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Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 10:25 am
by tmhudg
Hi,

My new company has an ESPP with most of the standard parameters (85% of the lower price, etc.) but with a surprising (to me) two year contribution period.

My previous company had a 6 month period and I participated in that eagerly - and sold right away - so I get the core advantages of the ESPP. However, this two year period had given me pause. Two years seems like a long time to tie up my money waiting for the payback.

Looking for thoughts whether participating would be a good idea or not.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 10:34 am
by ThriftyPhD
Assuming you're contributing each pay period, some of your money will be tied up for 2 years, some less, with an average of 1 year. If you think of this as a bond fund with an average duration of 1 year and a 17.6% return, it's a pretty good deal. Even if the entire amount went in on day one and sat for two years, that's > 8% annual return. That's assuming you get 15% off the price you can sell for. If it is 15% off the lowest price, and the stock goes up, then your have potential for even greater upside. How are dividends handled?

Note, I'm no expert on ESPP, hopefully someone will chime in if this is not the correct way to think about it.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 10:49 am
by Darth Xanadu
I think it's "probably" worthwhile, assuming no liquidity issues on your end for having the funds tied up that long. If course, there's opportunity cost while it's tied up if the money is just sitting in an ESPP holding account, which as I understand it, is generally how it works. So, consider that as well.

To be clear, this is a 2 -year contribution period, and the purchase is made at the end of 2 years? Not a 2-year holding period with more frequent purchases?

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 10:50 am
by Darth Xanadu
Darth Xanadu wrote:
Fri Feb 23, 2018 10:49 am
I think it's "probably" worthwhile, assuming no liquidity issues on your end for having the funds tied up that long. If course, there's opportunity cost while it's tied up if the money is just sitting in an ESPP holding account, which as I understand it, is generally how it works. So, consider that as well.

To be clear, this is a 2 -year contribution period, and the purchase is made at the end of 2 years? Not a 2-year holding period with more frequent purchases?
I also would suggest you explore the plan docs to see if you can cancel/withdraw funds (pre-purchase) at any time. That's how mine works, and would provide you with a bit more security/liquidity.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 11:37 am
by tmhudg
Darth Xanadu wrote:
Fri Feb 23, 2018 10:49 am
I think it's "probably" worthwhile, assuming no liquidity issues on your end for having the funds tied up that long. If course, there's opportunity cost while it's tied up if the money is just sitting in an ESPP holding account, which as I understand it, is generally how it works. So, consider that as well.

To be clear, this is a 2 -year contribution period, and the purchase is made at the end of 2 years? Not a 2-year holding period with more frequent purchases?
Yes, that is correct - 2 years contributing, after which I purchase at 85% of the lower of the start price and end price of the two year span.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 11:39 am
by tmhudg
Darth Xanadu wrote:
Fri Feb 23, 2018 10:50 am

I also would suggest you explore the plan docs to see if you can cancel/withdraw funds (pre-purchase) at any time. That's how mine works, and would provide you with a bit more security/liquidity.
Yep, I can cancel and withdraw my funds at any time prior to purchase. No interest on the accumulating funds though.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 3:25 pm
by inbox788
I would probably do it. Is it in the SP500? Russell 2000? Or any other index? How long has the company been public and what is the market cap and P/E ratio?

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 3:43 pm
by tmhudg
inbox788 wrote:
Fri Feb 23, 2018 3:25 pm
I would probably do it. Is it in the SP500? Russell 2000? Or any other index? How long has the company been public and what is the market cap and P/E ratio?
The market cap is 12.4 B and PE is 43.11. Not sure what index it might be in.

Are these questions to determine the likelihood of the company going belly-up in two years or is there some other consideration?

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 3:58 pm
by johnubc
I can say that I have never heard of a 2 year contribution period - and it makes no sense to me either. I would not participate, as holding onto the funds for two years is too risky - and ties up your money for too long.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:03 pm
by Darth Xanadu
johnubc wrote:
Fri Feb 23, 2018 3:58 pm
I can say that I have never heard of a 2 year contribution period - and it makes no sense to me either. I would not participate, as holding onto the funds for two years is too risky - and ties up your money for too long.
As the OP mentioned, the funds are not really tied up at all.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:05 pm
by ThriftyPhD
tmhudg wrote:
Fri Feb 23, 2018 3:43 pm
inbox788 wrote:
Fri Feb 23, 2018 3:25 pm
I would probably do it. Is it in the SP500? Russell 2000? Or any other index? How long has the company been public and what is the market cap and P/E ratio?
The market cap is 12.4 B and PE is 43.11. Not sure what index it might be in.

Are these questions to determine the likelihood of the company going belly-up in two years or is there some other consideration?
Smallest S&P 500 is currently around $3 B, so your company is probably on the list.

https://en.wikipedia.org/wiki/List_of_S ... _companies

Question probably has to do more with liquidity, trading volume, and bid/ask spread. If it was a penny stock that only sells one share per week on average, you might have trouble selling. At a $12 B market cap on all the exchanges, you'll likely have no issues selling.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:08 pm
by ThriftyPhD
johnubc wrote:
Fri Feb 23, 2018 3:58 pm
I can say that I have never heard of a 2 year contribution period - and it makes no sense to me either. I would not participate, as holding onto the funds for two years is too risky - and ties up your money for too long.
What is the part that makes this too risky? OP's not required to hold the stock for two years. Instead, the stock will be purchased at the end of 2 years, at a 15% discount. It can then be sold right away, at a 17.6% profit. And the discount is lowest of the start or end price, so there is potentially much more upside, but no real downside.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:23 pm
by ray.james
I have to read up a little, but the gains in this case will qualify for long term capital gains?
ESPP with 2 year holding period. Not all plans qualify though as per IRS definition. This is a partial advantage of 2 year holding period.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:24 pm
by Darth Xanadu
ray.james wrote:
Fri Feb 23, 2018 4:23 pm
I have to read up a little, but the gains in this case will qualify for long term capital gains?
ESPP with 2 year holding period. Not all plans qualify though as per IRS definition. This is a partial advantage of 2 year holding period.
The capital gains treatment depends on how long you hold the security. The 2 year holding period is just his employer holding the cash before buying at a discount on his behalf.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:40 pm
by ray.james
Darth Xanadu wrote:
Fri Feb 23, 2018 4:24 pm
ray.james wrote:
Fri Feb 23, 2018 4:23 pm
I have to read up a little, but the gains in this case will qualify for long term capital gains?
ESPP with 2 year holding period. Not all plans qualify though as per IRS definition. This is a partial advantage of 2 year holding period.
The capital gains treatment depends on how long you hold the security. The 2 year holding period is just his employer holding the cash before buying at a discount on his behalf.
https://turbotax.intuit.com/tax-tips/in ... /L8NgMFpFX

ESPP to become a Qualifying disposition depends on the IRS rules and plan rules. The term is different especially with 6 month offering cycles - often 1.5-2 years to reach LTCG rates. I am not sure of how it applies in this case, but worth reading.(May be just 1 year.)

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 4:56 pm
by inbox788
tmhudg wrote:
Fri Feb 23, 2018 3:43 pm
The market cap is 12.4 B and PE is 43.11. Not sure what index it might be in.

Are these questions to determine the likelihood of the company going belly-up in two years or is there some other consideration?
Yes and no. It's a little reassuring it's not a microcap or a startup, but I don't know if that is predictive in any nature. But I'd like to think it's like major commercial airlines, where there are always accidents, but more visibility and predictability than cargo or private planes. Turnover in the SP500 is relatively low and many are for corporate events (mergers/aquisitions) rather than relisting or bankruptcy. Plus if they're in an index, it means they're been a public company for a while (at least 2 years?; not Uber, SpaceX, or Spotify).

https://www.slickcharts.com/sp500

That's a large sized company and PE positive means it's making a profit, but it's high so it's either in some distress or is growing fast. I'd have not trouble investing some of my money (say 5%) on any single company with that size market cap (compare to Hasbro or Nordstroms). Sure, you take concentration risk, but you're being compensated for it with 15%+ extra. Those are good odds in my book.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Fri Feb 23, 2018 5:52 pm
by DrGoogle2017
It sounds like a good idea. I know big company like CISCO has them. They made my daughter an offer, that’s how I know, she didn’t take the offer though.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Sat Feb 24, 2018 12:22 am
by tfb
When you can buy at 15% off the price 2 years ago, the profit can be quite substantial. I would go for it.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 7:48 am
by johnubc
ThriftyPhD wrote:
Fri Feb 23, 2018 4:08 pm
johnubc wrote:
Fri Feb 23, 2018 3:58 pm
I can say that I have never heard of a 2 year contribution period - and it makes no sense to me either. I would not participate, as holding onto the funds for two years is too risky - and ties up your money for too long.
What is the part that makes this too risky? OP's not required to hold the stock for two years. Instead, the stock will be purchased at the end of 2 years, at a 15% discount. It can then be sold right away, at a 17.6% profit. And the discount is lowest of the start or end price, so there is potentially much more upside, but no real downside.

Having a two year Contribution period (not a 2 year holding period for tax purposes) - is risky because you are locking your gain in during the two year period to be a 15% gain on the purchase date (two years from now). Having half the money in the S&P last year, you would have missed that ~23% gain - and be at a loss in another year from now.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 8:05 am
by LittleGreenSoldiers
I had a previous employer where the ESPP price was set for 2 years at a time. Purchase windows were every 6 months. If the stock price was lower than the 2 year price at the end of any 6 month purchase period the ESPP price would then be reset for another 2 years. Similar to the structure where the price was based on the open or close every 6 months except when the price was lower than the 2 year price it would then reset the purchase for 2 years. You could potentially be purchasing across 4, 6 month periods with a 15% discount off the price of the open price of the first 6 month contribution/purchase period.

I hope I explained that correctly.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 8:28 am
by Bob's not my name
ThriftyPhD wrote:
Fri Feb 23, 2018 10:34 am
Assuming you're contributing each pay period, some of your money will be tied up for 2 years, some less, with an average of 1 year. If you think of this as a bond fund with an average duration of 1 year and a 17.6% return, it's a pretty good deal. Even if the entire amount went in on day one and sat for two years, that's > 8% annual return. That's assuming you get 15% off the price you can sell for. If it is 15% off the lowest price, and the stock goes up, then your have potential for even greater upside. How are dividends handled?

Note, I'm no expert on ESPP, hopefully someone will chime in if this is not the correct way to think about it.
I love it when the first reply is the best reply. Well done.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 9:54 am
by ThriftyPhD
johnubc wrote:
Tue Feb 27, 2018 7:48 am
ThriftyPhD wrote:
Fri Feb 23, 2018 4:08 pm
johnubc wrote:
Fri Feb 23, 2018 3:58 pm
I can say that I have never heard of a 2 year contribution period - and it makes no sense to me either. I would not participate, as holding onto the funds for two years is too risky - and ties up your money for too long.
What is the part that makes this too risky? OP's not required to hold the stock for two years. Instead, the stock will be purchased at the end of 2 years, at a 15% discount. It can then be sold right away, at a 17.6% profit. And the discount is lowest of the start or end price, so there is potentially much more upside, but no real downside.

Having a two year Contribution period (not a 2 year holding period for tax purposes) - is risky because you are locking your gain in during the two year period to be a 15% gain on the purchase date (two years from now). Having half the money in the S&P last year, you would have missed that ~23% gain - and be at a loss in another year from now.
It's 15% off the lower of the start price or the end price. So if the stock also grew last year at the same rate as the S&P, OP would have had 23+17% = 40% gains in the first year, 23+17+X% in the second year, where X is the amount of growth seen during the second year. If X is negative, the minimum gain is 17% since the amount would just switch to the lower at the end price. But the upside potential is 50%+ if growth this year is ~10%.

A guaranteed 17% gain, with possible much larger upside, I think most would take that rather than gambling that the S&P will gain 23% in a given year. Not many options that offer you minimum 15% and up to 50% return. Do you own any bonds?

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 10:11 am
by Darth Xanadu
Not to mention OP can withdraw his cash funds at any time, so the risk is mitigated significantly.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 6:21 pm
by tmhudg
Certainly lots of good information here and it's helping me to feel better about participating in the plan. As a new employee, I can't start yet but I'm thinking I will once I'm eligible.

Thanks for the great discussion.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 6:36 pm
by tmcc
I am currently sitting on a ~30% loss after discount on ESPP shares that required a 1 year vest. 2 years is a long time.

Dont forget that you have to pay the taxes up front on the theoretical gain that you won't be able to realize for 2 years. In the end the taxes are a wash but I'm quite sure that I'd rather have my money back than these stupid shares and a deduction.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 6:48 pm
by tmhudg
tmcc wrote:
Tue Feb 27, 2018 6:36 pm
I am currently sitting on a ~30% loss after discount on ESPP shares that required a 1 year vest. 2 years is a long time.

Dont forget that you have to pay the taxes up front on the theoretical gain that you won't be able to realize for 2 years. In the end the taxes are a wash but I'm quite sure that I'd rather have my money back than these stupid shares and a deduction.
Just to be clear, your 1 year vest means you waited/are waiting 1 year *after* you bought the shares at a discount before you can sell?

The plan we are discussing here is allows selling your shares immediately after you purchase at the discount. The 2 years is how long you contribute before you can make the purchase.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 6:53 pm
by boglesmind
tmcc wrote:
Tue Feb 27, 2018 6:36 pm
I am currently sitting on a ~30% loss after discount on ESPP shares that required a 1 year vest. 2 years is a long time.

Dont forget that you have to pay the taxes up front on the theoretical gain that you won't be able to realize for 2 years. In the end the taxes are a wash but I'm quite sure that I'd rather have my money back than these stupid shares and a deduction.
Please note that OP is not required to hold the ESPP shares for 2 years. You seem to be misreading the 2 year period. Funds are accumulated in an interest-free cash account for 2 years and at the end of the 2 year period, OP gets company X shares at 15% discount to the lower of the start or end price of X. It appears he can do same day sale and realize the minimum 15% gain (and as ThriftyPhd pointed out, OP may end up with a higher return).

The 15% discount offered ("bargain element" in IRS language) by his company would be treated as ordinary income and included in his W2. So as along as he chooses "same day sale" of all ESPP shares, he carries no risk. The risk appears only if the OP chooses to hold on to his ESPP shares for a later day sale.

Boglesmind

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 7:13 pm
by tmcc
boglesmind wrote:
Tue Feb 27, 2018 6:53 pm
tmcc wrote:
Tue Feb 27, 2018 6:36 pm
I am currently sitting on a ~30% loss after discount on ESPP shares that required a 1 year vest. 2 years is a long time.

Dont forget that you have to pay the taxes up front on the theoretical gain that you won't be able to realize for 2 years. In the end the taxes are a wash but I'm quite sure that I'd rather have my money back than these stupid shares and a deduction.
Please note that OP is not required to hold the ESPP shares for 2 years. You seem to be misreading the 2 year period. Funds are accumulated in an interest-free cash account for 2 years and at the end of the 2 year period, OP gets company X shares at 15% discount to the lower of the start or end price of X. It appears he can do same day sale and realize the minimum 15% gain (and as ThriftyPhd pointed out, OP may end up with a higher return).

The 15% discount offered ("bargain element" in IRS language) by his company would be treated as ordinary income and included in his W2. So as along as he chooses "same day sale" of all ESPP shares, he carries no risk. The risk appears only if the OP chooses to hold on to his ESPP shares for a later day sale.

Boglesmind
tmhudg wrote:
Tue Feb 27, 2018 6:48 pm
tmcc wrote:
Tue Feb 27, 2018 6:36 pm
I am currently sitting on a ~30% loss after discount on ESPP shares that required a 1 year vest. 2 years is a long time.

Dont forget that you have to pay the taxes up front on the theoretical gain that you won't be able to realize for 2 years. In the end the taxes are a wash but I'm quite sure that I'd rather have my money back than these stupid shares and a deduction.
Just to be clear, your 1 year vest means you waited/are waiting 1 year *after* you bought the shares at a discount before you can sell?

The plan we are discussing here is allows selling your shares immediately after you purchase at the discount. The 2 years is how long you contribute before you can make the purchase.
Correct, I didn't see your follow up posts. What you outlined isn't something I've seen before so my mistake.

I have to contribute in advance and there is no option to cancel. After shares are granted at the discounted price on a rolling quarter basis, one must hold the granted shares 1 year before the shares vest. :(

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 7:16 pm
by rob
The 2 year look back is valuable..... Even if you contribute a minimum to give you options in a couple of years to increase it using the older price.

Re: Thoughts on an ESPP with 2 year contribution period?

Posted: Tue Feb 27, 2018 8:15 pm
by Bob's not my name
Always contribute the maximum.