A Rule 10b5-1 trading plan is not exclusively for C-level employees anymore. In fact, if you work in biopharma, it is very likely that if you receive a stock option grant, you will have to use a 10b5-1 trading plan in order to be able to trade and sell your company stock. SEC regulations dictate your company’s insider trading policy and consider it a breach of your fiduciary duty if you trade your company stock based on material, nonpublic information.
The popularity and use of these plans have increased significantly over the past few years. Having employees adhere to these trading plans protects company shares from excessive selling volume, therefore reducing stock price fluctuations. Most importantly, however, 10b5-1 trading plans protect you, the executive, from any insider trading allegations.
It is possible that you will receive a large part of your compensation in the form of company stock, which can impact your net worth significantly. You may want to sell these shares to fund goals or to diversify your wealth, so that you don’t tie up a large chunk of your net worth in one stock. Establishing a 10b5-1 trading plan will allow you to sell out from company stock while protecting yourself from accusations of insider trading.
What Is It and How Does It Work?
A 10b5-1 trading plan is a written document that must be drafted while you are not in possession of nonpublic, material information about your employer’s company. Your plan must be established during an open trading window period, which will be communicated to you by your company. For the plan to be compliant and effective, it should specify the number of shares that will be sold, within a specific period and at a certain price.
There is lots of flexibility within a trading plan. You can specify the shares in dollar amounts, which grant you might want to sell fully, and you can even identify a percentage of a specific grant or your vested options.
You can also specify at what price you are willing to sell your stock. 10b5-1 trading plans will allow you to sell at market, or after a certain increase of the stock price, and you can put in limit orders as well.
How to Implement Your Plan
You will most likely implement your plan with the designated brokerage firm that is the custodian for your company’s equity compensation plan. Your plan should be reviewed and approved by the in-house counsel of the brokerage firm and be executed by a trading broker.
I recommend that you work with a financial advisor if your situation is complex and you have various option grants. Your company stock is most likely big part of your net worth and selling stock using a trading plan will have tax consequences. An advisor will use a valuation model (such as Black Scholes) to help you identify which option grants to sell to meet your goals, but with the least impact on your taxes.
Once you can identify your most immediate financial planning goals, as well as your long-term wealth planning goals, it will be easier to implement your trading plan on an ongoing basis.
Do you have any questions on this topic or any other pressing financial topics? We would like to hear from you. Please feel free to email Beata Dragovics.
Securities offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Advisory services offered through Freedom Trail Financial, LLC are separate and unrelated to Commonwealth. Freedom Trail Financial, LLC does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. This content is provided for general informational purposes only and should not be construed as individual advice.
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Founder, Freedom Trail Financial
Beata Dragovics is the founder of Freedom Trail Financial, an independent wealth management firm. A woman-owned and-operated financial planning firm, Freedom Trail Financial works with biopharma and tech professionals, families, and women clients in the Boston, Massachusetts area, the heart of biotech.
As the principal and a financial advisor at Freedom Trail Financial, Beata is a continuous resource to her clients in times of change. She helps clients think differently about their future, clarify their goals, and see how financial planning can be in alignment with their personal values and lives
Beata holds the FINRA Series 7 and 66 securities registrations (through Commonwealth Financial Network). She earned her bachelor’s degree in business management from the Budapest Business School and her master’s degree in financial planning from the College of Financial Planning.