August 29, 2009

Should I participate in an Employee Stock Purchase Plan (ESPP)?

At my place of work I have the option of putting a % of my pay towards an Employee Stock Purchase Plan or ESPP. With the plan I can put up to 10% of my pay into a fund and then every 6 months I get to buy stock at a 15% discount. Not only that but they also let me buy at the lower of the price of the start or the end of the period. So if the stock starts at $10 at the start of the period and ends at $12 at the end of the period then I get to buy it at 85% of the lower of the two or $10. I'm also allowed to flip the stock immediately and cash in the profits. I do the ESPP at work to the max then sell it immediately.

Many companies have ESPP plans nowadays. How the ESPP works will differ from one company to another. You may or may not get to buy at prices from the start of the period. Some companies make you hold the stock for a period of time before you can sell.

Should you do it?

Usually I think the answer is YES. A 15% guaranteed benefit is nearly impossible to beat.

You could even borrow money on a credit card to pay for it and end up coming out ahead. I wouldn't really recommend that, but it illustrates how good of a deal ESPP's are.

So generally I think the answer is YES you should do ESPP as much as you can.

Reasons You might Not want to do ESPP

1. If your company makes you hold the stock for a long period of time. If they lock you in for 1-2 years and won't let you sell the stock before then then I would look at this as a problem. Your company might be doing fine and then start to go downhill within 1-2 year period.

2. If your company is financially unstable. I really wouldn't want much of my assets locked into a stock for a company that is on shakey financial ground and might even go bankrupt. Imagine if you had ESPP money tied up in Lehman Bros. or Enron before they collapsed.

3. If the benefit isn't that big. My company does 15%, but the discount rate can vary. If your company only offers a 5% discount then that isn't very compelling to me and you may as well just put your money in savings and keep it liquid.

Should You Flip or Hold

Personally I think flipping ESPP shares is the better option. When I say 'flipping' the shares I mean selling them as soon after you buy them. I'd rather cash in that easy 15% profit than hold the stock and gamble that it will go up further. I also don't think its a good idea to hold too much of your own company's stock at any given time.

What if you cant afford it?

Find a way. A lot of people live paycheck to paycheck and can't see how they could live without 10% of their paycheck. I wouldn't look as an ESPP as living without 10% but instead making a 15% guaranteed profit in 6 months. So, figure out a way to make it work. If you have to shuffle around your money or even accumulate some short term credit card debt it should be worth it to get that extra 15% gain.

Be careful with taxes

The tax implications on an ESPP can be tricky. I'd recommend you talk to a CPA or at minimum read up on how ESPP is treated in taxes.

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