Top 10 Tips for Designing 10b5-1 Plans

By Aria Krumwiede on October 4, 2020

If you are an insider in your company, you know that you have restrictions on buying and selling your company’s stock because of the material nonpublic information (MNPI) to which you are privy.  In other words, insider trading rules make trading any shares you hold complex.

One solution is to use a 10b5-1 plan.  This specially designed plan specifies the price, number of shares, and dates you will transact on your company’s shares.  Because you establish the plan to be carried out at a later date, the SEC’s Rule 10b5-1 presumes that you are not impacting the trades with any MNPI you hold at those later dates.

While 10b5-1 plans can be established for purchasing stock, they are most commonly used to sell shares.  It is critically important to work with your company’s General Counsel, your financial advisor, and tax advisor as you establish your 10b5-1 plan.

Here are our top 10 best practices to consider when setting up a 10b5-1 plan to sell shares:

1. Be strategic about the shares you’re including.

Different types of executive compensation have different vesting and tax characteristics.  Vested Restricted Stock Units (RSUs), vested Performance Stock Units (PSUs), and other types of common shares are helpful to include since you only have capital gains tax remaining.  Non-Qualified Stock Options (NQSOs), that are in-the-money and are also relatively close to expiry, are also good to include.  However, Incentive Stock Options (ISOs) generally should not be included.  ISOs have favorable tax treatment if they meet special rules and holding period requirements.  Including an ISO in a 10b5-1 plan is treated as exercising and selling the stock immediately, which automatically breaks the holding period requirement.

 2. Sequence your transactions carefully.

It’s generally helpful to schedule your high cost basis/lowest tax impact shares to sell first.  That way, if trading conditions are met only briefly and you sell just a portion of your shares at the limit price you set, you minimize your tax burden.  If you structure your trading program to sell the higher tax impact shares later in the plan, you can effectively push a higher tax liability further into the future.

3. Establish your plan for 12 months.

While 10b5-1 plans can be for any duration, it should be long enough to distance your trades outlined in the program from any MNPI you might hold, but short enough to take into consideration changing market conditions and/or changes in your overall financial picture.  An optimal plan duration allows timely adjustments to be made without forcing you to modify or terminate a plan while in effect (which is highly discouraged).  For this reason, we recommend establishing your plan for 12 months.

 An additional benefit to setting up a 12-month plan is that it allows you to incorporate freshly vested RSUs, PSUs, or options in a new plan.  These freshly vested shares could be relatively more tax efficient than your other holdings and, as discussed previously, should be prioritized as you plan the sequence of transactions in your plan.

4. Set your limit price high enough to hit your price target, but low enough to get executed.

As an executive at your company, you likely believe in your company’s endeavors and prospects for success.  As a result, you may be subject to various emotional and cognitive biases about your company’s share price.  In our experience, executives tend to be overly optimistic about their company’s share price.  However, keep in mind that there are many factors outside of your control that can affect the price of your company’s stock.

Remember:  your goal in your 10b5-1 plan is to sell some of your stock.  You determine the limit prices above which your shares will be sold.  If you set your limit price too high, your shares won’t sell at all, and you may not receive the liquidity you’re hoping for from your shares.  One way to help you determine a limit price is to look at the 52-week range of the stock and determine the midpoint at which the stock has traded over the last year.  Then, adjust that median figure by a certain percentage (such as 15% or 25%) on both sides to come up with a range of possible limit prices to use.

5. Consider setting a second limit price.

If you are strongly tempted to set a higher limit price initially, consider allocating a smaller number of shares at a lower price first and then setting a higher limit for a second tranche of shares.  This second tranche will only trade if the share price trades favorably and hits that higher limit price.

6. Be careful not to move the market.

If your company’s stock is thinly traded, if you hold a large percentage of your company’s shares, or both, you’ll need to think carefully about whether the shares that may sell in your 10b5-1 plan could move the market.  In this case, you’ll need to consider using a more nuanced strategy that reduces the shares you sell in each tranche of the plan.

7. Consider a catch-up provision.

What happens if the share price suddenly goes above the limit you’ve set and the shares you’ve allocated for a particular time period don’t sell?  You can build a catch-up provision into your plan that allows any unsold shares from prior tranches to roll over to the next tranche.  However, and as noted previously, be mindful of volume and be careful that you will not move the market if all of your shares sell at once.

8. Build in a 3-month cooling off period.

Most companies only allow 10b5-1 plans to be submitted in an open window, so plan ahead.  The cooling off period is the window between when your plan is submitted and when transactions start.  Because the plan is designed to avoid both the regulatory definition of insider trading and the public perception of it, you want to be sure that you have enough buffer time to strengthen the defense that you are not trading on insider information.  Keep yourself an arm’s length away from these transactions.  A cooling off period of at least three months is recommended.

9. Coordinate with your tax advisor before and during your plan.

Your tax advisor should be involved in designing your 10b5-1 plan, especially if you have ISOs.  Projecting your income will help you create a holistic strategy for exercising your ISOs in conjunction with your 10b5-1 plan.  If your AMT income is likely to be less than your ordinary income in a given tax year, you could receive favorable tax treatment on your ISOs. So, it’s important to know what that threshold is.

In addition, as your plan unfolds, you may need to update your tax withholding elections and make estimated tax payments.

10. Build your plan with your company’s General Counsel in consultation with your financial and tax advisors.

10b5-1 plans are complicated.  There are many nuances to consider to be sure you are complying with SEC regulations and your company’s policies, all while building the optimal plan for you (given your financial and tax situation).  Be sure to consult with your entire financial team.

At Dowling & Yahnke Wealth Advisors, we believe strongly in collaborating with everyone on your financial team.  If you have questions about 10b5-1 plans, other executive compensation elements, or more, please contact us.



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