8 Things to Know About Trading Windows for Employees in Tech
For employees in the tech industry, stock-based compensation often forms a significant part of their total compensation package. This can include options, restricted stock units (RSUs), or other forms of equity awards. Understanding trading windows and the rules surrounding them is crucial to making informed decisions about when to buy or sell company stock.
In this post, we share 8 key things to know about trading windows for employees in tech.
1. What Are Trading Windows?
Trading windows are specific periods during which employees of a company are allowed to buy or sell company stock. These windows are established to ensure compliance with insider trading laws and to maintain the integrity of the stock market.
2. Purpose of Trading Windows
Trading windows are designed to prevent insider trading, which is the buying or selling of stock based on non-public, material information about the company. By restricting trading to certain periods, companies aim to reduce the risk that employees could exploit undisclosed information to make unfair profits.
3. Common Trading Window Periods
Typically, trading windows for employees open shortly after the company releases its quarterly earnings reports. This is because the earnings report levels the playing field by providing all investors with important financial information about the company at the same time.
Commonly, trading windows:
Open one or two days after the earnings release.
Remain open for a few weeks (often two to four weeks).
4. Blackout Periods
Blackout periods are times when trading is prohibited.
They usually occur:
In the lead-up to the earnings report.
Before major company announcements (like mergers, acquisitions, or product launches).
During blackout periods, employees cannot trade company stock because there is a higher risk that they might possess material non-public information.
5. Pre-clearance Requirements
Many companies require higher-level employees to obtain pre-clearance before executing any trades, even during open trading windows.
This process involves:
Submitting a request to trade.
Getting approval from the company’s legal or compliance department.
HOW DIVERSIFI CAN ASSIST CLIENTS NAVIGATING TRADING WINDOWS
Tailored Selling Plan: Our team of advisors can help provide a tailored selling plan specific to your financial goals, risk tolerance, and financial modeling, ensuring that we maintain an appropriate balance of return upside and risk optimization.
Tax Withholding Analysis: Our team can provide a tailored tax withholding analysis of your overall income and investment earnings to ensure that you’re paying enough taxes through tax withholding and quarterly tax payments.
Investment Analysis: If you’re employed at a Top 10 employer in our client base, we provide a tailored investment analysis of your company stock to help inform your selling strategy, which often leads to acceleration or deceleration of your company stock selling strategy.
Selling Strategy: We don’t simply say sell everything as quickly as possible; we take a strategic approach. We recognize that your company stock can be a significant growth driver for your net worth, but we also understand that there can be alternatives.
Reinvestment Strategy: Our advisory team also helps to curate reinvestment strategies to ensure that you’re staying invested to meet your goals and risk tolerance and not simply trading into cash positions, which will lose purchasing power over time.
6. 10b5-1 Trading Plans
Do you ever see headlines like, “Big time CEO sells $X millions or $X billions of company stock?” News outlets like to use this headline as a way to talk about the stock and paint an image that a potential top has been reached for the stock. However, due to trading restrictions, these sell orders are commonly placed many months in advanced through a 10b5-1 plan. A 10b5-1 trading plan is a mechanism that allows insiders to set up a predetermined plan for trading company stock.
These plans:
Must be established when the individual is not in possession of material non-public information.
Outline specific trading instructions (such as the amount of stock to be bought or sold and the timing).
Having a 10b5-1 plan can provide legal protection against accusations of insider trading because the trades are made according to the plan, regardless of any material non-public information the insider might possess at the time of the trade.
7. Potential Tax Implications
When trading company stock, employees should be aware of potential tax consequences.
These can include:
Capital gains tax on profits from selling stock.
Ordinary income tax on the value of exercised stock options.
It’s advisable to consult with a tax advisor to understand the implications and plan accordingly.
8. Staying Informed and Compliant
Employees should stay informed about their company’s specific trading policies and procedures.
Possible actions you can take:
Attend training sessions (if offered).
Review company communications regarding trading windows and blackout periods.
Consult with your company’s legal or compliance department if there are any uncertainties.
Final Thoughts
Trading windows for employees are a critical component of maintaining fair and legal trading practices within tech companies. By understanding and adhering to these windows, employees can ensure they remain compliant with insider trading laws and make informed decisions about their equity compensation. Always seek professional advice and stay informed about your company’s policies to navigate trading windows effectively.
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