Hola all,
Can someone please educate me on how to read the insider selling form/site SecForm4.com?
This looks like an ATM machine. I also don’t understand the difference between Indirect and Direct sales, but I do understand that I saw no purchases so far this year. Just wondering if all this selling is portentous. If it were me and I was building capacity to fulfill all my back orders, I think I’d be either NOT selling or buying.
What am I missing?
Mykie
Hi Mykie,
What you are missing is that in little start up companies, the companies don’t have cash so they pay their employees largely in stock. The employees then sell to live, and to have a little money in the bank. You’ll see the same thing on all these companies.
In fact, just look at AMZN. You’ll see hundreds and hundreds, and thousands even, of insider sales, going back years and years, while the price has gone up and up and up. So I’m not sure it means much. As Peter Lynch famously said (I’m paraphrasing) “Insiders sell for all sorts of reasons, to buy a house, to send their child to college, to diversify, etc, but they only buy for one reason, because they think the price is going up> So ignore insider selling but pay attention to insider buying if you ever see any.”
Saul
I also don’t understand the difference between Indirect and Direct sales
Mykie,
As I understand it, direct shares are those you own yourself, indirect are those you own through a trust, or your wife owns, or something similar. (If this is incorrect, please, someone correct me.
Saul
Mykie, something to keep in mind about sales of shares from options: as Saul said, many employees will see these shares as compensation that are intended to augment their (otherwise too low) salary.
But the tax codes also make it expensive – and even financially dangerous – to hold onto those shares. I’m not an accountant, so this is all just based on my personal knowledge as an employee who receives options, and it may have inaccuracies (someone please correct me if so). But with that said:
There are two types of employee options: qualified and non-qualified. Most employees will get non-qualified options. When they exercise those options, they immediately owe taxes on the difference between the strike price and the current market stock price at time of exercise, regardless of whether the stock price goes down afterwards. There are nightmare tales of employees who ended up with massive tax bills on worthless stock when the dot-com bubble burst, driving them into bankruptcy. So unless you have incredible confidence in the stock, the sensible thing to do to protect against financial disaster is to sell it immediately. Plus, regardless of what you do, you still have a giant tax bill that has to be covered somehow, and if an employee can’t do that from their income then they will have to sell at least a good chunk of the shares anyway to raise the funds.
Qualified options are a little different. Technically, no taxes are owed on the spread between the strike price and current market price at exercise like they are with non-qualified options, but that spread does get included in your calculation for Alternative Minimum Tax and can therefore still result in a large increase in your tax bill. Technically, it’s possible to recapture AMT payments in future years if you fall below it again, but you still end up out-of-pocket a potentially large chunk of change today and that money has to come from somewhere. So again, shares may need to be sold to at least raise cash to pay the additional taxes.
Finally, most employees don’t think like investors. In fact, sadly, many managers don’t even think like investors. Very few managers are good capital allocators, which is basically what investing is (since you’re part of MF One, I assume you’ve read “The Outsiders” which speaks to this).
And even if a manager is thinking like an investor, there’s a good chance that they’re overly concentrated in their company’s stock and may be looking to diversify. That’s almost certainly going to happen if their shares are in a trust being managed by a fiduciary – no fiduciary is going to risk the lawsuits that would arise if the company went bankrupt and completely wiped out someone’s finances because everything was left in the company’s stock.
So anyway, as Saul said, there are a lot of very good reasons for insiders and employees to sell shares, and that assumes they’re even thinking about their shares as investments – many are not and simply view them as compensation. It’s good to be aware of selling, but it’s hard to draw any conclusions from it.
Neil
But the tax codes also make it expensive – and even financially dangerous – to hold onto those shares.
Thanks Neil, I learned a lot from your post.
Saul