The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: on the road on December 15, 2020, 01:52:35 PM
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Mustachians,
I have access to an employee stock purchase plan where I can purchase shares at a 5% discount. Purchases are semi-annual, so payroll deductions across 6 months, discount is 5% off of price at the end of the period (no look back). No obligation to hold the shares per the ESPP plan itself, but I am considered a company insider, and so restricted to trading within a window each quarter, so generally couldn't sell the day of the ESPP purchase and would be obligated to hold 4-6 weeks on average.
At my previous employer, I always maxed the ESPP where the discount was 15%, quarterly purchase period, no obligation to hold, and I was not an insider so I could (and always did) sell within a few days of the purchase, once the transaction settled.
Would you participate in a plan like the one I have access to now? Why or why not?
Thanks!
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It's hard to say without more details, but my guess is I wouldn't. The fact that you're a company insider makes me guess that this is a fairly small company (and thus risky), and also that you already have a lot of personal risk tied of with this company -- either with direct financial holdings or just because they pay your salary. 5% discount with 4-6 weeks holding, plus you're giving them 6 months of float for the buy. If this were a random stock picked out of the newspaper, I'd probably take the deal, 5% isn't bad. But it's not great either, and not worth overexposure to company risk.
Definitely depends on how risky the company actually is and how much exposure you currently feel like you have though. If this is a stable company, and you think you could get a comparable job easily if this company had a negative shock... probably worthwhile.
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As cangelosibrown said, you're losing some of the discount floating the money until the buy. I'd call it 3 months (average time), then another month or two holding the stock before you sell. Your money will be tied up for 4 to 5 months, to make 5%. That is, unless the stock does something bad or good during the 4 to 6 weeks you have to hold. I don't like those odds, but it you're wanting to build a stake in the company it's nice to receive a discount.
I'd take an analytical and skeptical look at the company's valuation before investing for the long term. As a quick in and out to pocket the discount, I'd pass. There's prudence in not having your investments tied up in the company that pays your salary, but if you can build enough of a stake and influence the day to day it could work.
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Great answers, thank you both @yachi and @cangelosibrown. This is exactly how I am thinking about it, too. If it were any stock picked at random, it's worth doing. Given my extensive financial exposure to my employer, is it still worth doing?
The plan caps contributions at $25K annually. Say I max it: I lock up an average of $6,250 across 6 months, and buy $13,157 of stock at the end for $12,500, a discount of $657. That's a 10.5% return on my average investment of $6,250, or a 21% APR. Does this math check out? I feel like people sometimes under-appreciate the value of their ESPPs by not thinking about it as an APR.
The 21% APR would clearly be a no brainer if I could sell within a day or two of purchasing. Since I can't, I am balancing that 21% APR against the risk of price movement against me between when I purchase and when I am allowed to sell my shares.
To your point about risk concentration in my employer: obviously my company pays my salary, and I do also have substantial exposure to their share price through restricted stock, such that any given ESPP purchase is small by comparison to my overall equity stake. That being said, I can also afford to take risk if it's attractively priced. I am in a financially secure position, and most plausible scenarios where I would lose my current job would create a windfall for me.
Does any of this change your advice?
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I see your point about the APR. Over the course of the year you'd have a monthly average of $5208 in the account, and you'll make $1250 per year from this. Still, a temporary 5% drop in stock price can wipe out half your gain for the year.
How does a stock sell work in the plan, and what does their volatility look like? Can you put a limit order in, or watch it and sell within an hour?
You wouldn't want to do this with a stock that sees regular 5% gains/losses per week, especially if you can't put in a limit order.