ESPP strategy question

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MFD
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Joined: Fri Nov 06, 2015 10:46 pm

ESPP strategy question

Post by MFD » Tue Sep 27, 2016 3:44 pm

I've just become eligible to participate in my company's ESPP.

There is a new offering every six months, and each offering lasts 24 months.
There is a maximum monthly contribution each month of $500, for all offers combined.
There options are priced at 85% of market closing the day of the beginning of the period.
I can withdraw at any time prior to the close of the offer.

So, should I treat this like a lump-sum investment and max out the first offer, or put 1/4 the maximum into the first offer so I can participate in all future offerings?

Thanks for any advice!

dbr
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Re: ESPP strategy question

Post by dbr » Tue Sep 27, 2016 3:58 pm

In general you want to buy the stock at an 85% discount to what you can sell it and sell it as soon as possible. I am not exactly clear about when you can sell, but the idea is to take the 15% and run while holding as little exposure as possible to company stock.

In my job we once had the ability to buy stock monthly at 15% discount and sell it on purchase. You could allocate 10% of pay to that, so the result was a simple 1.5% pay raise. Later they imposed a one year vesting period meaning one was exposed to market risk for a year but with a 15% head start. At that point I considered the whole thing a wash and bailed.

NancyABQ
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Re: ESPP strategy question

Post by NancyABQ » Tue Sep 27, 2016 4:14 pm

MFD wrote: There options are priced at 85% of market closing the day of the beginning of the period.
Does it really base the price only on 85% of the price at the beginning of the period? My company's program bases it on the minimum of the price at the beginning or the end of the period, so it is always guaranteed to be at least a 15% discount, and might do better. You can opt in every 6 months and buy stocks every 6 months at the applicable discount. I can also sell the stock immediately, which is what I do.

I would clarify these things, because if it works like mine it is an awesome deal that you should put as much money into as possible, and then sell the stock immediately after you get it, risk-free massive awesome return on investment.

But if it is based on only the price at the beginning of the period, it doesn't seem like a good deal to me.

MFD
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Re: ESPP strategy question

Post by MFD » Tue Sep 27, 2016 4:38 pm

From the documentation I have it does seem like the price is set at the beginning of the period. In the case where the stock price is lower 24 months later, I would withdraw from the program and my money would be returned to me. So there is some risk of being out of the market, but no market risk. I am planning to sell immediately after exercising the options. My previous company had a plan like you described, which did seem a lot simpler.

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Meg77
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Re: ESPP strategy question

Post by Meg77 » Wed Sep 28, 2016 3:43 pm

MFD wrote:I've just become eligible to participate in my company's ESPP.

There is a new offering every six months, and each offering lasts 24 months.
There is a maximum monthly contribution each month of $500, for all offers combined.
There options are priced at 85% of market closing the day of the beginning of the period.
I can withdraw at any time prior to the close of the offer.

So, should I treat this like a lump-sum investment and max out the first offer, or put 1/4 the maximum into the first offer so I can participate in all future offerings?

Thanks for any advice!
If the price is set at the beginning of the offer, I don't see the benefit in maxing it all out up front. At the very least you could spread your contribution out over the months of the 2 year period.

If you think you'll be at the employer for years it might make sense to contribute to as many different offers as you can to diversify the purchase price. If you max out the first offer and the price drops you'll wish you could get into the next offer. On the other hand if the price goes up it'll be the opposite. I guess the decision may depend on how volatile the company stock is in general. I see what you mean about treating it like a lump sum opportunity versus DCA-ing which - all things equal - is probably the best bet. Also simplest.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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DaftInvestor
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Re: ESPP strategy question

Post by DaftInvestor » Wed Sep 28, 2016 4:13 pm

OP: Are you sure you fully understand this plan? Did they tell you that you would or could be contributing up to 4 plans at the same time (versus contributing to only a single plan for each period)?
The reason I ask is that I've been in plans with "24 month periods and 6 month buys" - but each buy was part of the same 24 month plan unless the price dropped in which case they would automatically move all my contributions up to the next plan. For current participants the 24 month clock would reset ONLY IF the stock went down (to get the better start price) and then you would move to the "new" 24 month plan. (The new plan would always start for for new employees, or employees who hadn't participated before, but if you were already in a plan with a better price - you stuck with that plan). In other words - you would put all your money into Plan A at the low start-of-plan 15% discount. After 6 month a buy would happen. If the stock wasn't cheaper on 6 months + 1 day your purchases would stick with Plan A. If the stock was cheaper on 6 months + 1 day your future purchase would automatically be moved to the new 24 month plan (say Plan B). After another 6 months the same thing would occur - you would be in Plan A or Plan B depending upon prior outcome but if the stock was cheaper after this next 6 month buy compared to the beginning of the cheaper of Plan A or Plan B you would be automatically moved to Plan C. It provided the best results without having to decide which 24 month cycle you were contributing against.
If this isn't the case for you I would think you could manage this yourself - start with all your $500 in the first plan. After 6 months shift contributions (provided they allow you to do so) if the stock is lower for the new plan start.

As a side note - the 24 month cycle is important because unlike regular LTCG you can only get LTCGs on ESPP after the 24 month period is up (but I would recommend selling ASAP anyway and taking the tax hit - versus risking losing your nearly guaranteed 15%+ gain).

jalbert
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Re: ESPP strategy question

Post by jalbert » Thu Sep 29, 2016 2:30 pm

dbr wrote:In general you want to buy the stock at an 85% discount to what you can sell it and sell it as soon as possible. I am not exactly clear about when you can sell, but the idea is to take the 15% and run while holding as little exposure as possible to company stock.

In my job we once had the ability to buy stock monthly at 15% discount and sell it on purchase. You could allocate 10% of pay to that, so the result was a simple 1.5% pay raise. Later they imposed a one year vesting period meaning one was exposed to market risk for a year but with a 15% head start. At that point I considered the whole thing a wash and bailed.
+1

Tal-
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Re: ESPP strategy question

Post by Tal- » Thu Sep 29, 2016 2:44 pm

We have an ESPP, and do the standard 'sell as fast as we can' approach as well. This results in the whole thing as income for taxes.

But, I heard on a podcast (Stacking Benjamins) that in some circumstances, it may be possible to treat a part of the gains as cap gains. A 2-second search showed a turbo tax page on this topic. https://turbotax.intuit.com/tax-tools/t ... 12047.html

So, while I've historically sold the stock immediately, I may start to hold the stock for long enough to move the gains from income tax to cap gains tax.
Debt is to personal finance as a knife is to cooking.

MFD
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Re: ESPP strategy question

Post by MFD » Fri Sep 30, 2016 12:04 am

DaftInvestor,

Yes, I believe I understand the plan. The plan summary does mention participating in multiple Offers, as long as the maximum monthly contribution level is not met. The Offer Period is 24 months, and a new offer starts every six months, which is how I came up with a possibility of participating in 4 plans at the same time. The plan does not allow for contributions to be shifted. If a plan is withdrawn from, the funds are returned, but a new plan may be participated in as long as the monthly maximum is not met.

Meg77,

While the price is set at the beginning, the withdrawals are taken out in an equal amount over the two year period. The stock price has mostly been going up, so putting the maximum monthly contribution into the first plan may be the best choice. If it does really drop, I can withdraw from that plan and start with the new one.

My previous company plan was much like the one DaftInvestor described, which was much simpler. I'm not sure why this company has the plan set up this way, possibly because they are not based in the U.S.

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