Which way would you go?

[August26th]

I have a unique opportunity to buy shares of my company stock. Long back story that isn’t pertinent to my question, but from the moment I found out about this until the date I need to buy the shares, is exactly one week. So I need money fast.

To go “all in” on the full amount of shares I’m allowed to buy would be 48K. I don’t keep that much in liquid funds at any given time. My question is, what would you do? I am absolutely certain I will do this.... I’m just not sure which option is best.

- I have access to my HELOC that has a 1.99% intro rate for 12 months. I can draw from this if needed to buy all the shares I’m allowed to.

- I could draw from my Vanguard taxable account to get most of what I need and supplement the rest with cash. I opened that account less than a year ago, so the gains aren’t huge but will still be taxable. (If I did this, the funds may not settle in time, so I do have a short term solution in this case.)

The really cool thing is that every December I’ll get a dividend check. The dividend price per share last year was $2. The year before was $1.50. I’d guess we’ll be in the $1.75 range this year.

So.... if I invest 48K now, in December I could get around $16,000 this year. That’s a very nice ROI for a 6 month investment! (No opportunity to reinvest the dividends, as we are capped at how many shares we can own.) I could pay off the HELOC probably in 2 years if I was diligent. Haven’t thought through that piece very much just yet.

So, should I take the money from the HELOC, or from Vanguard? Am I forgetting to consider an angle?

Thanks!

[JAYSLOL]

This doesn't seem right, they pay a 33% dividend?  Do you mean $1600?

[August26th]

I do not mean $1,600.

I indeed mean $16,000.

[August26th]

It is not publicly held. It is a small but stable employee-owned company that has been in business for over 40 years. Only employees can be stockholders.

The profitability has been very good historically. Until now, I was not allowed to be a shareholder (again, the long story that really isn’t important in the grand scheme.) Our shares are capped and I am going to buy the max.

If I leave the company, it’s an automatic sell with a payout that I am completely comfortable with.

There is absolutely a rush. If we don’t purchase by June 30, we are not eligible for an end-of-year dividend.

This is a no-brainer in terms of whether or not to invest. This is not a shady deal and there is sound info behind all of it. I just need perspective on whether it makes sense to liquidate some of my Vanguard, or to use my HELOC.

Thanks!

[JAYSLOL]

I do not mean $1,600.

I indeed mean $16,000.

With that amount of dividend being paid out on $48k, something illegal is going on and/or someone is getting screwed.  Prove me wrong and tell us all about this company

[August26th]

Not illegal, not shady, not anything crazy. Just a great company with a great history that is employee owned. Profits are returned to shareholders. Pretty much as simple as that.

[JAYSLOL]

It is not publicly held. It is a small but stable employee-owned company that has been in business for over 40 years. Only employees can be stockholders.

The profitability has been very good historically. Until now, I was not allowed to be a shareholder (again, the long story that really isn’t important in the grand scheme.) Our shares are capped and I am going to buy the max.

If I leave the company, it’s an automatic sell with a payout that I am completely comfortable with.

There is absolutely a rush. If we don’t purchase by June 30, we are not eligible for an end-of-year dividend.

This is a no-brainer in terms of whether or not to invest. This is not a shady deal and there is sound info behind all of it. I just need perspective on whether it makes sense to liquidate some of my Vanguard, or to use my HELOC.

Thanks!

Ok, I missed the employee-only owned part, so basically the "share price" has nothing to do with company value and is set as a fixed cost by the company and shares volume is artificially low and also controlled by the company?

[RWD]

Is this like a stock option where your $48k buys you more than $48k worth of shares? If so, keep in mind you can be caught by the AMT on the difference at the time you exercise your stock option, even if you later sell the shares for less. Some people were bankrupted by this during the dot-com bust.
https://en.wikipedia.org/wiki/Alternative_minimum_tax#Stock_options

Otherwise I don't have much to add. Sounds like a good deal.

[Stachless]

use the HELOC and nice job capitalizing on such a great opportunity!!

[August26th]

Thanks Stachless!

[robartsd]

- I could draw from my Vanguard taxable account to get most of what I need and supplement the rest with cash. I opened that account less than a year ago, so the gains aren’t huge but will still be taxable. (If I did this, the funds may not settle in time, so I do have a short term solution in this case.)

Less than a year means that any gains would be short-term capital gains - so higher taxes than if they had been held longer. I'd lean towards the HELOC with a well defined plan to pay it off in the introductory rate period without relying on the dividend. (You can always sell from your taxable account later if needed).

It all sounds great until it isn't. Lots of eggs in one basket owning your employer. What options do you have for liquidating your position?

[popcornflying]

When a stock pays a dividend, the price falls by the dividend amount. Source -
https://www.investopedia.com/articles/stocks/07/dividend_implications.asp, or just any experience owning dividend stocks


So starting with 48K, as you receive the 16k dividend, the stock price falls so your stock is worth 32k. Your total stock value plus dividend received is still 48k, minus any taxes you would owe for receiving 16k dividend income. You don't automatically make 16K.

[MustacheAndaHalf]

I'll focus on the risk since others are focused on the dividends.

I'd look at how long it takes you to save up $48,000 from your income.  And, is this opportunity going to appear once per year, or once every 5 years?  Figure out how long it takes you to recover from this spending.  If you can recover within 1-2 years, and you feel this is a once in a lifetime (or 5-10 year) opportunity, maybe it's worth the risk.  Note the risk is really that the company collapses - if the company just does okay, you still have your $48,000.

Can you accept bankruptcy if your company collapses?  If the company goes under, you will have no job and no $48,000 but still owe both a HELOC and mortgage.  From the sound of it, that will be difficult with $0 in an emergency fund.  If your investment assets are substantially more than $48k, this is less of an issue.

[Stimpy]

When a stock pays a dividend, the price falls by the dividend amount. Source -
https://www.investopedia.com/articles/stocks/07/dividend_implications.asp, or just any experience owning dividend stocks


So starting with 48K, as you receive the 16k dividend, the stock price falls so your stock is worth 32k. Your total stock value plus dividend received is still 48k, minus any taxes you would owe for receiving 16k dividend income. You don't automatically make 16K.

I think you missed the part about PRIVATE company.  Not sure it works the same way.   Though I won't argue (as I never have) that dividend in theory lowers the value of the stock.   Reality, is a different beast but I digress.

I'll focus on the risk since others are focused on the dividends.

I'd look at how long it takes you to save up $48,000 from your income.  And, is this opportunity going to appear once per year, or once every 5 years?  Figure out how long it takes you to recover from this spending.  If you can recover within 1-2 years, and you feel this is a once in a lifetime (or 5-10 year) opportunity, maybe it's worth the risk.  Note the risk is really that the company collapses - if the company just does okay, you still have your $48,000.

Can you accept bankruptcy if your company collapses?  If the company goes under, you will have no job and no $48,000 but still owe both a HELOC and mortgage.  From the sound of it, that will be difficult with $0 in an emergency fund.  If your investment assets are substantially more than $48k, this is less of an issue.

+1

Also any way to go half and half?  That way you still get some gains from your Vanguard and don't have as huge a loan?

[Scandium]

I'll focus on the risk since others are focused on the dividends.

 Note the risk is really that the company collapses - if the company just does okay, you still have your $48,000.

Not really, since the stock can only be sold to other employees of the company. If it's not doing great (i.e. the 33% dividend everyone is expecting) nobody is going to want to buy it. So the $48k might as well be lost. Maybe if sold off at a significant discount someone would pick it up..

OP wants to borrow money to buy stocks in what is also you employer, that you woun't be able to sell, which pays a 33% dividend? I don't care if they "have been doing great", this sounds pretty risky. I'd only do it if I could afford to loose most of that. And be sure you have a significant emergency fund. Do you have a spouse who works? Make sure you don't risk loosing your job and 50 grand at the same time with a stay at home spouse..

[acroy]

use the HELOC and nice job capitalizing on such a great opportunity!!

^^ this
Badass and congratulations! hope it all works out great.

[FIRE@50]

If you are cool with the risks of an Enron scenario, I vote for liquidating the Vanguard account.

[ClutchBeta]

Congrats on your opportunity! Just tap your HELOC and leverage up. If the interest rate really balloons after the introductory period, develop a plan to pay it off then. For instance, you could move some of your Vanguard assets into a more conservative allocation, like 80-90% bonds, in anticipation of using it to pay off the loan a year from now. You could lose if your investments do badly, but that's always the case. On the other hand, maybe wait to do anything with Vanguard until the gains become long term.

To everybody telling OP to watch out, I don't see much to be alarmed about.   It sounds like each employee's stake in the company is capped and the company itself acts as a market maker, buying and selling shares as needed. In other words, they're buying into something extremely illiquid with little or no chance of significant appreciation in price, and the buy-in price reflects that. On top of that, it's completely normal to compensate high-value employees with equity. Nobody thinks it's sketchy when CEOs get paid with stock options.

[Scandium]

Congrats on your opportunity! Just tap your HELOC and leverage up. If the interest rate really balloons after the introductory period, develop a plan to pay it off then. For instance, you could move some of your Vanguard assets into a more conservative allocation, like 80-90% bonds, in anticipation of using it to pay off the loan a year from now. You could lose if your investments do badly, but that's always the case. On the other hand, maybe wait to do anything with Vanguard until the gains become long term.

To everybody telling OP to watch out, I don't see much to be alarmed about.   It sounds like each employee's stake in the company is capped and the company itself acts as a market maker, buying and selling shares as needed. In other words, they're buying into something extremely illiquid with little or no chance of significant appreciation in price, and the buy-in price reflects that. On top of that, it's completely normal to compensate high-value employees with equity. Nobody thinks it's sketchy when CEOs get paid with stock options.

publicly traded stock options. Why is there "little risk" in putting $50k (which OP has some issue coming up with) into a stock you might be stuck unable to sell, and which also their employer? I'd say the risk is about $48k..  I see no sign that the company will be a market maker and buy the stocks back at the same price.

[Scortius]

Congrats on your opportunity! Just tap your HELOC and leverage up. If the interest rate really balloons after the introductory period, develop a plan to pay it off then. For instance, you could move some of your Vanguard assets into a more conservative allocation, like 80-90% bonds, in anticipation of using it to pay off the loan a year from now. You could lose if your investments do badly, but that's always the case. On the other hand, maybe wait to do anything with Vanguard until the gains become long term.

To everybody telling OP to watch out, I don't see much to be alarmed about.   It sounds like each employee's stake in the company is capped and the company itself acts as a market maker, buying and selling shares as needed. In other words, they're buying into something extremely illiquid with little or no chance of significant appreciation in price, and the buy-in price reflects that. On top of that, it's completely normal to compensate high-value employees with equity. Nobody thinks it's sketchy when CEOs get paid with stock options.

publicly traded stock options. Why is there "little risk" in putting $50k (which OP has some issue coming up with) into a stock you might be stuck unable to sell, and which also their employer? I'd say the risk is about $48k..  I see no sign that the company will be a market maker and buy the stocks back at the same price.

I think there's some misconceptions based on the word 'stock' being used. This sounds like OP is in a similar situation as many lawyers find themselves when being promoted from associate to partner. He has an opportunity to become a full partner in a successful business which will result in a very significant profit-sharing benefit over time. Given the rates of return on buying into a partner's stake, it seems like a very low-risk/high-benefit opportunity.

[ClutchBeta]

Congrats on your opportunity! Just tap your HELOC and leverage up. If the interest rate really balloons after the introductory period, develop a plan to pay it off then. For instance, you could move some of your Vanguard assets into a more conservative allocation, like 80-90% bonds, in anticipation of using it to pay off the loan a year from now. You could lose if your investments do badly, but that's always the case. On the other hand, maybe wait to do anything with Vanguard until the gains become long term.

To everybody telling OP to watch out, I don't see much to be alarmed about.   It sounds like each employee's stake in the company is capped and the company itself acts as a market maker, buying and selling shares as needed. In other words, they're buying into something extremely illiquid with little or no chance of significant appreciation in price, and the buy-in price reflects that. On top of that, it's completely normal to compensate high-value employees with equity. Nobody thinks it's sketchy when CEOs get paid with stock options.

publicly traded stock options. Why is there "little risk" in putting $50k (which OP has some issue coming up with) into a stock you might be stuck unable to sell, and which also their employer? I'd say the risk is about $48k..  I see no sign that the company will be a market maker and buy the stocks back at the same price.

I think there's some misconceptions based on the word 'stock' being used. This sounds like OP is in a similar situation as many lawyers find themselves when being promoted from associate to partner. He has an opportunity to become a full partner in a successful business which will result in a very significant profit-sharing benefit over time. Given the rates of return on buying into a partner's stake, it seems like a very low-risk/high-benefit opportunity.

Thanks for putting it better than I could. While this looks like a great deal, it's not too good to be true.

[August26th]

Thanks all. Perhaps I gave the impression that I have no money to invest or that if I lose my 48K I might be bankrupt. That’s not the case, fortunately.

My question was largely on how you’d handle the purchase, whether it be liquidating some Vanguard or using the HELOC. I have other investments and reserves and my company is not likely to go under.

I appreciate the point about STG with Vanguard... hadn’t thought of that. I’lll likely use the HELOC for now and do my best to pay it off fairly quickly.

Thanks again.

[ChpBstrd]

With a couple days to raise the funds, will the HELOC be fast enough?

Liquidate the Vanguard account and use the proceeds to buy the company stock. When the HELOC funds arrive, use them to buy back a different set of funds in your Vanguard account to avoid the wash-sale rule. I.e. go from S&P500 fund to a global fund, etc. Pay down the HELOC ASAP.

You did not mention: what is the buy back price if you leave your employer?

Also, once all these options mature, doesn't that dilute the dividend quite a bit (same funds distributed to more shares)? Are you sure the past 2 years weren't special dividends, i.e. existing stockholders paid themselves to empty the coffers before diluting their equity? Before pulling the buy trigger, ask the finance dept. how many shares existed last year, how many will exist after you exercise your option, and how many millions of dollars were used on dividends last year. Also ask for income and cash flow statements. Did retained capital get depleted in recent years. Did dividend cash flows exceed FFO? Do the math to find your expected yield.

[talltexan]

It sounds like the HELOC is already set up. If the money can move fast enough, I'd just use that, but then turn around and use those dividends to pay it down.

[px4shooter]

It sounds like the HELOC is already set up. If the money can move fast enough, I'd just use that, but then turn around and use those dividends to pay it down.

I would do the same.