Is my employee stock purchase plan a no brainer?

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Topic Author
mopman78
Posts: 63
Joined: Fri Jan 06, 2017 2:46 pm

Is my employee stock purchase plan a no brainer?

Post by mopman78 » Tue Jun 11, 2019 9:54 pm

My company's employee stock purchase plan was just updated.

They now offer a 75% match with a one year cliff vesting. In the past I've avoided my company's stock like the plague under the "eggs in one basket" argument but with a flat market return of 75% and a highly protected downside, this is probably the best investment I can find, right?

My plan would be to lump sum invest, sell immediately at vesting, and then diversify.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: No brainer?

Post by KlangFool » Tue Jun 11, 2019 10:00 pm

mopman78 wrote:
Tue Jun 11, 2019 9:54 pm
My company's employee stock purchase plan was just updated.

They now offer a 75% match with a one year cliff vesting. In the past I've avoided my company's stock like the plague under the "eggs in one basket" argument but with a flat market return of 75% and a highly protected downside, this is probably the best investment I can find, right?

My plan would be to lump sum invest, sell immediately at vesting, and then diversify.
You are missing three key pieces of information.

1) What is the stock price of the purchase?

2) Why are the employer doing this now?

3) What is the maximum limit of the purchase?

If it is too good to be true......

KlangFool

Topic Author
mopman78
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Re: No brainer?

Post by mopman78 » Tue Jun 11, 2019 10:05 pm

1-market price
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
3-as far as i can tell, no maximim

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willthrill81
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Re: No brainer?

Post by willthrill81 » Tue Jun 11, 2019 10:15 pm

It sounds like close to a no brainer to me. After looking into the details, I'd probably buy it, sell it after 366 days so as to pay lower long-term capital gains taxes, and invest the proceeds in a diversified portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: No brainer?

Post by KlangFool » Tue Jun 11, 2019 10:18 pm

mopman78 wrote:
Tue Jun 11, 2019 10:05 pm
1-market price
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
3-as far as i can tell, no maximim
mopman78,

Just think about this for a moment. If (1) and (3) are true, the stock will be heavily diluted. Or, the employer will be losing a lot of money.

Why does the 75% stock match come from?

A) The company buys back? Diluting profit.

B) The company issuing new shares? Diluting stock price.

<<i wouldn't expect explosive growth>>

Without explosive growth, how can (A) and (B) be sustainable?

If it is too good to be true......

KlangFool

quantAndHold
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Re: No brainer?

Post by quantAndHold » Tue Jun 11, 2019 11:34 pm

It’s been a few years, so I don’t totally remember how ESPP’s work, but how long is the holding period after you buy the discounted stock, before you can sell It? The only thing I have to contribute to the discussion is that the last company I worked for that had an ESPP program went bankrupt, and the stock everyone was holding for 366 days or whatever it was went to zero overnight. I only lost about $20k, so I was lucky.

Also, I remember some tax complexity. Make sure you understand how taxes work.

midagelawyer
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Re: No brainer?

Post by midagelawyer » Wed Jun 12, 2019 1:19 am

mopman78 wrote:
Tue Jun 11, 2019 10:05 pm
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
I'm pretty sure the board votes the unvested shares held by the employees (might even be vested to), that's why they're doing it. The shares probably are dilutive somehow, but this "company match" (aka, the board issuing new shares at a ridiculously low price to sell as much as possible in order to entrench themselves) kind of stinks. Makes you wonder where the board thinks the company will actually be in a year...
Last edited by midagelawyer on Wed Jun 12, 2019 8:26 am, edited 1 time in total.

DVMResident
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Re: No brainer?

Post by DVMResident » Wed Jun 12, 2019 7:27 am

I recommend against waiting for the 366 days LTGC. The value of the program is the discount/match. Paying taxes means you made money. Holding longer just increases risk and a linked risk with employment at that. Take your 75% and run.
mopman78 wrote:
Tue Jun 11, 2019 10:05 pm
1-market price
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
3-as far as i can tell, no maximim
On #2, the IRS puts a cap of $25k/yr. Each plan will have their additional rules and it would unusual for an employer to match 75% for every employee up to the IRS limit as that’s really expensive...but not impossible. Percent of salary or fix costs per tier are more typical structures. I would encourage you to dig deeper. There should be some company documents or plan administrators that has this information.

smitcat
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Re: No brainer?

Post by smitcat » Wed Jun 12, 2019 7:31 am

KlangFool wrote:
Tue Jun 11, 2019 10:18 pm
mopman78 wrote:
Tue Jun 11, 2019 10:05 pm
1-market price
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
3-as far as i can tell, no maximim
mopman78,

Just think about this for a moment. If (1) and (3) are true, the stock will be heavily diluted. Or, the employer will be losing a lot of money.

Why does the 75% stock match come from?

A) The company buys back? Diluting profit.

B) The company issuing new shares? Diluting stock price.

<<i wouldn't expect explosive growth>>

Without explosive growth, how can (A) and (B) be sustainable?

If it is too good to be true......

KlangFool
+1 to KlangFool….
Been there, done that, and have the T-shirt.

Topic Author
mopman78
Posts: 63
Joined: Fri Jan 06, 2017 2:46 pm

Re: No brainer?

Post by mopman78 » Wed Jun 12, 2019 5:25 pm

Found out the plan allows for stock to be purchased through payroll withdrawal between 3-20% of each paycheck. Payroll deductions accumulate and on the last day of each quarter, they purchase shares. Trading costs are paid by the company.

I haven't found any info on how the match is taxed and i'm still unclear on whether the 1 year vesting period counts against the 1 year long term cap gains period. If not, then taxes would take a big bite
Last edited by mopman78 on Wed Jun 12, 2019 5:46 pm, edited 1 time in total.

MotoTrojan
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Re: No brainer?

Post by MotoTrojan » Wed Jun 12, 2019 5:30 pm

DVMResident wrote:
Wed Jun 12, 2019 7:27 am
I recommend against waiting for the 366 days LTGC. The value of the program is the discount/match. Paying taxes means you made money. Holding longer just increases risk and a linked risk with employment at that. Take your 75% and run.
mopman78 wrote:
Tue Jun 11, 2019 10:05 pm
1-market price
2-to encourage stock ownership? the company went through a major downturn a few years back but with new management, restructured debt, and divested asset, they appear to be doing ok. i wouldn't expect explosive growth but i also wouldn't expect a huge downturn disproportionate to any market downturn
3-as far as i can tell, no maximim
On #2, the IRS puts a cap of $25k/yr. Each plan will have their additional rules and it would unusual for an employer to match 75% for every employee up to the IRS limit as that’s really expensive...but not impossible. Percent of salary or fix costs per tier are more typical structures. I would encourage you to dig deeper. There should be some company documents or plan administrators that has this information.
1 year vesting. Not holding for LTCG.

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serbeer
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Re: No brainer?

Post by serbeer » Wed Jun 12, 2019 5:58 pm

Not sure what 75% match means. Normally, ESPP is offered with discount, not match. Discount on purchase price of the stock, that of lower of beginning or end of plan period.

Normally, discount is between 5 and 15%, I believe to stay within IRS guidelines. The rest of your description does sound like traditional ESPP plan, so wonder if you correct on 75% "match."

Topic Author
mopman78
Posts: 63
Joined: Fri Jan 06, 2017 2:46 pm

Re: No brainer?

Post by mopman78 » Wed Jun 12, 2019 6:06 pm

It is indeed a 75% match. I read about the plans that offer discounts where the discount is taxed as ordinary income. This is different but I can't find out whether the match is taxed, and if so, whether it is taxed as ordinary income or as a capital gain.

If it's capped at 20% of each paycheck and I sell it immediately upon vesting, the most that could be toed up in the company's stock is 20% of a single year's pay (or the irs cap of $25,000), which is a small percentage of our overall portfolio.

The three major risks seem to be 1-the company goes under and we have a loss of 20% of a year's pay, 2-the stock declines more than 42% wiping out the match, and 3-either 1 or 2 happen and we have to pay taxes on the match regardless of the stock price when we sold.

Topic Author
mopman78
Posts: 63
Joined: Fri Jan 06, 2017 2:46 pm

Re: No brainer?

Post by mopman78 » Wed Jun 12, 2019 6:11 pm

You can choose an amount between 3% to 20% to be automatically deducted from each paycheck. These contributions will be used to purchase shares. For each one share purchased, participants will receive a matching grant of 0.75 Restricted Stock Units ("Matched RSUs"). Each Matched RSU is subject to a one-year cliff vesting period which means your Matched RSUs are vested 100% after one year
From the plan documents. The match is given as RSUs so it would be taxed as income at vesting based on the market price at vesting, which would be close to the sale price

jbranx
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Re: Is my employee stock purchase plan a no brainer?

Post by jbranx » Wed Jun 12, 2019 6:12 pm

{I edited post title for clarity.} Moderator Jbranx

inbox788
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Re: No brainer?

Post by inbox788 » Wed Jun 12, 2019 6:16 pm

Paying taxes is a good outcome, not a worst case or major risk. I'd look at the fine print, but looks like it's a plan to max out.

HomeStretch
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Re: Is my employee stock purchase plan a no brainer?

Post by HomeStretch » Wed Jun 12, 2019 6:21 pm

The full plan document (not the summary plan description) should include a section about income tax consequences. The fair value of the stock you receive as a 75% match will be treated as W2 compensation expense to you upon vesting and you will owe payroll tax and ordinary income tax.
Last edited by HomeStretch on Wed Jun 12, 2019 6:27 pm, edited 1 time in total.

Trader Joe
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Re: Is my employee stock purchase plan a no brainer?

Post by Trader Joe » Wed Jun 12, 2019 6:23 pm

mopman78 wrote:
Tue Jun 11, 2019 9:54 pm
My company's employee stock purchase plan was just updated.

They now offer a 75% match with a one year cliff vesting. In the past I've avoided my company's stock like the plague under the "eggs in one basket" argument but with a flat market return of 75% and a highly protected downside, this is probably the best investment I can find, right?

My plan would be to lump sum invest, sell immediately at vesting, and then diversify.
Yes, your ESPP is no brainer. Invest as much as you can, then sell at vesting.

SovereignInvestor
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Joined: Mon Aug 20, 2018 4:41 pm

Re: Is my employee stock purchase plan a no brainer?

Post by SovereignInvestor » Wed Jun 12, 2019 6:25 pm

Seems like a great deal. Yeah it's dilution but if they have low ratio of employee comp from this to market cap it won't dilute much

Employers like this because it gets employee to have skin in the game.

CeeKay1729
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Re: Is my employee stock purchase plan a no brainer?

Post by CeeKay1729 » Wed Jun 12, 2019 6:27 pm

Sounds too good to be true honestly... :shock:

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