Should I Set Up a 10b5-1 Plan? A Comprehensive Guide for Company Insiders

John Boyd, CFP®
August 7, 2023

If you’re an insider in a publicly-traded company, a 10b5-1 plan can serve as an effective financial planning tool. It offers the dual benefits of diversifying your portfolio and mitigating insider trading risk. You may have seen news of prominent executives, like Elon Musk, selling their company stocks immediately after a surge in stock price. This may appear as if they’re strategically trading their company’s stock, but in reality, it’s usually part of a 10b5-1 plan. And, the good news is, you don’t have to be a high-profile executive to set one up.

What is a 10b5-1 Plan?

A 10b5-1 plan is a tool often employed by employees, executives, and directors of publicly-traded companies to systematically sell their company stock. These plans are designed to enable company insiders to sell their stock without risking insider trading allegations. The primary requirement for setting up this plan is the absence of materially non-public information at the time of setup. Once the plan is activated and stock is sold, even if you later acquire materially non-public information, it’s irrelevant as the systematic trading program was set up at a time when such information was not in your possession, hence there generally aren’t negative implications for insider trading.

Key Benefits of a 10b5-1 Plan

Along with providing transparency to the public and mitigating potential legal issues related to insider trading, 10b5-1 plans also offer several other benefits:

Bypassing Blackout Periods: 10b5-1 plans can execute trades even during company blackout periods.
Customization: These plans can be tailored in various ways, including duration, predetermined number of shares to trade at specific time intervals, or even triggering sales at predetermined price levels.
Diversification: 10b5-1 plans aid in diversifying your portfolio and prevent the equity concentration issues often faced by executives and individuals receiving significant equity compensation.

How to Maximize a 10b5-1 Plan

To get the most from a 10b5-1 plan, you can include stock received from RSUs, ISOs, NSOs, and other equity-based compensation. However, it’s essential first to analyze the types of equity compensation you have. For example, if your compensation includes a mix of RSUs, ISOs, and NSOs, it might make sense to exclude the ISOs from your 10b5-1 plan due to their long-term tax advantages.

Furthermore, when setting up your plan, examine which exact shares you are including. For instance, if your company’s stock is trading at $100 per share, and you have acquired some shares at $25 per share and others at $80 per share, avoid the common mistake of placing the lower basis shares in your 10b5-1 plan. Everyone’s tax situation is unique, and in certain cases, it could make sense to sell low basis shares first. Regardless, this is a critical aspect that you or your financial professional should monitor closely.

Finally, consider the duration of your 10b5-1 plan. While it may be tempting to establish a long-term plan for a ‘set and forget’ approach, remember that modifying an existing 10b5-1 plan can be challenging and could attract public scrutiny. Therefore, it is wise to weigh the pros and cons of a shorter duration plan with your advisory team.

What’s Your Next Move?

10b5-1 plans are an excellent way to avoid blackout windows, diversify your portfolio, and shield yourself from insider trading allegations. At MDRN Wealth, we specialize in equity compensation and executive planning. If you feel a comprehensive financial plan review could benefit you, please reach out or schedule some time with us.