Opportunity to buy company stock at a discount

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miamivice
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Opportunity to buy company stock at a discount

Post by miamivice » Tue Jan 30, 2018 10:11 am

A company that I recently applied to work for was reviewing the benefits, and one they mentioned to perked my interest.

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.

I had a hard time wrapping my mind around the value of this benefit. Any suggestions on how best to interpret it? Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket. If the stock goes down, it might be a net negative. Stock going up would mean even more in my pocket.

I do have a hard time playing lottery with my compensation though.....

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Pajamas
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Re: Opportunity to buy company stock at a discount

Post by Pajamas » Tue Jan 30, 2018 10:20 am

miamivice wrote:
Tue Jan 30, 2018 10:11 am
Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket.
15% of $6k is $900, not a couple of grand.

Risk is involved, not just in stock price fluctuation as with any stock but also in owning stock in the company that employs you. If the company implodes, you lose your job and the value of the stock. $6k a year is not likely to bankrupt you, though.

I wouldn't put much value in that particular benefit unless the company were growing rapidly.

Jack FFR1846
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Re: Opportunity to buy company stock at a discount

Post by Jack FFR1846 » Tue Jan 30, 2018 10:25 am

The value is zero. I would personally not participate. The holding period is a deal breaker.

2 examples of companies where I worked.

1: Bought at 48. 6 months later, I quit and sold at 12.

2: Bought at 13. Sold right at the opening of the blackout period. Made $70k on the spot. 6 months later, stock was at 6.
Bogle: Smart Beta is stupid

Wagnerjb
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Re: Opportunity to buy company stock at a discount

Post by Wagnerjb » Tue Jan 30, 2018 10:33 am

miamivice wrote:
Tue Jan 30, 2018 10:11 am

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.
It sounds like an easy $900 a year, with minimal risk if you sell repeatedly at the 6-month mark. As far as evaluating the benefits of a job offer, I suspect the value of 401k matching and the medical insurance would far exceed this $900 benefit.

Best wishes.
Andy

Da5id
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Re: Opportunity to buy company stock at a discount

Post by Da5id » Tue Jan 30, 2018 10:34 am

Jack FFR1846 wrote:
Tue Jan 30, 2018 10:25 am
The value is zero. I would personally not participate. The holding period is a deal breaker.
The value is clearly not zero. I imagine the actual value can be calculated by someone who is into options (some variant of Black-Scholes?).

I'd say to OP if this is a reasonably stable company it is probably worth participating. However if $6000 is a lot to you, or would stop you from higher priorities (paying off CC debt, maxing 401k/Roth/HSA, filling up emergency fund, etc) don't do it. I seem to remember that the difference between the discounted price and actual price is taxable immediately and will be on your W2, so you do have to pay taxes up front which brings the basis up to 100%, but someone can probably confirm /deny that.

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lthenderson
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Re: Opportunity to buy company stock at a discount

Post by lthenderson » Tue Jan 30, 2018 10:44 am

I've been in a similar situation except that there was no holding period other than I could only sell it on the last day of the month. It certainly didn't make me wealthy during my time there but it was essentially free money with very little risk.

Making you wait six months definitely adds more risk to it. Personally if $6k a year isn't going to make or break you, I would participate and keep careful records on how I was doing. If it doesn't pan out, chalk it up as a lesson and opt out.

not4me
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Re: Opportunity to buy company stock at a discount

Post by not4me » Tue Jan 30, 2018 10:46 am

I'm sure there are a variety of plans out there & the devil may be in the details. I'm most familiar with one in which the $6K was not "deferred", that is the employee still paid income tax on it for that year. But they actually then had Stock -- I think it was "bought" quarterly -- no commissions, etc. Dividends, if any, could either be paid (if so, income tax due) or reinvested in the plan. It was somewhat popular with older employees. The company was stable & likely had a beta approaching 1. It was yet another option for their savings (especially if they had maxed 401k) & did defer the $900/year they wouldn't get otherwise. The single stock risk was a factor, but I never heard a horror story in this case. After retirement, they could sell off shares at their own pace

Nate79
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Re: Opportunity to buy company stock at a discount

Post by Nate79 » Tue Jan 30, 2018 10:49 am

It's certainly not a great perk, very normal except the 6 month holding period is a negative. If it is a stable company and you are ok putting $6k at higher risk than the market then I would do it. Immediately sell it at 6 months. But if your company can fluctuate more than 5-10% in a 6 month period I would not even think about it.

Jack FFR1846
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Re: Opportunity to buy company stock at a discount

Post by Jack FFR1846 » Tue Jan 30, 2018 10:53 am

As another input......have you already bought this company's stock?

One response talked about your company being stable. That's tough to determine when you're inside. When I think of stable, I think of the last original stock on the Dow. GE. Would you be happy if you had bought at 30 minus your 15% and were now looking to sell?
Bogle: Smart Beta is stupid

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Watty
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Re: Opportunity to buy company stock at a discount

Post by Watty » Tue Jan 30, 2018 10:57 am

miamivice wrote:
Tue Jan 30, 2018 10:11 am
At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount.
You didn't sound real familiar with the terms of this. Be sure to double check the details of how the purchase price is calculated. Sometimes the 15% discount is based on the lower price of the stock at the beginning or end of the purchase period.

If that is the case then just by random chance half the time you will get the stock at more than a 15% discount since about half the time the stock will have gone up over the purchase period if the company stock is not in a strong trend.

miamivice
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Re: Opportunity to buy company stock at a discount

Post by miamivice » Tue Jan 30, 2018 11:00 am

While I can't reveal details about this company, I can safely say that I don't know of any stock that is stable over the long term. Stocks go up, stocks go down. There may be period of stability but if you look at 10 year charts no stock is stable over the long term.

I'm not familiar with the details of the program because I don't work there. The program is offered at another company as a fringe benefit to encourage me to leave my current employer and move there. We have no such program at my current employer.

RudyS
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Re: Opportunity to buy company stock at a discount

Post by RudyS » Tue Jan 30, 2018 11:05 am

miamivice wrote:
Tue Jan 30, 2018 11:00 am
While I can't reveal details about this company, I can safely say that I don't know of any stock that is stable over the long term. Stocks go up, stocks go down. There may be period of stability but if you look at 10 year charts no stock is stable over the long term.

I'm not familiar with the details of the program because I don't work there. The program is offered at another company as a fringe benefit to encourage me to leave my current employer and move there. We have no such program at my current employer.
Doesn't sound like a big enough incentive to get me to change jobs. Look at all the other aspects of the change. This is just a "Lucky Strike extra." Maybe.

SQRT
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Re: Opportunity to buy company stock at a discount

Post by SQRT » Tue Jan 30, 2018 11:33 am

miamivice wrote:
Tue Jan 30, 2018 11:00 am
While I can't reveal details about this company, I can safely say that I don't know of any stock that is stable over the long term. Stocks go up, stocks go down. There may be period of stability but if you look at 10 year charts no stock is stable over the long term.
I guess you need to define “stable” but my previous employer (I have been retired for 11 years) has a CAGR for its total return (price appreciation and divs) of about 13% since 1970! I invested as much as a I could during my career and made millions. There are some very good companies out there with long track records. Sounds like you don’t really think the stock market is a very good investment over the long term. That being the case, ignore the “benefit”. You probably shouldn’t buy stock with this view.

Darth Xanadu
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Re: Opportunity to buy company stock at a discount

Post by Darth Xanadu » Tue Jan 30, 2018 11:40 am

I also don't think this is a good reason in and of itself to move jobs. If you move jobs or otherwise have the opportunity to participate in a plan like this, I would recommend it (with the caveats previously mentioned by others ... how comfortable are you risking $6k or whatever amount you decide to go with).

My employer offers after-tax purchase of shares at 5% discount (lower of beginning of quarter or end of quarter price). I've held onto all my shares and have a good number in LTCG territory, all the meanwhile getting dividends. I will look to liquidate over time so so as not to have an overly concentrated position in my employer stock.
"A courageous teacher, failure is."

Billionaire
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Re: Opportunity to buy company stock at a discount

Post by Billionaire » Tue Jan 30, 2018 11:42 am

It sounds like an ESPP plan. You use the word defer. I don't think you are deferring $6,000.00 of income per year. I'd guess you are using after tax payroll deduction to buy the stock. Additionally, you are actually buying $7,058.82 worth of stock at the 15% discount, which comes out to $6,000.00. So if there is no price fluctuation, you've made $1,058.82. I'd also guess there are some minimal selling expenses involved.

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samsoes
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Re: Opportunity to buy company stock at a discount

Post by samsoes » Tue Jan 30, 2018 11:44 am

Jack FFR1846 wrote:
Tue Jan 30, 2018 10:25 am
The value is zero. I would personally not participate. The holding period is a deal breaker.
Agreed. At a former Megacorp employer, there was no holding period. The stock could be sold as soon as administrativly possible, usually a day or two after purchase. It was free and easy money, especially since the purchase price was discounted 15% from the lower of the two market prices (beginning of 6 month period and end of it).

I wouldn't have participated if there was a 6 month waiting period.
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Agggm
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Re: Opportunity to buy company stock at a discount

Post by Agggm » Tue Jan 30, 2018 11:50 am

miamivice wrote:
Tue Jan 30, 2018 10:11 am
A company that I recently applied to work for was reviewing the benefits, and one they mentioned to perked my interest.

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.

I had a hard time wrapping my mind around the value of this benefit. Any suggestions on how best to interpret it? Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket. If the stock goes down, it might be a net negative. Stock going up would mean even more in my pocket.

I do have a hard time playing lottery with my compensation though.....
The holding period stinks. In your shoes, I'd still do it but hold for 1 year and get the tax benefit of long term cap gains. Wait and sell at profit only. It's risky. But 6k ain't much to risk annually.
When I worked for a stock company I participated in the 15% discount purchases. But I sold them almost immediately. Depending on the price action, sometimes I made 35%, sometimes 25% sometimes 20%. I got lucky and never sold at less than 17.65% (the profit if you sell immediately: 15% is a discount, so 17.65% = 1/(1-15%)-1 is your pretax profit.)

Da5id
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Re: Opportunity to buy company stock at a discount

Post by Da5id » Tue Jan 30, 2018 12:26 pm

Agggm wrote:
Tue Jan 30, 2018 11:50 am
miamivice wrote:
Tue Jan 30, 2018 10:11 am
A company that I recently applied to work for was reviewing the benefits, and one they mentioned to perked my interest.

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.

I had a hard time wrapping my mind around the value of this benefit. Any suggestions on how best to interpret it? Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket. If the stock goes down, it might be a net negative. Stock going up would mean even more in my pocket.

I do have a hard time playing lottery with my compensation though.....
The holding period stinks. In your shoes, I'd still do it but hold for 1 year and get the tax benefit of long term cap gains.
I think the 1 year isn't enough, doesn't it need to be 2 years after offering date to qualify as LTCG? It otherwise is a disqualifying disposition, and counts as ordinary W2 income. See, e.g. https://turbotax.intuit.com/tax-tips/in ... /L8NgMFpFX
Maybe I have that wrong, I always sold mine immediately and saw them as W2 income.

Agggm
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Re: Opportunity to buy company stock at a discount

Post by Agggm » Tue Jan 30, 2018 12:46 pm

Da5id wrote:
Tue Jan 30, 2018 12:26 pm
Agggm wrote:
Tue Jan 30, 2018 11:50 am
miamivice wrote:
Tue Jan 30, 2018 10:11 am
A company that I recently applied to work for was reviewing the benefits, and one they mentioned to perked my interest.

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.

I had a hard time wrapping my mind around the value of this benefit. Any suggestions on how best to interpret it? Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket. If the stock goes down, it might be a net negative. Stock going up would mean even more in my pocket.

I do have a hard time playing lottery with my compensation though.....
The holding period stinks. In your shoes, I'd still do it but hold for 1 year and get the tax benefit of long term cap gains.
I think the 1 year isn't enough, doesn't it need to be 2 years after offering date to qualify as LTCG? It otherwise is a disqualifying disposition, and counts as ordinary W2 income. See, e.g. https://turbotax.intuit.com/tax-tips/in ... /L8NgMFpFX
Maybe I have that wrong, I always sold mine immediately and saw them as W2 income.
You might be right. For ~1000 profit, it won't matter either way.

Luke Duke
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Re: Opportunity to buy company stock at a discount

Post by Luke Duke » Tue Jan 30, 2018 12:48 pm

miamivice wrote:
Tue Jan 30, 2018 10:11 am
A company that I recently applied to work for was reviewing the benefits, and one they mentioned to perked my interest.

At this particular company, I could defer up to $6,000 a year to purchase shares of the company stock at a 15% discount. I would be required to keep the stock for a minimum of 6 months, and then could sell at list prices.

I had a hard time wrapping my mind around the value of this benefit. Any suggestions on how best to interpret it? Technically, if the stock stayed stable, it'd be an extra couple grand a year in my pocket. If the stock goes down, it might be a net negative. Stock going up would mean even more in my pocket.

I do have a hard time playing lottery with my compensation though.....
This is probably not true. You could sell it ASAP and the 15% discount would be treated as income on your taxes.

Darth Xanadu
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Re: Opportunity to buy company stock at a discount

Post by Darth Xanadu » Tue Jan 30, 2018 12:53 pm

Da5id wrote:
Tue Jan 30, 2018 12:26 pm


I think the 1 year isn't enough, doesn't it need to be 2 years after offering date to qualify as LTCG? It otherwise is a disqualifying disposition, and counts as ordinary W2 income. See, e.g. https://turbotax.intuit.com/tax-tips/in ... /L8NgMFpFX
Maybe I have that wrong, I always sold mine immediately and saw them as W2 income.

I think you could sell after 1 year from purchase date and gains are treated as LTCG. At least, that's how my ESPP works.
"A courageous teacher, failure is."

stimulacra
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Re: Opportunity to buy company stock at a discount

Post by stimulacra » Tue Jan 30, 2018 1:07 pm

Similar situation at my current company. 7% discount on the lesser of either the start or end price of company stock every six months.

My strategy is to swap it out with VTI (Vanguard Total Stock Market) in my taxable ASAP.

Not as big of a perk as it is made out to be. I think 401k/HSA and IRAs should be maxed out first.

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Re: Opportunity to buy company stock at a discount

Post by sco » Wed Jan 31, 2018 9:46 am

I wouldn't bother. I have friends that have worked at places that allowed a 15% discount, you could defer 90% of your salary. YOu could sell within 1 day of purchase, they held your $$$ and only purchased once a quarter. This was a no brainer.

For $900 a year I don't feel the upside outweighs the downside with a 6 month hold..

This is how people end up with too much in their companies stock.

randomguy
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Re: Opportunity to buy company stock at a discount

Post by randomguy » Wed Jan 31, 2018 9:57 am

Nate79 wrote:
Tue Jan 30, 2018 10:49 am
It's certainly not a great perk, very normal except the 6 month holding period is a negative. If it is a stable company and you are ok putting $6k at higher risk than the market then I would do it. Immediately sell it at 6 months. But if your company can fluctuate more than 5-10% in a 6 month period I would not even think about it.
I think the OP needs to get exact details. That 6 month holding period might be that the stock is bought every 6 months and you get either the price on day 1 or the price at the end. And then you can sell like 1 day later. If you are not familiar with these plans it is easy to get confused about what is going on. Or it could be a zillion other things as there is a lot of flexibility on how these plans are structured. It probably shouldn't be high on your list of reasons to take or not take a job though.

In the good old days we used to have 2 year periods where you got either the lowest price at the start of the 2 year period or the current price (which would start a new 2 year period) every 6 months. Nothing like buying stock at 2 dollars when the FMV was 10:) It was almost another 70k/year of compensation:)

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KlingKlang
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Re: Opportunity to buy company stock at a discount

Post by KlingKlang » Wed Jan 31, 2018 10:10 am

This sounds like a pretty typical Employee Stock Purchase Plan (ESPP). As others have mentioned the gotchas are how the purchase price is calculated, how long you give the company an interest free loan between your contributions and the actual purchase, and the holding period before you can sell. Also is this a publically traded company with a transparent stock price or a privately held company that makes up its own stock prices? Beware of having to sell your stock through the company's high commission designated broker.

lstone19
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Re: Opportunity to buy company stock at a discount

Post by lstone19 » Thu Feb 01, 2018 5:17 pm

My wife’s plan with mini-corp (not mega but but not micro either) is contribute up to 15% and then stock is bought semi-annually (6/30 and 12/31) at 15% off the lower of the start and end of period prices*. Stock can be (and we do) sold immediately (1/2 and 7/1). E*Trade is the administrator and the stock generally appears in her account by early evening of the closing date of the period. It’s easy money and we’re only at risk for a few hours. Being at risk for six months would make us reconsider.

* In an oddity, the start of period price is the closing price on the first day of the period (1/1 and 7/1) if it’s a market day (1/1 never is) and the closing price of the last market day before the start of period if the first day isn’t a market day. So for the current period, since 1/1 wasn’t a market day and 12/30 and 31 were a weekend, it’s the 12/29 closing price that is used. The end of period price is always the closing price on the last market day of the period.

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Cycle
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Re: Opportunity to buy company stock at a discount

Post by Cycle » Thu Feb 01, 2018 5:31 pm

I do 15% of salary for the 15% discount. I sell the lots when they become ltcg, 1yr, after the dividend payout dater. The company stock is very stable, but pays a nice dividend.

Sometimes fidelity warns that it could be counted as ordinary income despite it being 1yr holding... Never looked into it.

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unclescrooge
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Re: Opportunity to buy company stock at a discount

Post by unclescrooge » Thu Feb 01, 2018 5:41 pm

My company had a similar policy with a 6 month hold.

I waited until they removed the policy (due to employee complaints) and then I participated. Now I sell as soon as the vest...free money.

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Re: Opportunity to buy company stock at a discount

Post by Grt2bOutdoors » Thu Feb 01, 2018 6:06 pm

miamivice wrote:
Tue Jan 30, 2018 11:00 am
While I can't reveal details about this company, I can safely say that I don't know of any stock that is stable over the long term. Stocks go up, stocks go down. There may be period of stability but if you look at 10 year charts no stock is stable over the long term.

I'm not familiar with the details of the program because I don't work there. The program is offered at another company as a fringe benefit to encourage me to leave my current employer and move there. We have no such program at my current employer.
That is not an incentive. Anything that requires the employee to pony up the capital is not an incentive, and no, $1,000 is not an incentive either. Incentives - higher base pay (10%+), restricted stock given to you, guaranteed bonus, stock options or performance shares. That is an incentive. Putting your hard earned compensation on the line - I would pass.
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Gill
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Re: Opportunity to buy company stock at a discount

Post by Gill » Thu Feb 01, 2018 6:17 pm

I had this benefit with an employer but the stock could be sold immediately after purchase which I did. The six month wait is a deal breaker. You are taking considerable risk for only a small benefit.
Gill

simas
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Re: Opportunity to buy company stock at a discount

Post by simas » Thu Feb 01, 2018 6:58 pm

this is fairly standard benefit within megacorps - small amount of money in exchange to some time complications (1099B corrections ,etc).
whether that is worth your time, up to you to determine. I do not know what level you are interviewing at, however ESOP is rarely what sways the decision as benefit is very small.

The way megacorps truly pay is in things like RSUs, ISOs, NSOs - up to half of my total comp in megacorp when I worked there was in these (essentially doubling base salary ) .

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