Category: Glossary

Open window

Open windows are periods when executives, employees, and other inside shareholders are free to sell their company stock (subject to the broader rules restricting insider trading). In other words, such shareholders are not within a blackout or lockup period.

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Lockup period

A period of time after a company completes its initial public offering (IPO), when executives, employees and other inside shareholders are prohibited from selling their company stock. Specific terms depend on the agreement the company has with the investment bank underwriting the IPO, but a typical lockup period includes the six months following the IPO. The intent is to promote pricing stability immediately following the IPO.

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Insider Trading

The illegal act of buying or selling a company’s stock based on confidential information you possess. For example, if you’re aware your company is about to announce a major setback or advance that is likely to affect its share price, it would be illegal to sell your shares before the news has been made public.

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Blackout periods

Also referred to as blackout windows, these are periods of time when executives, employees and other inside shareholders are prohibited from selling their company stock. Blackout periods usually precede and follow earnings announcements and similar times when there are heightened risks that insider trading could occur. (It may be possible to trade during a blackout period by having a pre-determined 10b5-1 plan in place.)

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10b(5)-1 Plan

These plans allow an executive or employee to enter a pre-determined program for the future sale of company stock at times when trading may otherwise be prohibited, such as during blackout periods or while in possession of material non-public information. So long as they satisfy the rules and regulations for a properly drafted 10b5-1 plan, the trades are permitted.

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Withholding

When Restricted Stock Units vest and/or you exercise your Non Qualified stock options, your employer is likely to withhold value/shares from the transaction to cover your estimated taxes due. This is similar to paycheck withholdings to cover estimated taxes on your salary. Taxes are typically withheld at a Federal 22% tax rate (or 37% if it’s over $1 million in supplemental income) plus Social Security, Medicare, and state income tax, if applicable. To avoid facing an unpleasant surprise when you file your annual return, it’s important to work with a tax planner to ensure the withholding is sufficient, with no additional estimated taxes due.

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Vesting

When granted equity compensation, there’s usually a period of time that must elapse prior to the value becoming yours (for restricted stock units) or you having the right to exercise them (for stock options). Once you meet the requisite timeline, you are considered vested. Terms vary, but vesting typically occurs in stages. For example, 25% of your shares may vest after a year has passed, with additional amounts vesting monthly over the next several years. As your options vest, you can then exercise those shares if you wish, and purchase company stock. If you leave the company, you are likely to lose unvested shares; you may have a window of time during which you can exercise vested shares, after which you can no longer do so as a former employee.

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Tax-sheltered accounts

There are myriad accounts whose holdings receive tax-favorable treatment, such as your company’s 401(k) plan, traditional and Roth IRAs, 529 college savings accounts, health savings accounts, and others. Each type is subject to different tax treatments as you add or remove funds. But for all of them, interest, dividends and capital gains on holdings that remain in the account are not taxed along the way (nor can capital losses be used to offset the untaxed gains). For some account types, you do incur ordinary income taxes when you withdraw assets from the account. As always, your tax professional can advise you on the details.

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Taxable accounts

Unless an account specifically qualifies for tax-favorable treatment, it’s a taxable account. For example, when you sell shares of a security held in a “regular” bank or brokerage investment account, capital gains are taxable; and capital losses can be used to offset those gains. Any dividends or interest earned on taxable account holdings are taxable as well.

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Hi, I'm Daniel Zajac, CFP®, EA

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Understand what you have, what you should consider, and what ultimately matters to you.