What are 10b5-1 Plans and Should I Use One?

Many of you remember when well-known domestic guru Martha Stewart went to prison for insider trading. For those of you who do not remember, we’ll provide a brief recap.

Martha Stewart is a writer, businesswoman, television personality, and owner/founder of Martha Stewart Living Omnimedia. She is the publisher of Martha Stewart Living magazine and previously hosted two television programs (Martha Stewart Living and Martha). In 2004, Stewart received hefty fines and five months in jail for selling company stock after learning that the company she was invested in (ImClone) would soon experience a rapid drop in price because the company failed to get FDA approval for a new drug it had been working on. Martha Stewart got into trouble because: (1) She possessed insider information (no FDA approval), and (2) she acted upon that knowledge for her gain.

Stewart’s experience serves as a cautionary tale for all of us. Why? Because if you are a mid- to high-level employee at any company, it’s likely that you possess insider information which can, if you aren’t careful, put you at risk of engaging in insider trading yourself. So, how do you protect yourself?

10b5-1 plans are schedules that you arrange with your company’s legal team and your company’s stock plan administrator to give them advanced notice about what you plan to do with the equity you own.

Insider Information,Trading Windows, & Trading Restrictions

If you’ve worked at a public company and received equity, you’ve likely already experienced some restrictions when trying to sell company shares. 

For example, companies provide open windows in which employees can freely sell their company shares. However, if you’re working on a project or know something that other employees don’t know, you may receive an email notice from your company’s compliance department telling you that you will not be able to sell company shares during the next open window or for some other designated period of time.

Of course, this can be a major bummer if you were planning to sell company shares during the open window.

It isn’t against the law to have insider information - executives and other key employees often (in fact, usually) have insider information. It’s the sharing of this information and acting upon it that completes the insider trading circle of illegality. Remember this and don’t become a Martha (well, just the unethical Martha. Being a successful, millionaire Martha is great). 

10b5-1 Plan Basics

As mentioned above, a 10b5-1 plan is a schedule you provide to your company’s legal team and your company’s stock plan administrator.

Within this schedule you make four major decisions/declarations about the company equity you own in advance of any transaction to sell (we’ve color coordinated these four decisions to go with our sample 105b-1 plan even farther below):

1. What type of company shares you plan to sell

• Shares can stem from Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Restricted Stock Units, and Employee Stock Purchase Plan shares.

2. How much of each type of equity you plan to sell

• 10b5-1 plans get really specific. You’ll be required to provide specifics for each equity type. Down to each grant, and potentially each vesting date.
• A common example of the fine detail required here is that you may have to include the specific grant numbers from each equity grant and then itemize how much from each grant you want to sell.

3. When you want to sell company shares

• In your 10b5-1 plan, you will set the dates you want to sell company shares.
• Typically you’ll keep your 10b5-1 plan in place for a year, so you’ll want to make a plan to sell company shares throughout the entirety of the 10b5-1 plan.
• A common detail to be aware of is your future vests of RSUs. You can declare that you’d like to sell RSUs on a specific date after they’ve vested or as they vest.

4. The price for which you want to sell company shares

• There are different types of orders that you’ll be able to request. The two most common types of orders are limit orders and market orders.
• For limit orders, you’ll select a price per share that you’re okay selling for. When the date arrives and the price is at the price you designated or higher, the stock plan brokerage (ETRADE, Morgan Stanley, Etc.) will sell the shares you’ve designated to sell. Note: If the price of the limit order is never reached, no shares will be sold under these directions.
• For market orders, you state that you’ll accept whatever price you can get when the time comes to sell your company shares. Market orders are used most when you care more about selling your shares than selling them at a specific price.

Simple Example of a 10b5-1 Plan’s Scheduled Sales

Here’s a simple example of what an actual 10b5-1 plan looks like when you submit it to your stock plan administrator. The plans are typically formatted in Microsoft Excel, which can be kind of a pain to make pretty, but as long as your 10b5-1 plan accomplishes your plan to sell company shares, it’s done its job.

There’s a lot going on here, but we’ve tried to color coordinate the sample 10b5-1 plan with the information above.

Under the column, “Security Type” we’ve designated that we would like to sell RSUs.

Under the column, “Number of Shares to Sell” we provided the instruction, “Net Vested.” If you glance at the “Vest Date” under the “Date of Grant” column, you’ll see that the RSUs on the 10b5-1 plan have not yet vested. At the vest date when your RSUs become taxable to you, it is typical that your employer will withhold shares on your behalf to cover taxes and then deposit the remainder into your account. This remainder is known as the “Net Vested.”

These instructions to sell the “Net Vested” will result in the 10b5-1 plan selling all of our shares that vest in the future. If you wanted to only sell only a portion, you could state the specific number of shares you’d like to sell instead.

Under the columns “Earliest Sell Date” and the “Date of Grant,” it specifies the instructions for each RSU grant as they vest quarterly. You can check the grant number to make sure everything matches up.

Under the “Order Type” column, instructions are given for the order type. In this example, the order type is a market order, which means that on the sell dates provided, all net vested RSUs will be sold for whatever the company is trading for on that day.

Why Should I Use a 10b5-1 Plan?

Establishing a 10b5-1 one plan protects you from allegations of insider trading and allows you to trade freely within the confines of the plan.

We highly recommend using a 10b5-1 plan if you’re an employee who is consistently exposed to insider information or who consistently receives emails from your compliance team saying that you aren’t able to sell stock for x number of weeks.

As you can see from the example, a 10b5-1 requires that you relinquish a sizable amount of control over your stake in the company you work for. Once you’ve put instructions in your 10b5-1 plan and the requirements to sell company stock are met, your shares will be sold regardless of what insider information you may possess later. However, we believe relinquishing that bit of control is necessary to protect yourself from the risks of insider trading. That is precisely why big-time CEOs use 10b5-1 plans when selling company stock. 

Why Shouldn’t I Use a 10b5-1 Plan?

If you’re a rank and file employee who is not often subject to insider information, you probably don’t need to establish a 10b5-1 plan. If this is the case in which you find yourself, then the trading windows your companies provide should be enough for you to sell company shares and get the cash liquidity you need for other investments.

Conclusion of 10b5-1 Plans

10b5-1 plans are a must-use if you’re receiving a lot of company equity and are exposed to insider information on a consistent basis. If that doesn’t sound like you right now, at least you’ll be prepared should you need to use a 10b5-1 plan in the future.

If you’d like help with your 10b5-1 plan, please reach out to us. We can assist you in setting up your customized plan. In addition, we’ve published an article breaking down our top 8 tips for building a 10b5-1 plan.

As always, thanks for reading.