If you're an executive or high level employee at a publicly traded company, you already know the frustration of blackout periods. Sometimes it feels like they cover most of the year, leaving you with a tiny window to actually do anything with your company stock. There's a reason they exist though, and there's also a tool that can help you work around them. It's called a 10b5-1 plan, and if you have concentrated equity, it's worth understanding.
Why Blackout Periods Exist
Blackout periods exist to protect against accusations of insider trading. As an executive, you often have access to material non-public information (MNPI), things the public doesn't know yet that could move the stock price. Trading during those windows creates risk, both for you and your company.
What a 10b5-1 Plan Actually Does
In 2000, the SEC adopted Rule 10b5-1 to give executives a way around this problem. It allows you to set up a predetermined trading schedule for your company equity in advance. Because the plan is created ahead of time and automated, it creates a defense against insider trading claims. The SEC updated this rule again in December 2022 to tighten up some of the requirements.
Beyond the legal protection, these plans create real financial planning benefits too. You're not selling emotionally or opportunistically whenever a blackout window happens to open. You're selling on a consistent, predetermined basis, which makes it easier to systematically diversify away from concentration risk in a single stock.
The Key Components of a Compliant Plan
For a 10b5-1 plan to hold up, it needs to meet a few requirements:
- It must be entered into in good faith, not as part of a scheme to get around insider trading rules
- You must certify that you're not aware of any MNPI at the time you adopt the plan
- You need to comply with a cooling off period after adoption. For directors and officers, that's typically 90 days, or two days following the disclosure of financial results for the fiscal quarter, whichever is later. For non-directors, it's often 30 days
- The plan needs to specify the amount, price, and date of each transaction, or include a written formula, algorithm, or program that determines those details
How to Set One Up
Setting up a 10b5-1 plan isn't a DIY project. You'll want to loop in your company's CFO or equivalent, along with legal counsel, to make sure your plan is compliant. It also needs to be established outside of a blackout period. If your company recently went public, you may be able to set one up during the lock up period.
You'll also need to work with a brokerage to execute the plan. Some companies have specific rules around which brokerage you're allowed to use, so check on that before you get too far into the process.
Deciding How You'll Sell
When you build out your plan, you're typically setting it up for a defined period, often 12 months. Within that, you'll decide how shares actually get sold. A few common approaches:
- Market price: the simplest option, shares sell at whatever the current market price is
- Limit order (floor) or better: you set a minimum acceptable price, which can help you avoid selling into a temporary dip
- Staggered limit orders: you set different share amounts to sell at different price points, which spreads out your exposure to price movement
- Percentage based formula: for example, sell 90% of vesting shares and retain 10%
You'll also need to keep company specific policies in mind, like any minimum share ownership requirements you're required to maintain.
RSUs vs. Stock Options
These plans can apply to both stock grants you already own and stock options. Keep in mind that options come with a strike price, so your strategy needs to account for that. You can also set different rules for different types of equity. For example, you might choose to sell RSUs automatically upon vest, while taking a more strategic approach with your stock options based on where the price sits relative to your strike.
What to Talk Through With Your Financial Planner First
Before you lock in a 10b5-1 plan, it's worth having a real conversation about your bigger financial picture. Things to consider:
- Your current concentration in the stock
- Your future concentration, factoring in additional vesting
- Your near-term cash needs
- How much this equity is funding future goals
- Your and your spouse's risk tolerance
- The tax consequences of your selling strategy
- Any other personal circumstances relevant to your plan
The Downsides
These plans aren't free, and they aren't without tradeoffs. There's typically a cost per share, often a few cents, which can add up depending on how much stock you're moving. You also lose some flexibility since you're on autopilot for the length of the plan, though for a lot of people that's actually a feature, not a bug. And selling shares can trigger a tax impact, though this is often minimal if you're selling RSUs right at vest. Either way, you want a proactive tax planning team involved so there are no surprises.
Wrapping It Up
If you're an executive with concentrated company stock and you're tired of navigating blackout periods reactively, a 10b5-1 plan is worth a serious look. It gives you a compliant, automated way to diversify on your terms, without the stress of trying to time a narrow trading window. Talk to your CFO, your legal team, and your financial planner before you set one up so it actually reflects your goals.
