Mandatory gotcha counterpoint: it's risk free assuming immediate execution, which is not the reality. Between the time ESPP is finished at price X and the time your shares actually land on your account in Etrade / other broker so you can sell, there are several days of processing time, during which the stock can easily go down 10%+ in the "current economic climate". Then, the upside might be taxable (depending on your country) and suddenly the 15% becomes 0% or negative.
(Source: saw it happen.)
The good thing though is that you may withdraw all the money until a few days before offerring time end. Useful in situations of uncertainty like here.
As noted in a few comments below already there are risks still.
Immediate execution isn't always possible due to the processing time of shares to your brokerage account and then execution of the trade, but also if your company grants the ESPP shares and it coincides with a black-out period. This adds to the risk you might be taking on.
Still usually an amazing return for the time/effort required, but caution all around.
That's true, but I always sell my ESPP as soon as it is purchased. That is an immediate 15+% return. Our ESPP is 15% off of the lower of either the beginning or the ending of the offering. Of course the hope is that it will be the lower at the beginning of the offering so that the sell will be 15% + the amount the stock has risen since the beginning.
ESPP programs are fairly common, and usually a great decision because they yield a minimum 15% return on the final value of the investment at the end of the program period whether the stock goes up or down. If you sell immediately, you realize a minimum of 90% ARR over the program period. [1]
No need to keep it there if you just want to take your gains and walk.
The only company I've worked at with an ESPP required you to hold the stock for 1 year before selling--not in the sense of tax incentives unfortunately, but you literally cannot sell before 1 year. I didn't realize there were ESPPs where you sell immediately. In that case, woo free money!
If you have the free cash to tie up in an ESPP, I generally think they are worth doing. They usually let you buy shares at a 15% or so discount of the lower of the price on the vesting date, or the price on the initial offer date. This is typically over either a 2-year or 6-month look-back period, although I've seen other time periods as well. Some programs even let you automate that automatic-sell rule.
So... if you're playing it conservatively, you can just sell the shares on the day that they are granted to you, thus realizing a guaranteed 15% increase on whatever percentage of your salary you can put in the program.
There is some risk that if the company goes bankrupt, you could lose the amount invested. But I'd guess that ESPP programs are pretty senior in the debt pool, and generally management doesn't want to piss off its employees any more then absolutely necessary during a bankruptcy proceeding.
ESPP is guaranteed to make money for employees. Everyone should sell ESPP shares immediately, of course, and most don’t, so functionally you’re right, they’re dangerous, but if you can be mildly disciplined, I don’t think there’s a better investment in the world than taking your employer up on discount ESPP shares then selling the moment they’re in your account.
I agree with what you are saying about not having too many eggs in a basket. I have seen many variations on ESPP:
1) You can buy the stock at market value on some set date by paycheck deductions (but you avoid that commision!). Worthless, not work doing IMHO.
2) You contribute up to N% of your salary at M% discount on the stock. I would do this and sell immediatley. There was a small risk associated with that of a big market movement, but in my case M was 15%, so that made me feel comfortable. It worked out to some free money.
3) There was a 6-month window. The company took the lower of the prices at the start of the window or end of the window AND applied a discount. That was awesome. A big rise in 6 months led to big gains. If the stock was tanking, you still got the discount. I would still sell immediately.
Both are ways for the company to have your income be invested in the overall success of the company, which makes sense from an alignment perspective. ESPP usually has a material discount benefit, which typically is a "can't lose" scenario if you sell immediately (with some caveats of course as immediately isn't technically possible).
I got 50 shares from e-Trade. Never used eTrade before. It was one of the few platforms that were open for retailers. eTrade mentions that if I flip those shares in less than a month, I might not be able to get access to future IPO shares.
If you sell ESPP without waiting a year, that’s a disqualifying disposition. The difference between purchase price and sale price is taxed as ordinary income. If you hold it for a year after the sale (and 2 years after the grant), that’s a qualifying disposition, and you pay the lower of the discount or the profit from the sale price as ordinary income and the rest of the gains as LTCG.
If the stock is generally not going down and your company does the typical “you pay the lower of the first and last day price of the offering period” thing (a look-back provision), holding the stock is the only way to get preferential tax treatment on that part of the benefit. Of course this isn’t a sure thing; you do risk the stock going down before you finally sell.
That's relatively rare in tech, but some companies are very touchy about their trading windows. Usually smaller companies, lower floats, lawyers trying to manage insider trading risks, etc..
For larger companies, it's almost always -- ESPP purchase happens, you can sell it immediately.
Companies routinely have blackout periods where employees are not allowed to sell their shares. Typically the shares from equity grants or ESPP are done by a brokerage and they can block those shares from being sold during these blackout periods.
However, when someone leaves the company, they can transfer those shares out to their e-trade account or whatnot. I've done that before and it only takes a few days. After that you aren't beholden to stock blackout periods, unless you have Material Non-Public Information, which means you will probably have to figure out if you can sell without being considered insider trading.
Not to mention, you probably don't hold shares, you hold options, unless you were clever/daring/solvent enough to exercise early. Substantial dollar amounts involved, and big tax implications.
So really it's a question of what the share price is when you're eventually allowed to sell shares, minus the cost of options exercise.
Early exercise still seems like a better option than waiting if there is a positive exit event since you get to pay capital gains rates, rather than income tax rates if you hold it for more than a year.
It certainly depends on how much risk you're willing to take on though.
pro: might be a good signal to potential employees that the private-illiquid-stock timeframe will be long (not a quick flip) and best to discount face value of stock
They've given you a free put option, haven't they? You can sell to them in April, or to anyone else in the intervening months. After all, even if you "accepted" for real and started tomorrow, a compelling offer in March could still move you. I'm having trouble identifying the downside here.
Generally the advice is to sell immediately and diversify.
I've also had ESPP shares that appreciated significantly and therefore held onto them to get long term capital gains, then sold them into a donor advised fund (DAF) to give to charities in a doubly tax advantaged way.
(Source: saw it happen.)
The good thing though is that you may withdraw all the money until a few days before offerring time end. Useful in situations of uncertainty like here.
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