How Executives Can Use a 10b5-1 Plan to Automate Stock Sales

You worked hard to build your career, and your company stock may be one of the most valuable results of that success. But when a significant portion of your wealth is tied to the same company that provides your income, deciding what to do with those shares can become complicated.

At Stratos Private Wealth, we aim to help San Diego executives and technology professionals take a more objective approach to managing concentrated equity. You may know diversification matters, but that does not necessarily make selling easier. You may believe strongly in your company, worry about taxes or find yourself waiting for the "right" market conditions. A 10b5-1 plan can provide a predetermined framework for selling company stock, helping you establish a strategy before market movements or emotions influence the decision.

That strategy may be more effective when your equity decisions are considered as part of your broader financial picture. “Our practice aims to take a well-rounded approach. It’s the planning, it’s the investments. It’s keeping in mind tax and estate. I think really I try to take a holistic approach with my client relationships, which allows me to consider different aspects of a client’s financial needs and identify areas where we may be able to provide support,” said Colin Domonoske, Financial Advisor at Stratos Private Wealth.

The goal is not simply to automate stock sales. It is to create a disciplined approach that seeks to connect your equity compensation to your broader financial strategy.

When Familiarity Changes How Risk Feels

Your connection to your company can make its stock feel different from any other investment in your portfolio. You understand the business. You know the people. You may have watched the company grow and seen your equity compensation become a meaningful part of your wealth.

That familiarity can create affinity bias, making a concentrated stock position feel safer than it objectively is.

Familiarity with your company can also influence how you perceive the risk of holding its stock. Tyler Morris, Founding Partner and Wealth Advisor at Stratos Private Wealth, noted "Investors may sometimes underestimate the potential risks of a concentrated position when they are familiar with or have a long-standing connection to a particular company.” Considering a concentrated position in the context of the overall portfolio may provide a more complete perspective on diversification and potential risk.

The result can create a difficult cycle. You recognize the need to diversify, but selling feels like giving up potential future growth. Taxes may make the decision feel even harder. So you wait for the right time, which can leave your financial strategy dependent on a decision you have to make over and over again.

How Does a 10b5-1 Plan Work?

A 10b5-1 plan is a written trading arrangement adopted when you are not aware of material nonpublic information about your company. The plan establishes in advance the amount, price and timing of transactions, or uses a qualifying formula, algorithm or independent third party to determine those terms. Once it is in place, sales occur according to those predetermined instructions rather than decisions you make in the moment.

Because the plan can provide an affirmative defense against insider trading claims, the SEC attaches specific conditions to it. Directors and Section 16 officers cannot begin trading until the later of 90 days after adopting the plan, or two business days after the company discloses financial results for the quarter in which the plan was adopted, capped at 120 days. For people who are not directors, officers or the company itself, the waiting period is 30 days. Officers and directors also certify at adoption that they are not aware of material nonpublic information, overlapping plans are largely prohibited, and single-trade plans are limited to one every 12 months.

Those conditions are the reason this cannot be a last-minute decision. Modifying the amount, price or timing of transactions under an existing plan can be treated as adopting a new plan, which may restart the applicable waiting period.

Your company's insider trading policy, general counsel and designated broker may also have a role in whether and how you can put a plan in place, which is why coordinating early matters. The SEC's summary of the current rule is a useful starting point before that conversation.

Stop Trying to Find the Perfect Time to Sell

You do not have to predict the market to create a disciplined stock selling strategy. In fact, Stratos often uses the principles behind 10b5-1 plans when helping clients create a framework for managing concentrated equity.

A more informed process aims to separate investment decisions from the emotions that can accompany market uncertainty. “We’re looking at analytical market research, not emotion-based or driven to tell us when we should invest. So all these factors come into play and it’s a very delicate balance that you’re trying to walk amongst a multitude of decisions,” said Cynthia Gatlin, Wealth Advisor at Stratos Private Wealth.

Instead of deciding what to do after the market moves, you seek to establish the framework in advance.

For those who are eligible to use a formal 10b5-1 plan, that structure may help reduce the influence of market timing and emotion on future transactions. For others, a similar predetermined strategy aims to provide clarity around when and how to sell. You are not trying to predict whether your company's stock will rise or fall. You are creating a process for managing your equity based on decisions you made when you could step back and consider the bigger picture. That distinction matters when a concentrated stock position represents a meaningful part of your overall wealth.

Make Your Equity Part of a Bigger Plan

A stock selling strategy should not exist in isolation.

The number of shares you sell, when you sell them and how you use the proceeds should be considered alongside your investment portfolio, tax situation, liquidity needs and long-term financial goals.

This is where equity compensation planning in San Diego can play an important role. Rather than treating each vesting event or potential stock sale as a separate decision, you can develop a broader framework for how your equity fits into your financial life.

For example, your strategy may account for how much company stock you are comfortable holding, how quickly you want to diversify and where the proceeds could be directed. Tax considerations can be evaluated as part of that process rather than becoming the sole reason to delay action.

Selling shares is the mechanism. Making sure those shares serve the larger financial strategy you are pursuing is the point.

Turn a Concentrated Position Into a Financial Resource

Diversification does not necessarily mean eliminating your connection to your company's stock. Your appropriate level of exposure depends on your circumstances, objectives and broader portfolio.

What matters is having a clear framework for determining that level rather than allowing familiarity or short-term market movements to make the decision for you.

Once a stock selling strategy is established, the proceeds can become part of a broader wealth plan. Depending on your circumstances, that may include building a diversified portfolio, strengthening liquidity or supporting other long-term financial priorities.

This is where private wealth management seeks to help connect the individual decisions. Your equity compensation, investments, taxes and financial goals do not exist in separate categories. They influence one another.

Build the Strategy Before the Market Gives You a Reason to React

The hardest time to decide what to do with your company stock may be when the market is already moving and emotions are running high.

A predetermined strategy gives you an opportunity to make those decisions before market conditions create pressure to react. A 10b5-1 plan can be one tool for creating that structure, provided you are eligible and the conditions above are satisfied.

Uncertainty is part of investing and no plan removes it. What a plan seeks to remove is some of the unnecessary decision-making from a process that can have a meaningful impact on your financial future.

If you are managing a concentrated stock position, our San Diego advisory team can help you evaluate how your equity compensation fits into your broader financial strategy. Schedule a personalized consultation to develop an informed approach to managing your equity compensation.

Disclaimer. Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets wealth management services. Investment advisory services offered through Stratos Wealth Partners, Ltd., a registered investment adviser. Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing involves risk, including possible loss of principal. Some of the information contained herein has been obtained from third-party sources, which are reasonably believed to be reliable, but we cannot guarantee its accuracy or completeness. The information should not be regarded as a complete analysis of the subjects discussed.