What The Hell Is An ESPP?

When I first saw the abbreviation ESPP, I didn’t even know what it was. Chances are if you haven’t run into one before, you probably don’t either. Yet it’s something that lots of folks have access to, even if they’re a bit uneducated about it. I’ve had about a dozen coworkers at previous companies ask about ESPP’s, and if it makes sense for them.

Let’s clear a few things up, then see if it’s something you’re interested in.

What is an ESPP?

ESPP stands for Employee Stock Purchase Plan. There are a few different ways they can be structured, but most typical is allowing you to use post-tax money to buy company stock, typically at a discount. These are called Qualified ESPP’s. Two companies I’ve worked at who offered ESPP’s both offered the ability to purchase company stock at a 15% discount (up to 10% of your gross income). The way you sign up will vary by company so check with HR or Payroll for confirmation. Offering an ESPP is a great way for a company to provide incentives to stay gainfully employed with them – after all, if you’re a shareholder you’re more likely to be a harder worker.

After you’ve enrolled, the amount you’ve specified gets deducted from each paycheck. At the end of each quarter, stock is purchased at the discount and you’re the proud new owner of some shares of stock for the company you work. But there may be a small catch – plans like this frequently have a minimum holding period before you can sell your shares.

Note: These are specifics from my experiences, but may vary at your company. Double check with the HR/Payroll department at your work for specifics on any plan offered.

Should I use an ESPP?

The decision to participate in an ESPP or not is completely your decision. If you work for a financially responsible and healthy company, ESPP’s are a great way to invest in the company and dip your feet into investing if you’re new. I like them because they’re a good way to save money without even making a conscious effort to do so. Once you’ve set up the payroll deduction, you don’t see the money. Later you look, and you have shares of stock you can sell. It’s a good feeling because a lot of times you don’t even miss the incoming cash. If you’re making $50,000 a year and put 10% of your paycheck into an ESPP, your take-home pay will probably change by less than $200 or so, but you’ll have a ton of stock at the end of the year. As you continue to earn more through raises, you’ll gain stock even more quickly.

What if I leave the company?

I’ve left two companies now and had participated in the ESPP at both. When I left, I was refunded any amount for the current quarter that had been allocated toward the ESPP but not yet gone to the actual purchase of stock. This money was just put on my final paycheck. You still have all the stock you had, at the discount you had it. When you participate in an ESPP, you own the stock just as if you had bought it yourself.

Question:

Does your company offer an ESPP? Do you participate in one?

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2 Comments

  1. I suggest holding the ESPP shares only for the required minimum holding period, if working at a stable company. Holding shares in your own employer overexposes you to both single company risk, as well as the risk of losing your job and investments at the same time.

    The debate whether to even use the ESPP mainly centers around the volatility of your employers stock, discount offered, personal cash flow/liquidity situation, and minimum holding period. However, in no fact set could I see continuing to hold your employer’s stock beyond the minimum hold time.

    1. Totally agree on the holding period and making sure you don’t put all your eggs in one basket. At one of my old companies it was a 15- or 16-month period; I sold when the stock was near its 52-week high, which happened to coincide perfectly with when we needed an influx of cash. It’s since dipped about 10% from there so I got lucky with timing.

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