“Director Jerry Fiddler unloads 500 shares of …”. I see a headline like that every month or so, and many more like it referring to other directors and officer that I know. And, I get questions. Why did you (or whoever) “unload” the stock? Is there a problem? I assume that other insiders get the same question, and I often see it discussed on stock bulletin boards – “why is the CEO/CFO/whomever selling?”. So, I decided to answer the question for me, personally, and hope that the answer extrapolates to other insiders as well.
No, there’s not a problem. In fact, if there was a problem that I knew about and you didn’t, I couldn’t sell the stock. (More on that later.) I sell the stock for the simple reason that I need the money. I don’t have a job that pays me a salary. As an angel investor, I put money into very young companies, where it stays for a long time – usually years. When that company becomes public, it’s time to take some of the money out, providing money to live on, and also money to do my next investment. Capital wants to move. Even if that weren’t the case (and, after all, not all insiders are professional investors, and some do draw salaries) it’s only prudent financial management to diversify. When a company becomes successful and goes public, many of the early shareholders find that a huge percentage of their personal assets are in one, single stock. It makes sense to move some of that investment to other assets, perhaps including a house.
So, the question becomes not whether to sell stock, but how and when to sell it.
As an insider (all directors, most officers, and many others within a company are considered insiders) I am extremely restricted in when I can buy or sell stock. Every quarter, we are “blacked out” from some period (usually 15 days but sometimes longer) before the end of each quarter until two days after we announce the quarter results. Since the announcement is usually about a month after the quarter ends, thats at least 6 weeks out of every 13 week quarter that we can’t buy or sell stock. We also can’t trade the stock during the other 7 weeks if we have any material information that’s not yet public. That could be a pending big deal, acquisition, or whatever. There was one period of time when I was at Wind River that I couldn’t trade the stock for two full years, because there was always something happening and therefore a trading window never opened.
That’s why the SEC, in its infinite wisdom, created 10b5-1 plans. A 10b5-1 plan lays out a schedule of stock trades, almost always sales. It must be created in an open trading window (not near the end of a quarter, no material inside info, …), approved by corporate counsel, and then filed with an agent (usually an investment bank) that will administer the plan and execute the trades. Once created, I no longer have any control over the plan. Therefore, it is irrelevant whether I’m blacked out, and the plan can trade on its schedule regardless of blackout windows.
The plan can be as simple or complex as desired. It could say, simply, sell 1000 shares (or $1000 worth of shares) on the 15th day of every month, or every third month. It could say sell 1000 shares every month if the price is over X, another 500 shares if it’s over Y, another 500 shares if it’s over Z. A plan like is often cumulative, where if the stock had been below X for three months, when it moves north of X the three months worth of trades are executed. Although plans are not made public, it’s usually pretty easy to see that an insider has a 10b5-1 plan in place because they’re usually quite regular. If you see someone make a sale of 500 shares on the 12th of every month, it’s a pretty good bet that there’s a plan. If you see an insider make a large sale when a stock reaches a new high, especially a round number, it’s very possible that there was a plan in place with a breakpoint at that price and the cumulative sale has occured.
The sales can be weekly, monthly, quarterly, every 10 days, or whatever. Shorter periods lead to lots of announcements of the form “Director Unloads 2 Gazillion Shares”, which just don’t look great. (Insiders must file a form with the SEC whenever we buy or sell, which becomes public info.) Longer periods mean the sales are larger. More importantly, long periods can lead to the appearance of managing the company (announcements, etc.) to affect the stock price at those times, which is a very bad thing. I usually opt for monthly.
Another question I often get is why I don’t buy shares when the stock is down. The problem is that the SEC imposes “short swing” restrictions and penalties. If an insider executes a sell and a buy within six months of each other, the SEC will impose a fine of all the profit for the transactions. Of course, buying more shares of a company that I already own a lot of also flies in the face of diversification, and the ability to invest that cash in other companies. Despite that (and the inevitable argument from my financial advisor), I still do it occasionally when the stock is irresistibly low.
So, what is the moral of this missive? First, insider sales are usually no big deal, especially if they seem like they’re being done under a plan. Second, an insider buy can be a very big deal, because the insider is making the buy despite the short swing restriction that means he can’t sell any stock for at least six months. It doesn’t mean that the insider knows anything specific that you don’t, because if he did he or she couldn’t buy the stock. It does, though, show real confidence in the company from somebody who know it well. There’s an old saying – “There are a thousand reasons to sell, but only one reason to buy.”
Please comment on why Solazyme offers no hard numbers. ZERO.
In the last CC of July 30th, the statement was made that the 2Q volume out of Clinton was 40% more than 1Q. But we were never given a real number for 1Q. We were given vague numbers on the Feb 26th CC,but never did we get hard numbers for 1Q.
What harm could it do to offer hard numbers other than to make SZYM management look like they are obfuscating the truth. What were the real numbers? What? Admitting you made…pick a number….between 1000 and 3000MT is not going to make a difference. But 500MT or less might make a big difference.
Moema- not even fully commissioned yet? Really? Commissioned in the “next few weeks”. Again…few has no meaning really. When does the 12 to 18 month timeline start for Moema. Did it start in May or does it start when the plant is fully commissioned? And when will it actually be fully commissioned? And why would it hurt to put out a PR to say so?
Finally-Wolfson stated the second stage for the ramp up at Clinton will start in “several months”. Is that 2 to 4 months? 3 to 6 months? 4 to 9 months, 8 to 15 months? I have looked up the definition of “several” and it basically means nothing…as you lawyers know.
Why does SZYM give no numbers? There is no “sharing of secrets” here that mean anything. We don’t want to know what you are producing…and that is not threatening anyone’s supply chain.
We are left to believe that this withholding of information is purposeful and meant to hide information to benefit someone other than the shareholders.
Don’t think you will actually answer any of these questions except with non-answer attorney answers,
but thank you for your time
Thanks for the comment, Thomas. This is my blog on the Zygote Ventures site, and therefore not the place for a discussion of specifics regarding Solazyme. I will, though, make some general comments.
Transitioning a company from development into commercial operation is a difficult thing to do. That’s especially true for Solazyme, because of the very large scale, sophisticated first-in-the-world technology, global operations, and diverse, extremely demanding end markets. I think that the nature of the information that Solazyme provides reflects that. They have been quite detailed about what they are doing and how they are progressing, while offering predictions and forecasts to they extent that they are able to do so reliably.
Most management teams love to share news with their investors. After all, they put their life into their company and want you to share their excitement. But the nature of the public market, and the regulations of the market, is that they need to be very careful in doing so.
I believe in Solazyme. That belief is reflected, very concretely, in the investment in time and money that I’ve put into Solazyme over the last 12 years, and continuing today. I hope you share that belief. But, an early stage company like Solazyme is not for everybody. The promise is huge, but the path is not always smooth and predictable. For me, that’s a tradeoff I’m willing to make.
Jerry, Thank you for the excellent and very insightful post. If I understand your comments correctly, it is very difficult for insiders to buy because 1) they must hold it for more than six months or else be subject to short swing penalties, 2) they want to diversify their large holding and 3) are restricted if there is any material information like a pending deal. All together , that explains to me why it seems so seldom that we see insider buying. Please correct me if I have my thinking wrong. Also, I would assume that many successful Silicon Valley high tech start-ups are always in the midst of doing deals, your Wind River being an great example, and therefore find the window seemingly perpetually closed. Is that an accurate assumption on my part?
I am wondering if you care to share your thoughts on the efficacy of BOD initiated stock buybacks on public companies in general? Not the stock buybacks that are designed to limit dilution and help raise EPS over a number of years, but the buybacks that, according to MBA 101, are supposed to send a signal to Wall Street and investors that the BOD has long term confidence in the company. In general, do they have merit in your opinion? I remember during 2008 and 2009 when I could count over 10 public tech companies that were selling below or close to cash per share–net of debt, and would not do a stock buyback, even though there BS had 3-4x times annual opex. I would love to get your thoughts how BOD’s perceive “confidence building” buybacks. Thank you very much. Sincerely, Dave Karson
Yes, David, you’re correct in your assumptions. In fact, it’s even a bit worse than you describe. An insider can’t buy and sell within six months of each other, in either order. So, if one has sold stock, one can’t buy for six months, and also vice versa. Well, actually, you can, but one must pay a penalty of 100% of the financial gain. This is true even if the sale is within a 10b5-1 plan. (disclaimer: I’m definitely NOT a lawyer, so don’t rely on me for legal advice on this! My description is broadly accurate to the best of my knowledge)
As for stock buybacks, I think of it as a capital efficiency question rather than as a signal, though where one comes down on the capital efficiency equation may send a signal. If the company has a potential use for the cash that will increase the value of a share of stock more than the dilution benefit of buying it back, then it should hang on to the cash. Entering in to the decision, of course, is the company’s confidence in its own cash needs, cash generation, and expected capital expenditures. I don’t see a great reason to sit on a huge pile of cash if there’s no good use for it – better to give it back to the shareholders either as a dividend or decreased dilution. But, if there may be a need for the capital, it makes little sense to give it back. In general, it’s much better to err on the side of more cash rather than less. Doing a buyback just to send a signal is a very expensive use of potentially important, and hard to come by, capital. All of this is very much a case-by-case balancing act, always with tradeoffs.