Company just announced an ESPP

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bluetree
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Company just announced an ESPP

Post by bluetree »

My company just announced an ESPP. The basics are that we can set aside up to 15% of our paycheck, for a 6 month period, then at the end of the period, the company gives us stock, priced at the lowest price of the of two dates -- the start of the 6 month period, and the end of the 6 month period, and sell us that stock at a 15% discount. I'm assuming this is a common way of doing this. The thing that makes this seem fairly low risk, is that we can elect to back out, one month before the last month, and instead of buying the stock we get our money back.

My team was discussing this at a staff meeting and there were two camps of opinions:

a) this is a lot of hassle and potential tax complication for an investment that increases ones non-diversity (we all already get yearly stock grants, and of course earn a salary from this company)
b) why not do this, it is free money, of at least 15% of what we invest (minus taxes).

The other factor in all of this (not for everybody in the company, but for members of my team), we are subject to trading blackout dates because we have access to insider information -- and so if the date we get our stock falls within a blackout period -- we can't sell it, so there is some risk that the stock price would fall between the date we get the stock and the date we would be allowed to sell (if we wanted to sell).

Curious what the boglehead view of this is. I suppose if we were not subject to blackout dates (on my team) it could be free money (minus taxes) -- but I tend to think I'm better off putting this money into my own diversified investments, in spite of the 15% discount.
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rob
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Re: Company just announced an ESPP

Post by rob »

The discount is more than 15% since you have either the current price or the lookback price..... I always used these in the past with similar paramaters. Just keep selling at the end so you don't build up too much in company stock. I would only skip if your 401K match is in company stock or you already have a lot of RSU/Options in that employer.
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grabiner
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Re: Company just announced an ESPP

Post by grabiner »

The free money is probably worth the increased risk; just ensure that you do not have too much tied up in employer stock. If your employer stock gets to be too much of your portfolio, it's probably worth selling even for a short-term capital gain as soon as you can sell subject to ethics rules. Otherwise, you may want to wait until you have a long-term gain.
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vas
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Re: Company just announced an ESPP

Post by vas »

I think its hard to argue against using the ESPP if you sell the stock immediately after each six month purchase. Due to short term volatility you may not make much (or could even loose money) on some purchases. But given the discount and the fact that they use the lower price of the start and end dates you will generally come out ahead. Any profits will be treated as short term gains of course. But if they offered you a 2.25% raise would you turn it down because it would be taxed? Probably not. Also, if you only hold the stock for a couple of days I don't think diversification is an issue.

If you hold the stock for 1.5 years (two years form the start of the six month period) you can treat these as short term gains and reduce your tax burden. If you purchase 15% every six months you will have 15% of 2 years salary in your company stock before you sell the first six month lot. Is 30% of your salary in company stock too much? Depends on your total portfolio and risk tolerance etc.

The "hassle and tax complication" amounts to receiving a 3922 form from your company and a 1099-B form from the brokerage handling the ESPP program. Enter this data in the 1099-B section of your tax software. This might occupy 10 minutes a year.
Last edited by vas on Sat Feb 21, 2015 6:07 pm, edited 1 time in total.
“For every complex problem, there is a solution that is clear, simple, and wrong.” - H. L. Mencken
ccieemeritus
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Re: Company just announced an ESPP

Post by ccieemeritus »

ESPP is free money and enforced savings. If the money is not in your checking account, you're not spending it.

Buying at a 15% discount from the discounted price at the beginning of the period (in periods when prices are rising) has resulted in substantial gains.
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Watty
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Re: Company just announced an ESPP

Post by Watty »

darrellr wrote:ESPP is free money and enforced savings. If the money is not in your checking account, you're not spending it.

Buying at a 15% discount from the discounted price at the beginning of the period (in periods when prices are rising) has resulted in substantial gains.

+1

In looking at it you also need to remember that since your money is contributed over six months, then on average it is only invested for three months. Getting at least a 15% return on a three month investment is a great deal especially since just with random stock price changes you will get more than that about half the time.

You only need to figure out the required tax paperwork once since once you have it figured out you can just do the same thing each time.

You will need to figure out your tax withholdings so that you are qualify for the the safe harbor provisions to not have an under withholding penalty but that is a good problem to have to deal with.
freebeer
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Re: Company just announced an ESPP

Post by freebeer »

*minimum* 60% rate of return (15% discount x average 3 month of invested capital) is nothing to sneeze at, and that's only if the stock sinks during the offer period, maximum return is much more. Back when I was at a MegaCorp that offered essentially the identical ESPP I used to advise folks to do 401K to employer match level, then max out ESPP, then do rest of 401K if possible.
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bluetree
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Re: Company just announced an ESPP

Post by bluetree »

Thanks everybody. Yes the free money aspect is appealing, still have to think about the fact that it would make me less diversified. (though as someone pointed out, I could view it as just a 3 month commitment for my money if I sell right away).

We already get yearly stock grants that amount to slightly over 10% of our salary, and have a 3 year vesting schedule (way of keeping us at the company and not going elsewhere). So if I were to max out the ESPP, i'd potentially have 25% of my yearly compensation in this company's stock, especially if I want to hold it long enough to get the favorable tax treatment, and as a guy that believes in the 5% rule, that rubs me the wrong way. If I sell it right away and transfer the proceeds to a balanced Vanguard fund (where I'd be putting this money in the first place if I wasn't deferring it to the ESPP), then yeah, I can see the benefit, because upon rereading the prospectus, looks like the blackout dates for buying/selling stock don't apply to the ESPP stock.
vas
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Re: Company just announced an ESPP

Post by vas »

bluetree wrote:... still have to think about the fact that it would make me less diversified. (though as someone pointed out, I could view it as just a 3 month commitment for my money if I sell right away).
In your original post you noted that you could:
bluetree wrote:back out one month before the last month
So, really your funds are committed for only one month. Granted the money does not produce a return for those five months but it isn't committed.

It also isn't invested during the six month period. It is only invested between the purchase date and the date you sell. If you sell as soon as possible this might be about three days. Technically this will skew your diversification and asset allocation for those three days but if you know you plan to sell every six months then it doesn't seem necessary to consider this in the same context as your long term investments.
“For every complex problem, there is a solution that is clear, simple, and wrong.” - H. L. Mencken
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