Skip ESPP? - 5% discount on fix date with holding period of 6 months

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Hector
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Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Fri Apr 14, 2017 1:32 pm

Purchase Price: "The price you pay for the stock will be 95% of the closing price of "Company Name" Common Stock on the last business day of the period."

Sell, Transfer, or Obtain Certificates
"You are required to own the shares for six-months from the date of purchase before you can sell, receive stock certificate, or transfer them to your brokerage account. In the meantime, "Administrator Name" will be the administrator of your shares."

Offering periods:
January 1 – March 31
April 1 – June 30
July 1 – September 30
October 1 – December 31

Skip it?

Edit for adding more information:
Selling fee is $24.95 per trade plus 3 cents per share.
Transfer fee is $30 per transaction when I transfer to my brokerage account. I pay no trading fee at my broker.
Last edited by Hector on Wed Apr 19, 2017 11:27 am, edited 2 times in total.

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dm200
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby dm200 » Fri Apr 14, 2017 1:35 pm

Hector wrote:Purchase Price: "The price you pay for the stock will be 95% of the closing price of "Company Name" Common Stock on the last business day of the period."
Sell, Transfer, or Obtain Certificates
"You are required to own the shares for six-months from the date of purchase before you can sell, receive stock certificate, or transfer them to your brokerage account. In the meantime, "Administrator Name" will be the administrator of your shares."
Offering periods:
January 1 – March 31
April 1 – June 30
July 1 – September 30
October 1 – December 31
Skip it?


If I had the money, I would buy it. Then, after keeping for six months - sell half. Then repeat, but keep the total holdings within a modest amount over time to stay diversified.

If the stock appreciates, then this could be a tax advantaged way of charitable donations (including to fund a donor advised fund).

slapfish
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby slapfish » Fri Apr 14, 2017 11:11 pm

The holding period would be a deal-breaker for me. A lot can happen in six months, both positively and negatively. I've had the experience of riding an employer's stock from $50 to $0.50 over roughly a half year; fortunately it was a loss I could handle. More recently, I sweated out some pretty onerous holding terms on my wife's 401(k) (all of the match is paid out in company stock) and dumped it all on the first day that we were able to. Fortunately the administrator has loosened up the terms since then, and so we dispose of the company stock match on a much more regular basis now.

I'm not willing to take the risk of things going south at my company, or things going well, but not as well as Wall Street expects. If this is money that you would otherwise use to speculate on individual stocks, company stock or otherwise, you might be ok. Otherwise, for me a 5% discount isn't enough to compensate me for the risk of the holding period.

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unclescrooge
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby unclescrooge » Sat Apr 15, 2017 12:08 am

Hector wrote:Purchase Price: "The price you pay for the stock will be 95% of the closing price of "Company Name" Common Stock on the last business day of the period."

Sell, Transfer, or Obtain Certificates
"You are required to own the shares for six-months from the date of purchase before you can sell, receive stock certificate, or transfer them to your brokerage account. In the meantime, "Administrator Name" will be the administrator of your shares."

Offering periods:
January 1 – March 31
April 1 – June 30
July 1 – September 30
October 1 – December 31

Skip it?


I would skip it. In fact, I did even though my employer offered a 15% discount.
Even employees complained about it that they soon got rid of the 6 month holding period.

Bob's not my name
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Bob's not my name » Sat Apr 15, 2017 6:42 am

A program this stingy is hard to make a case for. Without a holding period, the 5.26% immediate return becomes about 50% annualized, because your payroll deductions are on average 1.5 months before purchase. The six-month holding period nixes that though, since your money is willy nilly invested for 7.5 months.

Since you never want to hold ESPP stock, the 3-month plan period makes any flat fees a major factor. Assuming a $107,000 salary and a 15% limit on contributions, you're investing only $4,000 per plan period. Selling a $4,000 increment of stock every 3 months might cost a lot in fees if there is a flat fee per sale. $50 of fees would take about a quarter of your return.

Sticking with the hypothetical $107,000 salary, the most you'd have invested in your company stock at any time would be $12,000, so the overall risk to your financial welfare is trivial. But the holding period does change your ESPP from a guaranteed little quarterly bonus into a stock investment, which reduces its attractiveness.

Tanelorn
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Tanelorn » Sat Apr 15, 2017 7:52 am

Bob's not my name wrote:A program this stingy is hard to make a case for. Without a holding period, the 5.26% immediate return becomes about 50% annualized, because your payroll deductions are on average 1.5 months before purchase. The six-month holding period nixes that though, since your money is willy nilly invested for 7.5 months.

Perhaps it's stingy compared to other programs offered in years past (which might have had 10-15% discounts and/or valuable lookback options), but I will try to make the case for participation. Even counting the longer average period that his money is tied up, a 5% discount over 7.5 months is slightly more than an 8% annualized return. Any fund manager out there would love an opportunity to beat the market by 8%. Yes, individual stocks can fall, but they can rise too.

Since you never want to hold ESPP stock, the 3-month plan period makes any flat fees a major factor. Assuming a $107,000 salary and a 15% limit on contributions, you're investing only $4,000 per plan period. Selling a $4,000 increment of stock every 3 months might cost a lot in fees if there is a flat fee per sale. $50 of fees would take about a quarter of your return.

It would be worth checking the fees to sell. In your example, the 5% discount is giving you $200 in free money for each quarter's investment, so figure how much the costs are compared to that.

Sticking with the hypothetical $107,000 salary, the most you'd have invested in your company stock at any time would be $12,000, so the overall risk to your financial welfare is trivial. But the holding period does change your ESPP from a guaranteed little quarterly bonus into a stock investment, which reduces its attractiveness.

Given the risk starts from the end of the quarter period when you buy at the closing price, your money may have been partially tied up for longer than 6 months but your exposure to the company stock will only be for 6 months. Said another way, by the time you've got 3rd quarter's worth invested in stock (end of the 3rd quarter), you'll be just selling the block from the end of the 1st quarter. On a rolling basis, each investment has 6 months worth of stock risk.

----

If you were more sophisticated, you could consider hedging this risk and locking in the profits via short selling the stock during the relevant exposure periods. This will add costs and potentially capital requirements, hence reducing the IRR, but would take all the risk away so the benchmark would be a 1% savings account or a 6-9 month CD. of course you need to be capable with a margin account, short selling, and to be allowed by your company to engage in short sales in company stock (which may be against the company policy or even against the SEC rules if you are a senior executive or have inside information, YMMV).

Tanelorn
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Tanelorn » Sat Apr 15, 2017 7:58 am

OP - earlier this year you posted about an ESPP with more details and slightly different (and better) terms:

viewtopic.php?f=1&t=209768

Is this the same plan as the one you are asking about here?

dbr
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby dbr » Sat Apr 15, 2017 8:02 am

I don't think holding an asset like that for six months to get a 5% bump on a small fraction of your annual salary is worth the trouble. When Megacorp went from a 15% benefit and no holding period to a one year holding period I bailed from their program. But, it is your choice. On average you do increase your compensation by a smidgen.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby spammagnet » Sat Apr 15, 2017 5:14 pm

Skip it. 5% isn't much. The risk of the holding period negates the benefit.

Hector
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Wed Apr 19, 2017 11:19 am

Tanelorn wrote:OP - earlier this year you posted about an ESPP with more details and slightly different (and better) terms:

viewtopic.php?f=1&t=209768

Is this the same plan as the one you are asking about here?


Information I posted in the previous post(the one that you referred) was from the administrations company site where they have public information and anyone can access it by searching if you know company's name. I looked it up before started working. It still shows the information that I posted in that thread.

Terms which are applicable to me (information I got after joining) is the one that I mentioned in this post.

Hector
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Wed Apr 19, 2017 11:26 am

Tanelorn wrote:
Bob's not my name wrote:A program this stingy is hard to make a case for. Without a holding period, the 5.26% immediate return becomes about 50% annualized, because your payroll deductions are on average 1.5 months before purchase. The six-month holding period nixes that though, since your money is willy nilly invested for 7.5 months.

Perhaps it's stingy compared to other programs offered in years past (which might have had 10-15% discounts and/or valuable lookback options), but I will try to make the case for participation. Even counting the longer average period that his money is tied up, a 5% discount over 7.5 months is slightly more than an 8% annualized return. Any fund manager out there would love an opportunity to beat the market by 8%. Yes, individual stocks can fall, but they can rise too.

Since you never want to hold ESPP stock, the 3-month plan period makes any flat fees a major factor. Assuming a $107,000 salary and a 15% limit on contributions, you're investing only $4,000 per plan period. Selling a $4,000 increment of stock every 3 months might cost a lot in fees if there is a flat fee per sale. $50 of fees would take about a quarter of your return.

It would be worth checking the fees to sell. In your example, the 5% discount is giving you $200 in free money for each quarter's investment, so figure how much the costs are compared to that.

Sticking with the hypothetical $107,000 salary, the most you'd have invested in your company stock at any time would be $12,000, so the overall risk to your financial welfare is trivial. But the holding period does change your ESPP from a guaranteed little quarterly bonus into a stock investment, which reduces its attractiveness.

Given the risk starts from the end of the quarter period when you buy at the closing price, your money may have been partially tied up for longer than 6 months but your exposure to the company stock will only be for 6 months. Said another way, by the time you've got 3rd quarter's worth invested in stock (end of the 3rd quarter), you'll be just selling the block from the end of the 1st quarter. On a rolling basis, each investment has 6 months worth of stock risk.

----

If you were more sophisticated, you could consider hedging this risk and locking in the profits via short selling the stock during the relevant exposure periods. This will add costs and potentially capital requirements, hence reducing the IRR, but would take all the risk away so the benchmark would be a 1% savings account or a 6-9 month CD. of course you need to be capable with a margin account, short selling, and to be allowed by your company to engage in short sales in company stock (which may be against the company policy or even against the SEC rules if you are a senior executive or have inside information, YMMV).


I updated main post with fees. It would be $30 per quarter when I transfer to my brokerage account.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby rantk81 » Wed Apr 19, 2017 11:32 am

Hah, my employer (which is a highly debt-leveraged company) offers a 15% discount for the ESPP, but they require a TWO YEAR mandatory holding period! I said "no thanks".

rebellovw
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby rebellovw » Wed Apr 19, 2017 11:54 am

I did ESPP for the longest time - way before I became a BH. I'm glad that I did it as I own a bunch of company stock at a fairly good price - I just held onto it. Kind of my way of saving money/putting money away.

I was contributing 700.00 per paycheck. I've since - about a month ago - turned it off. Instead I'm using that money to buy Total Stock Market - every 2 weeks.

So instead of ESPP buying two times a year - I buy stocks twice a month - all set up automatically. I will miss seeing the large bump in my brokerage account every 6 months - but I think what i'm now doing is better.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby MikeG62 » Wed Apr 19, 2017 12:09 pm

Many companies use to do a 15% discount off the lower of the stock price at the beginning or end of the quarter. Those were the days.

After companies were required to expense stock-based compensation, most companies dropped the discount to 5% (and eliminated the lower of beg or end of quarter look back). I believe in doing so they were avoiding having to expense the in-the-money value of the stock issued.

A six month holding period can be a long time. I think it depends on how stable the employer is. If a fortune 25 company with a stock price that has not been volatile at all, this discount might well make sense. If the company stock tends to move around a bit, then maybe not such a great idea. I think this would be my deciding factor if in your shoes.

My former employer offered an ESPP (initially with the 15% discount with look-back provision and subsequently dropped to 5% after FAS123R become effective). I participate very early on (in the 90's) for a while. Once I became a section 16 reporting officer I stopped as I had to clear all trades with CEO in advance and I did not need the aggravation this ESPP was causing (I had enough headaches getting approval to exercise and sell options).

rebellovw
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby rebellovw » Wed Apr 19, 2017 12:10 pm

MikeG62 wrote:Many companies use to do a 15% discount off the lower of the stock price at the beginning or end of the quarter. Those were the days.

After companies were required to expense stock-based compensation, most companies dropped the discount to 5% (and eliminated the lower of beg or end of quarter look back). I believe in doing so they were avoiding having to expense the in-the-money value of the stock issued.

A six month holding period can be a long time. I think it depends on how stable the employer is. If a fortune 25 company with a stock price that has not been volatile at all, this discount might well make sense. If the company stock tends to move around a bit, then maybe not such a great idea. I think this would be my deciding factor if in your shoes.

My former employer offered an ESPP (initially with the 15% discount with look-back provision and subsequently dropped to 5% after FAS123R become effective). I participate very early on (in the 90's) for a while. Once I became a section 16 reporting officer I stopped as I had to clear all trades with CEO in advance and I did not need the aggravation this ESPP was causing (I had enough headaches getting approval to exercise and sell options).


Yep - I remember those days - what a deal it was.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby MikeG62 » Wed Apr 19, 2017 12:16 pm

rebellovw wrote:...Yep - I remember those days - what a deal it was.


And the holding period was only through earnings release for that quarter. :moneybag

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby gogleheads.orb » Wed Apr 19, 2017 12:21 pm

no,

it's free money with relatively low risk., no? If your employer stock holdings are only a small percentage of your net worth I don't see an issue.

Hector
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Wed Apr 19, 2017 12:31 pm

gogleheads.orb wrote:no,

it's free money with relatively low risk., no? If your employer stock holdings are only a small percentage of your net worth I don't see an issue.


Maximum contribution in 6 months = ~5% of current total stock holdings.

rightdecisions
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby rightdecisions » Wed Apr 19, 2017 12:32 pm

I participate in my company's 15% discount espp. We have no holding period.

At 5% and a holding period, I would not bother with the risk.

lazydavid
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby lazydavid » Wed Apr 19, 2017 12:42 pm

Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

Hector wrote:Maximum contribution in 6 months = ~5% of current total stock holdings.


...until you said that. Now it's just a stock buyback funded by the employees. If you wanted to contribute at the rate of $4,000/quarter, you'd have to go take $160k out of your portfolio and dump it into company stock? That has to be the stupidest thing I've ever heard.

Not only would I not participate, I'd look for a new job. Your management is shady, and this is probably a precursor to very bad things.

isuuofi
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby isuuofi » Wed Apr 19, 2017 12:46 pm

In addition to transaction fees, be aware of the taxes. In my case, 40% of the discount was withheld from my paycheck for state, federal, SS, and Medicare. I participated because it was a 12% discount, but I would not participate in general if I wasn't willing to hold the stock for several years at the underlying cost basis.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Tamales » Wed Apr 19, 2017 12:54 pm

MikeG62 wrote:Many companies use to do a 15% discount off the lower of the stock price at the beginning or end of the quarter. Those were the days.

After companies were required to expense stock-based compensation, most companies dropped the discount to 5% (and eliminated the lower of beg or end of quarter look back). I believe in doing so they were avoiding having to expense the in-the-money value of the stock issued.

A six month holding period can be a long time. I think it depends on how stable the employer is. If a fortune 25 company with a stock price that has not been volatile at all, this discount might well make sense. If the company stock tends to move around a bit, then maybe not such a great idea. I think this would be my deciding factor if in your shoes.

My former employer offered an ESPP (initially with the 15% discount with look-back provision and subsequently dropped to 5% after FAS123R become effective). I participate very early on (in the 90's) for a while. Once I became a section 16 reporting officer I stopped as I had to clear all trades with CEO in advance and I did not need the aggravation this ESPP was causing (I had enough headaches getting approval to exercise and sell options).


Interesting perspective (I've been wondering if accounting rules might be driving the more strict programs, so you answered that), thanks.

But that should only affect the amount, right? The holding period would be different.
Any ideas on what is motivating the long holding periods that companies are applying to ESPP programs?
Is it somehow financially advantageous for a company to require x months as opposed to allowing immediate sale? Or do you think it's just some misguided "company loyalty" thing, ignoring the concentration risk that probably 99% of financial advisors would agree that individuals should seek to avoid?

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby MikeG62 » Wed Apr 19, 2017 1:16 pm

Tamales wrote:
Interesting perspective (I've been wondering if accounting rules might be driving the more strict programs, so you answered that), thanks.

But that should only affect the amount, right? The holding period would be different.
Any ideas on what is motivating the long holding periods that companies are applying to ESPP programs?
Is it somehow financially advantageous for a company to require x months as opposed to allowing immediate sale? Or do you think it's just some misguided "company loyalty" thing, ignoring the concentration risk that probably 99% of financial advisors would agree that individuals should seek to avoid?


This provides some background on why companies have dropped the discount to 5% and killed the look-back period.

Employee Stock Purchase Plan (ESPP)

Under FAS 123R, if the provisions for ESPPs do not meet the following three conditions, the cost to acquire shares (over the employee’s contributions) will need to be expensed:

1) The purchase price is not discounted more than 5% of the fair market value on the purchase date,

2) There is no look-back provision in the plan (meaning that the shares are acquired based on the lowest price looking back over a certain time period), and

3) The plan is broad based within the organization (meaning that all employees are eligible).

As to your question about why the 6 month holding period, I see nothing in the rules which require a 6 month holding period for the plan to be non-compensatory. So I would tend to agree with you (to drive company ownership among employees).

I think many companies extended the holding period back when they changed the plan to drop the discount (to 5%) and eliminate the holding period since they were taking a fresh look at the plan provisions. Prior to that, many of these plans had been in existence for decades and there was no burning platform or reason to revisit the plan provisions.

Allowing employees to dump the stock within 30 days of quarter end (as was commonplace back in the day) really does not drive a culture of employee ownership, especially when coupled with a 15% discount (and worse yet with a 15% discount and the look-back). It was simply additional compensation and I think companies decided if people were going to get additional compensation, then there should be a longer holding period. Keep in mind that even though the ESPP may be non-compensatory, there is still a cost (impact) to the company as the shares issued each quarter increase weighted average shares outstanding (the denominator in the diluted EPS caluclation).

FWIW, I was the CAO of a large NYSE listed company for over a dozen years - and was in that position when FAS123R was adopted.
Last edited by MikeG62 on Thu Apr 20, 2017 6:42 am, edited 1 time in total.

inbox788
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby inbox788 » Wed Apr 19, 2017 1:51 pm

lazydavid wrote:Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

I wouldn't turn down the free money. It's small, but if you're employed at the company for many years, it adds up. Risk cuts both ways and for the small involved, I'd take the chance.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby lazydavid » Wed Apr 19, 2017 3:12 pm

inbox788 wrote:
lazydavid wrote:Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

I wouldn't turn down the free money. It's small, but if you're employed at the company for many years, it adds up. Risk cuts both ways and for the small involved, I'd take the chance.


Agreed.
Last edited by lazydavid on Wed Apr 19, 2017 4:03 pm, edited 1 time in total.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Wed Apr 19, 2017 3:26 pm

lazydavid wrote:Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

Hector wrote:Maximum contribution in 6 months = ~5% of current total stock holdings.


...until you said that. Now it's just a stock buyback funded by the employees. If you wanted to contribute at the rate of $4,000/quarter, you'd have to go take $160k out of your portfolio and dump it into company stock? That has to be the stupidest thing I've ever heard.

Not only would I not participate, I'd look for a new job. Your management is shady, and this is probably a precursor to very bad things.


I did not understand your calculation. Would you explain it please?

Bob's not my name
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Bob's not my name » Wed Apr 19, 2017 3:28 pm

lazydavid wrote:Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

Hector wrote:Maximum contribution in 6 months = ~5% of current total stock holdings.


...until you said that. Now it's just a stock buyback funded by the employees. If you wanted to contribute at the rate of $4,000/quarter, you'd have to go take $160k out of your portfolio and dump it into company stock? That has to be the stupidest thing I've ever heard.

Not only would I not participate, I'd look for a new job. Your management is shady, and this is probably a precursor to very bad things.
Not what he said.

lazydavid
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby lazydavid » Wed Apr 19, 2017 4:03 pm

Hector wrote:I did not understand your calculation. Would you explain it please?


Now I think I misunderstood this statement: "Maximum contribution in 6 months = ~5% of current total stock holdings"

I took to mean that you had to currently hold 20x the amount of company stock that you wanted to purchase via ESPP. Now I see you were referring to all of the equity in your portfolio. My bad, I take it back.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby cutehumor » Wed Apr 19, 2017 9:26 pm

I just started my ESPP at my top fortune 10 company. It's 15% off in a six month month period, whichever is cheapest price at the beginning or the end of the six months. six month holding period. I decided to try it, I read multiple sites saying "can't beat 15% gain" in the market, if you sell every six months and repeat. Short term capital gain taxes would hit me on federal taxes, I do live in a tax free state though. I haven't decided if I will save or keep the stock after six months. The stock appears to be stable, it has climbed steadily the past eight years.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Tamales » Wed Apr 19, 2017 10:10 pm

gogleheads.orb wrote:no,

it's free money with relatively low risk., no? If your employer stock holdings are only a small percentage of your net worth I don't see an issue.


No, it's not free money when you are subject to a 6 month holding period. Especially with only a 5% discount, the odds of ending up with a loss after 6 months of stock market whims are not small.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby MikeG62 » Thu Apr 20, 2017 6:48 am

cutehumor wrote:I just started my ESPP at my top fortune 10 company. It's 15% off in a six month month period, whichever is cheapest price at the beginning or the end of the six months. six month holding period. I decided to try it, I read multiple sites saying "can't beat 15% gain" in the market, if you sell every six months and repeat. Short term capital gain taxes would hit me on federal taxes, I do live in a tax free state though. I haven't decided if I will save or keep the stock after six months. The stock appears to be stable, it has climbed steadily the past eight years.


You have an old style plan, very rare these days. The look-back eliminates quite a bit of (although not all) risk. If as you say your company stock has climbed steadily the last eight years, I think at a minimum this is worth doing even if you sell the shares the day the restriction lapses. You can try it for a while and see how it goes.
Last edited by MikeG62 on Thu Apr 20, 2017 11:53 am, edited 2 times in total.

Hector
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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Thu Apr 20, 2017 9:33 am

lazydavid wrote:Using the $107,000 salary/$4,000 ESPP per quarter example listed previously, another way to ask this question is:

"Am I comfortable holding $8k worth of company stock for the duration of my employment, in exchange for $170/quarter of free money?" My company's stock tracks the S&P 500 fairly closely most of the time, so the answer for me would be yes.

Hector wrote:Maximum contribution in 6 months = ~5% of current total stock holdings.


...until you said that. Now it's just a stock buyback funded by the employees. If you wanted to contribute at the rate of $4,000/quarter, you'd have to go take $160k out of your portfolio and dump it into company stock? That has to be the stupidest thing I've ever heard.

Not only would I not participate, I'd look for a new job. Your management is shady, and this is probably a precursor to very bad things.


Beta for the company's stock is ~1.5. Its a small cap. Company went public ~20 years ago.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Hector » Thu Apr 20, 2017 9:43 am

dm200 wrote:
Hector wrote:Purchase Price: "The price you pay for the stock will be 95% of the closing price of "Company Name" Common Stock on the last business day of the period."
Sell, Transfer, or Obtain Certificates
"You are required to own the shares for six-months from the date of purchase before you can sell, receive stock certificate, or transfer them to your brokerage account. In the meantime, "Administrator Name" will be the administrator of your shares."
Offering periods:
January 1 – March 31
April 1 – June 30
July 1 – September 30
October 1 – December 31
Skip it?


If I had the money, I would buy it. Then, after keeping for six months - sell half. Then repeat, but keep the total holdings within a modest amount over time to stay diversified.

If the stock appreciates, then this could be a tax advantaged way of charitable donations (including to fund a donor advised fund).


What is the logic behind selling half every six month? By doing so one would keep holding more and more company's stock overtime.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Bob's not my name » Thu Apr 20, 2017 11:44 am

You should always sell immediately. tfb's article on ESPPs explains why.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby c078342 » Thu Apr 20, 2017 3:45 pm

I did not read all of the responses, so this may be redundant. My wife participated in an ESPP for about ten years, and did well return wise (she bought at 85% price level). We decided to sell in the 2007 or 2008 period. But income tax reporting was a real PITA. Just be prepared.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby acanthurus » Thu Apr 20, 2017 10:10 pm

I would participate and let it be known how much I believed in the company and thought the stock was a great deal. Especially around management.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby SciurusVulgaris » Fri Apr 21, 2017 7:55 pm

c078342 wrote:But income tax reporting was a real PITA. Just be prepared.


This. Even if you're making $200/year by selling immediately, I'm not sure it's worth it. Depending on how much support the company gives with paperwork, you may be willing to pay someone $200 to do the legwork for you.

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Re: Skip ESPP? - 5% discount on fix date with holding period of 6 months

Postby Bob's not my name » Sat Apr 22, 2017 3:22 am

For a $107,000 annual salary and a 15% of gross salary limit on contributions (both numbers are assumptions), the quarterly contribution is:

$107,000 x 15% x 0.25 = $4,000

Assuming the stock is dead flat for the six month holding period, the quarterly profit is:

(5/95) x $4,000 - $30 transfer fee = $180

so the pre-tax annual profit is:

4 x $180 = $720

and the post-tax annual profit might be $500.

The actual profit will vary due to stock price fluctuations, but since you buy a new block every time you sell an old block, there's built-in hedging.


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