sometimes readers get very excited if they see that Joe Blow, CEO, has sold 10,000 shares and now owns 0. What is not obvious from the paper is whether our friend Joe has no options left, is cashing out, and about to leave. However, Joe might have vested options on a million shares, and has thus sold 1% of his stock to buy a new house. Obviously, the imputed meanings are rather different
The timing of sales also means relatively little. Silicon Valley financial advisors tell people to sell some stock every year for tax reasons. (More on this later in this article.) Normally, there are at most 4 times during a year when an insider can sell stock anyway, and it is easy for other events to knock this down to 1-2, or even 0. I've heard of cases where people got stuck for 2 years post-IPO not being able to sell any stock.
Bottom line: founders often actually own lots of stock, sometimes so do early employees.
But, for many insiders (and in fact, not just legal insiders, but other officers and actually, any employees who have significant stock positions and/or legal advice that restricts the timing of sales),
the natural state of affairs gets to be (as the absolute cost of options goes up):
* Have a bunch of vested options that account for a big chunk of one's net worth.
* Do same-day exercise once or twice a year.
* Actually own zero shares.
And these are basically driven by SEC rules, legal advice, and tax laws, not by short-term price fluctuations. [Note: anyone in high-tech investing who doesn't expect short-term stock price fluctuations ... is crazy
].
Thus, moderate sales by insiders ... simply don't mean much. It takes work to know whether or not a sale is substantial. For instance, an executive may have an employment contract that includes an $X loan (where I've heard of $X in the millions), where they moved to the area, wanted to buy a nice house, and the deal is that within N months of being allowed to exercise options, they are required (or encouraged by interest on the loan) to do so. This means that they'd better sell off enough stock to cover the loan, and the taxes incurred from selling the stock. The only way to figure this stuff out is to backtrack through the annual reports and read the fine print.
