Using 10b5-1 to Help Individuals With Concentrated Equities

Written by: Justin Dime, CFP® | November 15, 2022

For many executives, it is easier to accumulate equity and equity options than to diversify out of them in an optimal way. In fact, if handled incorrectly, individuals can face penalties and / or lawsuits around transacting in their company’s equity positions. More specifically, the regulations around insider trading put key employees at risk of lawsuits by angry shareholders and/ or governmental organizations. As the stock price fluctuates, one may be tempted to either buy or sell options or shares at “opportune” times to maximize their return. Doing this without regard to the insider trading laws, company blackout windows or even the perception of using insider knowledge can lead to legal scrutiny.

The challenge then becomes how can an “insider” effectively diversify out of a concentrated equity position in their own company’s stock? This is especially critical if a big portion of an individual’s net worth is tied up in their company’s stock, and they want to use some of that value to address their financial goals such as purchasing a house or paying for their kids’ college educations.

In many cases, utilizing 10b5-1 plans is an effective approach. These plans help to predetermine when and how much one will divest of positions ahead of time, minimizing regulatory risk, while also aiding in the diversification of these concentrated positions in a way that aligns with your financial goals. As we’ve seen in 2020 and 2021, those once coveted appreciated positions can quickly turn to out-of-the-money options and a feeling of regret. Having created a plan, employees are able to minimize the emotional decision-making, capture the stock’s value, and better control their tax implications.

10b5-1 plans are created in conjunction with the plan administrator for your company. The process involves designing a specific plan of what, when, and how much of each stock you plan to exercise and / or sell for the future. These plans radically decrease the probability of insider trading lawsuits since the timing is scheduled far in advance.

Everyone’s situation is unique and specific to the different options they hold, their liquidity needs and timing requirements. Successful 10b5-1 planning requires familiarity with both your specific financial goals, and the inner workings of your equity compensation arrangements. It can take some time to model a plan, have it reviewed by the administrator, and verify it for accuracy. In addition, to overlay this plan with your tax profile and financial modeling requires considerable attention to detail. 10b5-1 plans are extremely useful, but require careful, advanced financial planning.

Have more questions? I encourage you to reach out to our experienced team. Bordeaux can assist you in developing a 10b5-1 or other equity compensation planning. To learn more about how we helped a BWA client with a 10b5-1, click here for a client case study.

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Important Disclosures

The material has been gathered from sources believed to be reliable, however BWA cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. Investment Advisory services are offered through Bordeaux Wealth Advisors, LLC. Advisory services are only offered where Bordeaux and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.