If you work for a publicly-traded company, there’s a good chance that your company has an Employee Stock Purchase Program (ESPP), also known as free money. Let me explain.
ESPPs allow employees to purchase stock at a discounted rate over a period of time, typically 6 months. The price that you get the stock is at the cheaper price on either end of the 6 months, typically at a 15% discount.
You give up money out of your paycheck every month and at the end of the 6 months, you receive the discounted stock. Typically, not always, you’re allowed to sell this stock when you receive it which results in a risk-free return. Let’s walk through an example.
Joe at Boogle
Joe works at Boogle with a salary of $100,000. Boogle offers a 15% discount on either end of the 6 month period. Joe is able to do this with 15% of his $100k salary. Getting paid every two weeks, Joe is able to contribute $576 every paycheck. At the end of the 6-month period, Joe will have contributed $7500.
For simplicity, let’s say Boogle’s stock price at the beginning and end of the 6 months was $100. Discounted at the 15% Joe gets $7500 at a cost of $85 a share which will actually turn into ~18% return on your money in 6 months. Ask any investor if they’d take an 18% return in 6 months and they’d snatch up that money quicker than they can spend (or reinvest) it. This is assuming that you sell the stock the day you get it in which you will incur ordinary income taxes on the gain. The great thing about taxes is that when you do, it’s usually because you’re making money.
Note: I did work for one publicly traded company that forced us to hang on to the stock for 1 year before we could sell, which induces more risk into the picture. This is still likely an advantageous scenario. Read the fine print to understand what you might be getting yourself into.
Risk-Free Return
Even if the stock declines, these programs are typically set up to give you the lower price at either end of the period. Your 18% return is literally the worst-case scenario. If the stock rises over the course of the period, your return only increases from 18%.
It’s also not practical to keep substantial pieces of your capital in your company’s stock. Yes, it might feel good (and there could be upside), but from a diversification standpoint, you’re already putting your time and salary in that basket. Take your salty return and run!
Bottom Line
If you work for a public company that has an ESPP, do a little homework. It’s easily the best financial tool available to you.
