I haven’t shared a situational example via email in a bit, but this one came up recently and I thought it’d be valuable to share. As with all of these I modify some of the details in respect to privacy and autonomy. That said however, these are all based very close to reality.
Steve (44) and his wife, Lizzie (38); they have a 12-year-old daughter who loves travel and a large chocolate Doberman named Thor (couldn’t modify that, it’s too good).
Anyway, Steve works for a tech company that you’ve probably heard of, but also probably have no idea what they do.
Not one of the Mag 7s, but a company that helps connect all things internet.
Steve has a respectable base salary of around $220,000, but the largest part of his compensation comes from restricted stock units (“RSU’s”).
Steve also participated in the Employee Stock Purchase Plan (“ESPP”), this comes with a nice 15% discount on the purchase price.
When he began working for the company, we devised a plan with a hard rule: No more than 10% of their liquid net worth would be in the company stock. “Why, that seems low?” You might ask? Well, remember that 100% of his paycheck is already tied to the company.
As part of our process, we notated in our calendar all the vesting dates of his RSU’s and set corresponding Zoom dates to discuss the appropriate next steps.
This most recent round of vesting was interesting, the company stock had appreciated by around 600% year-to-date!
Nobody would ever complain.
However, after a promotion, Steve is now considered an insider (privileged access to material non-public information), he can no longer freely buy or sell the stock without proper disclosure and must follow various blackout periods.
Well, our rule has been broken: Due to the outsized performance, the stock now makes up a whopping 40% of his liquid net worth.
Enter the 10b5-1 Plan
After a quick check with HR, the 10b5-1 Plan is available to him.
For those that aren’t familiar, the 10b5-1 Plan allows executives to:
- Avoid insider-trading concerns
- Create a predictable selling schedule
- Smooth future market impact
How it works
- The executive sets up the plan at a time when they have no material non-public information
- They define (1) date or intervals for trades (2) number of shares (3) price target or family
- Once active, trades execute automatically.
- Executive cannot interfere with, or influence trades.
This is a financial planning win due to the automation, not to mention a huge stress relief for Steve and his family.
Going forward, as the RSU’s vest they will be liquidated based on the definitions we outlined above, and proceeds will sit in a cash accounts with appropriate allocations set aside for taxes.
Our next step is investing the remaining proceeds into Steve and Lizzy’s plan as we’ve set forth: (1) invest in a low-cost diversified portfolio to fund the plan (2) allocate to the annual family travel budget (3) guilt-free expenditures with the remaining balance.
If you or someone you’re close to could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
–Nic
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing. This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
