ESPP Question [Employee Stock Purchase Plan]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
adam61
Posts: 144
Joined: Sat Nov 08, 2008 5:10 pm

ESPP Question [Employee Stock Purchase Plan]

Post by adam61 »

My company recently increased the ESPP from 5% to 15% discount and 10% max contribution to 20%. At the lower discount and contribution I didn't bother, but from reading several posts and sites at 15% discount it's a huge no-brainer. However, I have a couple questions...

1) Can these ever be bad? I see a 2 year holding period is stipulated, but it also says I can sell the shares 3 days after they are granted each quarter? I feel like this just means I lose my potential to have my gains taxed at capital gains rate instead of ordinary income?

2) Are there any red flags? I'm putting 20% of my gross income into this and another 20% into 401k so my paychecks will be nothing, I can wait and pay my bills, but if there's a "gotcha" anywhere I could quickly get in hot water. The document is very onerous and makes it hard to determine what price the stocks are bought at given stock performance in each quarter?

Thanks for the help I've probably given away a lot of money over the years NOT investing in these and then just selling, but I was always focused on diversification and not realizing the potential to just churn them for the discount and pay the tax.
User avatar
The529guy
Posts: 610
Joined: Fri May 23, 2014 1:08 am

Re: ESPP Question

Post by The529guy »

adam61 wrote:My company recently increased the ESPP from 5% to 15% discount and 10% max contribution to 20%. At the lower discount and contribution I didn't bother, but from reading several posts and sites at 15% discount it's a huge no-brainer. However, I have a couple questions...

1) Can these ever be bad? I see a 2 year holding period is stipulated, but it also says I can sell the shares 3 days after they are granted each quarter? I feel like this just means I lose my potential to have my gains taxed at capital gains rate instead of ordinary income?

2) Are there any red flags? I'm putting 20% of my gross income into this and another 20% into 401k so my paychecks will be nothing, I can wait and pay my bills, but if there's a "gotcha" anywhere I could quickly get in hot water. The document is very onerous and makes it hard to determine what price the stocks are bought at given stock performance in each quarter?

Thanks for the help I've probably given away a lot of money over the years NOT investing in these and then just selling, but I was always focused on diversification and not realizing the potential to just churn them for the discount and pay the tax.
Make sure you understand the tax implications of a disqualifying disposition. There's more going on than just short-term vs long-term gains. (In some scenarios, you're taxed on profits you didn't actually realize.)

Dispositions of ESPP Stock at Fairmark.com is helpful.
ras4250
Posts: 197
Joined: Tue Mar 04, 2014 12:25 pm

Re: ESPP Question [Employee Stock Purchase Plan]

Post by ras4250 »

What does it say about holding for 2 years? You must hold or else what happens? A penalty? You then say you can sell 3 days after getting the shares. How? What happened to 2 year holding period? This obviously is critical to understand before investing in this.
Topic Author
adam61
Posts: 144
Joined: Sat Nov 08, 2008 5:10 pm

Re: ESPP Question [Employee Stock Purchase Plan]

Post by adam61 »

It seems to just say selling before 2 years is a disqualifying disposition. Like I said if this is a no brainer I would be interested, but if there's a lot of risk for a fairly certain return this is my paycheck not my retirement income so I can't take that risk. It's a quarterly offering that takes out of each paycheck, grants at quarter end, and is deposited at Fidelity in 3 business days and subject to $8 trade but no other costs except the heavy taxes.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by Bob's not my name »

Awesome. Sell immediately every quarter. The tax issue is a red herring. See thefinancebuff's column on ESPP.

15% discount = 17.6% gain at each sale

Investment period is on average 1.5 months.

Annualized gain is 267%.
User avatar
SmileyFace
Posts: 9080
Joined: Wed Feb 19, 2014 9:11 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by SmileyFace »

Sounds like a great plan - you are right to max into it. Sell as soon as you can after each purchase - having to pay the higher taxes on your profit is better than waiting 2 years and risking the fact that you may have not profits to pay taxes on.
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by dcabler »

Bob's not my name wrote:Awesome. Sell immediately every quarter. The tax issue is a red herring. See thefinancebuff's column on ESPP.

15% discount = 17.6% gain at each sale

Investment period is on average 1.5 months.

Annualized gain is 267%.
+1 Sell every quarter for 17.6% gain. At companies where I had ESPP, I was always able to sell them the next day - then the only risk is the difference between closing price when the price is set and the opening price the next morning when you sell.
chrismeyers2k1
Posts: 8
Joined: Fri Feb 02, 2018 6:38 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by chrismeyers2k1 »

With all due respect, the standard advice of sell it all every quarter at a high cap gains rate is horrific and terrible advice if you think you are in a company with an upward trajectory. Ive been in my ESPP for 2 years. I work in an industry and a company that I know not only will be here 100 years from now, but one that has about 20 years of growth left. We get a 15% discount from the price on the first or the last day of the 6 month periods. Do you know how many idiot coworkers of mine sold their espp shares immediately every 6 months? I warn them every semester, you are in a solid growth company in an industry which basically every American will always need every day and soon connected physical things will need to. But they stupidly keep selling. Let me tell you my results, $30K raw dollars in over the 2 year period. My balance is now north of 120K on that 30. And every year as the stock increases, the value of the cheap past period shares keeps increasingly exponentially. All of those idiots who kept selling made a meager return and arent benefiting like me on a continual basis from old shares I purchased and held. Basically Im getting rich and theyre getting 15%. Dont be those people
airborne
Posts: 145
Joined: Mon Jan 15, 2018 11:04 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by airborne »

chrismeyers2k1 wrote: Fri Feb 02, 2018 6:52 am With all due respect, the standard advice of sell it all every quarter at a high cap gains rate is horrific and terrible advice if you think you are in a company with an upward trajectory. Ive been in my ESPP for 2 years. I work in an industry and a company that I know not only will be here 100 years from now, but one that has about 20 years of growth left. We get a 15% discount from the price on the first or the last day of the 6 month periods. Do you know how many idiot coworkers of mine sold their espp shares immediately every 6 months? I warn them every semester, you are in a solid growth company in an industry which basically every American will always need every day and soon connected physical things will need to. But they stupidly keep selling. Let me tell you my results, $30K raw dollars in over the 2 year period. My balance is now north of 120K on that 30. And every year as the stock increases, the value of the cheap past period shares keeps increasingly exponentially. All of those idiots who kept selling made a meager return and arent benefiting like me on a continual basis from old shares I purchased and held. Basically Im getting rich and theyre getting 15%. Dont be those people
:oops:

You may find this "idiotic" as well, but perhaps those people are considering the risk of accumulating ~12% (10% + 17.6% return--not 15% as you said) of their salary equivalent in company stock yearly. When an unforeseen event or changes in the market cause the company to make significant cuts (which would no doubt coincide with a large decline in share price) and they lose their job, those accumulated shares won't do them much good.

Take the 17.6% return (pretty solid for an "idiot"!!!) and put it to work with your current AA, debt reduction or savings expansion plans. Like Bitcoin, you may miss out on some great returns, but I'd suggest it's worth it.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by Bob's not my name »

Annualized, it's over a 90% return. And low risk. Pretty good for idiots.
chrismeyers2k1
Posts: 8
Joined: Fri Feb 02, 2018 6:38 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by chrismeyers2k1 »

I'm not saying the base rate of return isn't respectable or high. But you have to do a rational analysis of your company to make a proper decision. You dont just sell them automatically which seems to be the only advice given here. I mean quite frankly, those people really knew if they reallly thought about it at all using info known as an employee that there would be substantial revenue growth and hence stock price. Who knows things like that better than you for the company you work for? But inevitably they do the foolish, sell it immediately because either a) They need the cash (and you should never invest if you need the cash) or b) They take advice from places like this that dont properly frame the argument. I bought my 2 year ago Espp shares at 17 a share. The stock is now in the 60s. Think how much they would have benefited
airborne
Posts: 145
Joined: Mon Jan 15, 2018 11:04 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by airborne »

chrismeyers2k1 wrote: Fri Feb 02, 2018 10:35 am I'm not saying the base rate of return isn't respectable or high. But you have to do a rational analysis of your company to make a proper decision. You dont just sell them automatically which seems to be the only advice given here. I mean quite frankly, those people really knew if they reallly thought about it at all using info known as an employee that there would be substantial revenue growth and hence stock price. Who knows things like that better than you for the company you work for? But inevitably they do the foolish, sell it immediately because either a) They need the cash (and you should never invest if you need the cash) or b) They take advice from places like this that dont properly frame the argument. I bought my 2 year ago Espp shares at 17 a share. The stock is now in the 60s. Think how much they would have benefited
I see where you're coming from.

But if you wouldn't go out and buy+hold that significant amount of your company's stock without the ESPP, why would you do it just because of the ESPP? If you're going to invest in your own company, then the program is a good vehicle for that. Most people, however, should diversify their risk and not hold so much of their own employer's stock. (There are countless cautionary tales.) That's why the advice is sell immediately to capture the 17.6% return and put the proceeds toward your already-established investment strategy. If your strategy includes holding your employer's stock, then obviously you'll hold some of the shares.
inbox788
Posts: 8372
Joined: Thu Mar 15, 2012 5:24 pm

Re: ESPP Question [Employee Stock Purchase Plan]

Post by inbox788 »

chrismeyers2k1 wrote: Fri Feb 02, 2018 6:52 amWith all due respect, the standard advice of sell it all every quarter at a high cap gains rate is horrific and terrible advice if you think you are in a company with an upward trajectory. Ive been in my ESPP for 2 years. I work in an industry and a company that I know not only will be here 100 years from now, but one that has about 20 years of growth left. We get a 15% discount from the price on the first or the last day of the 6 month periods. Do you know how many idiot coworkers of mine sold their espp shares immediately every 6 months? I warn them every semester, you are in a solid growth company in an industry which basically every American will always need every day and soon connected physical things will need to. But they stupidly keep selling. Let me tell you my results, $30K raw dollars in over the 2 year period. My balance is now north of 120K on that 30. And every year as the stock increases, the value of the cheap past period shares keeps increasingly exponentially. All of those idiots who kept selling made a meager return and arent benefiting like me on a continual basis from old shares I purchased and held. Basically Im getting rich and theyre getting 15%. Dont be those people
I believe the advice to sell ESPP is correct. It's blind to any particular employee or company or market condition. It doesn't matter what you or anything thinks. Or whether it's in an upward or downward trajectory or simply flat. The goal is simply to get the extra 15% every cycle and be content. Everyone can get that 15% the same way everyone can save 1%+ AUM fees from active funds by investing in passive index funds. Without the extra 15%, your company is like any other company or fund you could invest in, and you're simply stock picking. You may be right about your pick, but you have risk single stock risk compounded by risk to your income source. Few folks would advocate taking extra cash and buying more shares of the company they work for, but by needlessly holding on to ESPP, you're doing just that.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: ESPP Question [Employee Stock Purchase Plan]

Post by Bob's not my name »

chrismeyers2k1 wrote: Fri Feb 02, 2018 10:35 amyou should never invest if you need the cash
An ESPP isn't an investment really, it's more like a 3-month CD that pays 90%. Once you do without the cash for the first plan period, it is cash flow neutral and you're just taking the 90% yield. So you should invert your advice for anyone who needs the cash -- an ESPP is ideal for them.
Post Reply