RSUs to vest and ESPP shares to be purchased outside of trading windows.

For RSUs, this causes a separation between when RSUs are taxed and when you’re able to sell them. Most employees need to wait a few weeks after vest before they’re able to sell their RSUs.

For ESPP shares, it’s a similar case. ESPP shares are often purchased at a discount, but then you have to wait for a trading window in order to sell. This means there’s a chance that the value could drop between the date of purchase and the date you intend to sell.

But with a 10b5-1 plan, you can set it up in a way that allows you to sell your RSUs immediately after vest and immediately after an ESPP purchase. 

#4 - A 10b5-1 plan removes emotion from trading decisions.

Whether your company stock goes up or down, it’s always an emotional decision whenever you buy or sell stock. A 10b5-1 plan forces you to make a decision and not look back.

Tips For Building an Effective 10b5-1 Plan

Since 10b5-1 plans are customized by each individual, it’d be impossible to cover all of the possible customization tips in this article. That said, from our experience helping people establish 10b5-1 plans, we can share a few important considerations you should be aware of while you’re building your plan.

10b5-1 Plan Tip #1 - Get clear on all the types of equity you have.

You can build instructions within a 10b5-1 plan for every type of equity that exists. You will need to first have a clear understanding of exactly what you have since different types of equity are managed completely differently.

For example, RSUs don’t need to be exercised, but ISOs and NSOs do. 

10b5-1 Plan Tip #2 - Gather all the important dates and data for each equity type.

Examples of the important dates and data you’ll want to gather are all the unique grant dates, vesting dates, purchase dates, exercise prices, and expiration dates.

For RSUs, you’ll want to gather all of their vest and/or settlement dates.

For ISOs/NSOs, you’ll want to keep track of their exercise prices, previous exercise dates, and expiration dates. Be careful not to let your ISOs/NSOs accidentally expire by forgetting them in your plan!

For ESPP shares, you’ll want to take note of upcoming purchase dates according to your company’s specific ESPP.

For shares held outright, you’ll want to keep record of the cost basis, the date you acquired the shares, and where they were acquired from (RSU vest, ESPP purchase, or option exercise).

10b5-1 Plan Tip #3 - Think through which equity you want to keep or sell.

Again, this exercise varies by the individual, but you’ll want to think about what equity you want to keep or sell. It ultimately comes down to a question of how much company stock you think you should have and how much equity you need to sell to help accomplish and fund other important financial goals in life.

If you have multiple equity types, you may want to consider a different strategy based on the equity type.

For example, if you have NSOs, perhaps you might want to exercise and immediately sell, whereas with ISOs, you may want to exercise and hold.

Or perhaps you want to be aggressive in building a portfolio outside of your company stock this year, so you may decide that you want to sell everything from every type of equity throughout the duration of a given year’s 10b5-1 plan.

10b5-1 Plan Tip #4 - Determine how long you want this 10b5-1 plan to run for.

Since there are limits to how short (and how long) 10b5-1 plans can run for, you’ll want to think through the timing of when you want the current plan to expire and when you want it to be replaced.

Most plans must be 12 months at a minimum and 24 months at a maximum.

It’s most common for people to stick to 12 months, but that can vary based on the individual.

A reason this is important is because you cannot include grants of ISOs, NSOs, or RSUs that you have yet to receive. If you elect to have a 10b5-1 plan run for a long time, you could end up having equity that sits with no instructions attached. You can technically amend/cancel a 10b5-1 plan, but it’s usually met with some scrutiny.

10b5-1 Plan Tip #5 - Think through the pricing and timing you’re happy with.

In your 10b5-1 plan, you’ll need to determine when you want to sell and at what price. 

Since it’s impossible to know what the price of your company stock is going to be, you can arrange for an infinite number of combinations. 

You can set the lowest possible price you’d accept, the highest you’d accept, you can opt to sell at whatever the price happens to be, or any combination with any percentage of your equity you choose.

One important thing here is that we have seen people building ineffective 10b5-1 plans when they only expect their company stock price to increase. For example, if someone only says, “Sell X shares at X price or above.” it only leaves room for sales to happen if pricing stays where you want it. If the price of the company stock drops, you could be left with a 10b5-1 plan that doesn’t sell anything.

10b5-1 Plan Tip #6 - Have a plan for the proceeds.

Getting a 10b5-1 plan built is a big step, but after your company stock is sold, you’ll want to make sure you’re putting the resulting cash to good use.

If you want the proceeds to stay in cash, great. But if that’s not what you want to do, invest that cash where it will be the most useful and beneficial to you.

10b5-1 Plan Tip #7 - Don’t engage in trading outside of the plan or hedging outside of the plan.

It should go without saying, but if you have a 10b5-1 plan, you need to stick to it. And remember that this also applies to your close relatives and people living within your household.

It might be tempting to hedge against whatever you’ve dictated in the plan, but doing so could put you in jail.

10b5-1 Plan Tip #8 - Know your plan won’t be perfect.

Since 10b5-1 plans require lots of planning ahead with variables that are unknown, it’s impossible to perfectly optimize a 10b5-1 plan. There will nearly always be a decision or two that could have been different and would have resulted in more money in your pockets. Just choose to make peace with this going in.

Do the best you can, and know that you'll have another shot to make a new 10b5-1 plan in a year or so.

Building an Effective 10b5-1 Plan Conclusion

We hope you’ve found our tips for building an effective 10b5-1 plan helpful. When used properly, 10b5-1 plans can be a really powerful tool to help you grow your wealth and keep a healthy balance of company stock and other assets.

We’ve helped executives at numerous public companies build 10b5-1 plans. We’ve done really simple plans and also some complex plans. If you need help constructing a plan that will work best for you, we’re happy to help.

Thanks as always for reading and if you have questions, please reach out to team@equityftw.com.