Design and Implement a 10b5-1 Selling Plan

10b5-1 selling plans allow employees to schedule future stock sales based on customized criteria, enabling trades even during blackout periods.

Strategy Overview

A 10b5-1 selling plan is a legal document you sign and execute with a broker when your company is publicly traded. You plan details and rules that you pre-specify regarding when and at what price(s) your company stock (or options) will be sold. Once it's established, transactions are executed by your broker (according to the plan rules), even during blackout periods.

Tax Details

Publicly traded companies have to consider, and protect against, insider trading. A few common strategies that most companies use to do this are (1) instituting blackout periods (periods during which no employee is allowed to trade the company shares) prior to reporting quarterly company earnings, and (2) designating senior management and other certain employees as preclearance individuals (employees who need pre-approval to trade company shares, even when not in a blackout). A 10b5-1 selling plan offers a way to navigate these restrictions.

A 10b5-1 selling plan entails working with a broker (typically one your company has partnered with) to create a selling plan for your company stock, options, and RSUs. The plans allow an individual a significant degree of flexibility:

• Most tend to be relatively simple: For example: "sell 1,000 shares every Monday for the next year"

• But complexity is definitely able to be incorporated into plans if desired: For example: "sell 1,000 shares every Monday for the next year as long as the price is between $20-$30 per share. If the price is above $30 per share sell 2,000 shares, and if the price is below $20 per share sell 500 shares. All sales should be specifically from the shares purchased via the ISO exercise on 5/18/2020".

What's most important about a 10b5-1 selling plan is that stock sales are scheduled far in advance. This advance planning provides the individual and the company with legal protection that the sales of company stock pursuant to the plan were pre-determined when the individual did not have future proprietary/non-public information -> protecting against insider trading.

Key Benefits

• Avoids insider trading concerns. 10b5-1 plans came into existence as a way for highly-informed employees (e.g. typically senior management) to be able to make transactions in company stock according to rules they specified far in advance; providing a defense/protection against the possibility of insider trading.

• Ability to sell during blackout periods. Blackout periods are specific times when access to trading company stock is restricted. Companies institute them to protect against the possibility of insider trading. But because a 10b5-1 plan already does that, transactions pursuant to a 10b5-1 plan can occur at any time, including during blackout periods.

• Customized selling criteria. You can customize your 10b5-1 plan based on criteria like date ranges, market prices, number of shares to sell, which shares/options to sell (e.g. different tax lots; strike prices), and more. This provides significant flexibility and control over the timing, amount, and conditions of your stock sales.

Key Considerations/Flags

• Complexity of setup; management; costs. Setting up a 10b5-1 plan requires careful planning and compliance with securities laws. Managing the plan can also be complex and costly, requiring regular monitoring, potential updates to adapt to changing circumstances, and sales typically include commissions (whereas most stock market trades now are free).

• Inflexibility once established. Once the plan is in place, you by and large must follow the established criteria (canceling the plan is sometimes possible, but typically results in "time penalty" before you can create a new one). This means an individual cannot respond to short-term market movements or adjust the plan based on new information.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• If you are a preclearance individual. Preclearance individuals (by definition) frequently have material non-public information, and thus are rarely allowed to sell shares ad-hoc (due to the risk of insider trading). The by far most common solution to this is for them to enter into a 10b5-1 plan.

• If you desire systematic selling, including during blackout periods. A 10b5-1 plan allows you to set predetermined criteria for when and how much stock to sell, providing a structured approach to selling shares, including during blackout periods.

🔴 When to Not Use This Strategy:

• If you are not a preclearance individual and prefer the ability to trade whenever you want outside of blackout periods. The flexibility to trade how much you want whenever you want (excepting blackout periods) can be compelling and value-additive.

• You don't want the complexity or costs of setting up and managing a 10b5-1 plan. A 10b5-1 plan requires time to setup, get approved and implement; and typically has higher transaction costs.

🟡 Consider on a Case-by-Case Basis:

• If you are not a preclearance individual. If you're not subject to pre-approval, the complexity and costs of a 10b5-1 plan may not be worth the benefits.

Note: Many publicly traded companies only allow preclearance individuals to create and implement 10b5-1 selling plans

Example

John is a C-level executive of a publicly traded company, and is a preclearance individual. He currently owns 500,000 shares of the company, and also has RSU grants that vest a total of 15,000 shares every quarter. John would like to divest of a portion of his stock holdings, and sets up a 10b5-1 plan. John works with the broker his company has partnered with for 10b5-1 plans and specifies the following rules:

• Sell 10,000 shares per month for the next two years of stock (John specifies which specific tax lots he desired these to be sold from)

• Sell 100% of all RSUs when they vest (excepting the RSUs that the company will force-sale to cover withholding taxes)