ESPP - company giving a do-over option

[dandan14]

So this is interesting. Our company only allows you to participate in 2 years of the ESPP. I don't know why.
Like most ESPPs, it is setup to pretty much be a "can't lose" scenario for participants.
For 2 years, you accrue money. A the end of 2 years, you get to purchase at the lower of either the beginning price minus 15% or the ending price minus 15%.

Last year, the stock was at 18.xx. Our stock went down by about 20% in 2019, so now it is at 14.xx.

So the company is doing something I didn't expect -- a do-over. For anyone that started their 2 year period in early 2019, you can literally get all your money back and start over.

I'm trying to think through this, pros and cons.

Pros:
Have a definite lower base price

Cons:
Only get back what I put in for 2019. No growth.
If you leave before converting the accrued money (2 more years), you just get your money back. No growth.

Thoughts?

[retired@50]

I wouldn't go anywhere near this ESPP. The memories of Enron haven't faded.

Regards,

[rantk81]

Not a lawyer or tax pro or an accountant... but that sounds fishy to me because I have never heard of such a thing. Might be worth taking some time to read IRS Pub 525 to see what/if any possible pitfalls and/or tax consequences there would be?

Myself personally, if I were presented with all of this info, I'd just take the 15% discount off of the ending price, and sell out of the position immediately, with a 15% profit (fully taxable as wage income.)

[dandan14]

Adding to my own post. This is a math problem -- not a stock timing problem.

Worst case scenario in this plan is that you make 18% on your money over 2 years. Roughly 8.5% annualized. That's the likely outcome in this case, because it would be unlikely that the stock will go above where it was a year ago by this time next year.

(To illustrate this, consider if it was a $100 ending price. I get it for $85. Let's say i have 10k in accrued. I'd get 117.64 shares. I'd then sell for $100 each. So I'd get 117,640. A gain of 17.64% over 2 years.)

If I take the do-over over, the floor is still 18% over 2 years, but the potential is much higher since the starting price will now be relatively low.

Now here is where it gets interesting. If I accept this last year as sunk cost, what I'm saying is that between now and this time next year, I'm guaranteed a minimum of 18% annualized return, but likely not more.

If I take the redo, I'm guaranteed an annualized 8.5%, and maybe more, over a period of 2 years.

I'm very tempted to take the 1 year 18% guaranteed annualized return -- and as a bonus, I don't have to worry about forfeiting gains if I were to leave the company between 1-2 years from now.

[rascott]

I'd probably be more concerned with working for a company who's stock dropped 20% in a year when the market was up 30%

You keep talking about "guarantees"..... how much have you lost in opportunity costs funneling money into this over the last year? What if the company goes bankrupt?

If you believe in the company.... I'd probably take the reset... but I like risk. Talking about guarantees makes me worried about your outlook of the situation.

[Lee_WSP]

I'd probably be more concerned with working for a company who's stock dropped 20% in a year when the market was up 30%

You keep talking about "guarantees"..... how much have you lost in opportunity costs funneling money into this over the last year? What if the company goes bankrupt?

This answer.

[HomeStretch]

Do you intend to hold the shares or does the company have any restrictions (like a holding period after purchase) on selling shares purchased through the ESPP? If yes, consider not participating if the company is not doing well.

It’s not uncommon for employee stock purchase plans to allow a participant to withdraw from the offering period before the stock purchase date at the end of the period. The participant receives a refund of all contributions withheld for the offering period.

[dandan14]

I'd probably be more concerned with working for a company who's stock dropped 20% in a year when the market was up 30%

You keep talking about "guarantees"..... how much have you lost in opportunity costs funneling money into this over the last year? What if the company goes bankrupt?

This answer.

Fair questions. It is a $5b company -- so I don't think bankruptcy is anywhere in the cards. Layoff would be much more likely -- at which point, according to the ESPP, I get my invested dollars back (with no ROI).

You are right about the lost opportunity -- but that is a sunk cost. If I go forward without resetting, I'm promised (since guaranteed is too strong of a word) an 18% return for 2020 (which will average 8.5% annualized for 2019-2020).

So I think the answer is sit tight, do nothing, and cash out a year from now.

[Lee_WSP]

No company is immune to bankruptcy.

[ryman554]

I wouldn't go anywhere near this ESPP. The memories of Enron haven't faded.

Regards,

And how does that relate to the OP at hand?

The OP doesn't actually purchase the stock until the 2-year mark. Until then, it's sitting.. well... somewhere, doing "nothing".

Assuming the OP can sell at 2 years and a day, this is not the same situation.

Note, most plans allow one to withdraw from the ESPP and get the money returned.

The real egg on this, is the discount is usually 15% over 6 months. This one is 15% over two years... really reduces the guaranteed rate of return to, well, about 15% in this case, instead of about 60%. The long holding period is a challenge for getting started on cash-flow, too. 15% is 15%, but, I'm not sure I'd prioritize this one, unless there are overlapping 6-month periods.

[retired@50]

I wouldn't go anywhere near this ESPP. The memories of Enron haven't faded.

Regards,

And how does that relate to the OP at hand?

The OP asked for thoughts, so here are mine.
From the OP.
"For anyone that started their 2 year period in early 2019, you can literally get all your money back and start over".
...
"Cons:
Only get back what I put in for 2019. No growth.
If you leave before converting the accrued money (2 more years), you just get your money back. No growth. "

Both of the above sentences make me think the company is manipulating the ESPP to get interest free loans from their employees. If I worked for this company, I wouldn't participate, which is what my first post stated.

Regards,

[ryman554]

I wouldn't go anywhere near this ESPP. The memories of Enron haven't faded.

Regards,

And how does that relate to the OP at hand?

The OP asked for thoughts, so here are mine.
From the OP.
"For anyone that started their 2 year period in early 2019, you can literally get all your money back and start over".
...
"Cons:
Only get back what I put in for 2019. No growth.
If you leave before converting the accrued money (2 more years), you just get your money back. No growth. "

Both of the above sentences make me think the company is manipulating the ESPP to get interest free loans from their employees. If I worked for this company, I wouldn't participate, which is what my first post stated.

Regards,

You are reading something into this ESPP that is present in virtually all plans.

Anybody (and that means virtually any ESPP plan) can withdraw at any time (including when leaving the company) and get their money back. No interest is accrued nor due, just like the one in the OP. What the OP describes is absolutely not unique (indeed, is required!) to this plan.

Every ESPP plan in an interest free loan, until the purchase date. I would not be surprised to see requirements of escrow, but I do not know enough to assert such things.

So, the only thing that is weird about this is the 2-year requirement. It's long. And it's certainly designed to make it as hard as possible for employees to take advantage of it, especially due to the average length of employment at companies nowadays. However, I see nothing nefarious about what hte OP company is doing, given the statutory(?) requirements of all ESPP plans.

[niceguy7376]

So far, I have heard of ESPP at 6 month intervals of purchase. This is first time I hear about a 2 year interval of purchase.
What did the company do in similar scenarios previously. Did they also allow for reset? If not, why is it being offered now only?

[milktoast]

This is HR trying to encourage employees to stay. I would reset.

[anon3838]

2-years seems like a long time. I would pass on this “opportunity”.

[ryman554]

2-years seems like a long time. I would pass on this “opportunity”.

It's still a guaranteed 15% ROI. (in this case, actually is 15%: 15% discount rate, average time cash is in plan = 1 year) Tough to turn that down if you can manage the cash.

The $$ involved is pretty low due to IRS limits, so it's not going to handcuff you in much of a way if you need to swap jobs.

[Lee_WSP]

2-years seems like a long time. I would pass on this “opportunity”.

It's still a guaranteed 15% ROI. (in this case, actually is 15%: 15% discount rate, average time cash is in plan = 1 year) Tough to turn that down if you can manage the cash.

The $$ involved is pretty low due to IRS limits, so it's not going to handcuff you in much of a way if you need to swap jobs.

Not exactly.

If he holds out for only 1 more year, he has a guaranteed 15% in 1 year (2 year effective loan).

If he does the do-over, he has a guaranteed 15% return in 2 years (effectively a 3 year loan).

Which is better?

[ryman554]

2-years seems like a long time. I would pass on this “opportunity”.

It's still a guaranteed 15% ROI. (in this case, actually is 15%: 15% discount rate, average time cash is in plan = 1 year) Tough to turn that down if you can manage the cash.

The $$ involved is pretty low due to IRS limits, so it's not going to handcuff you in much of a way if you need to swap jobs.

Not exactly.

If he holds out for only 1 more year, he has a guaranteed 15% in 1 year (2 year effective loan).

If he does the do-over, he has a guaranteed 15% return in 2 years (effectively a 3 year loan).

Which is better?

Oh, you were talking about the removal and redo of the ESPP? Yeah, that is a a bad deal no matter how you look at it, and I wouldn't take it.
1. As you say, you delay you ROI, so you *guarantee* yourself a "loss" for the aborted term, in this case, to inflation / checking account rates.
2. If you hang on and grab the discount, you still get the 15%.
2a. Unless this plan only gives you a discount on the grant date (2 years past) and not the purchase date, in which case you'll be losing money on the transaction and a corollary, I would never have gotten into the ESPP in the first place with terms like that. And if I did, I'd take the opportunity.
3. If you want to roll the dice, I'd prefer to buy-and-hold company stock that is at it's 52 week low vs it's 52 week high. More upside, all other things being equal. But I don't hold company stock (any more!)

I thought you were commenting on this ESPP plan in general, and the 2 year term of it being bad. Sorry for misunderstanding.