Jungle Guys’ ESPP Dilemma



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The timing of Canadian Capitalist’s post on Employee Stock Purchase Plan (ESPP) is impeccable, as I need to make a quick decision this week on whether to participate in my own ESPP.

I must have scorned 4 or 5 consecutive invitations to enroll in my employer’s ESPP. I work for a technology company with a very erratic earning history - the type that deserves no place in a conservative dividend-paying portfolio. Nothing against my employer, but the stock may be more suited for a growth-oriented portfolio. Another reason is I want to soften my reliant on the company I work for; losing both your job and your investment is a double-whammy.

Although I must confess, the ESPP is seducing me with a 15% discount to the market price at either the beginning or the end of the vesting period - which ever is lower. Sounds like easy money. I wonder if I should relax my investment philosophy to accommodate this enticing offering, even though I’m not keen on keeping the stock for the long haul. One strategy is to sell the shares as soon as they’re vested as I have no desire to hold the stock without the discount protection, but there is a one-month delay between when the vesting period expires and when my trading account receives the shares. I.e. there’s a risk that the stock will fall 15% during the month, which I peg at about a 20% probability of that happening. Still pretty attractive odds, in my opinion.

My heart tells me to forgo the 15% discount and buy dividend-paying stocks the old fashion way, but I hate to pass up good odds. Am I the only one with this dilemma?

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Reader Comments

Comment Number:
1
Written by:
Luc
Posted on:
September 17, 2007 at 9:31 am

My employer provides the same 15% discount but there is no such thing as “vesting” - the shares are deposited as tradeable stock the same day with eTrade. If you sell there is a settlement period, but the sale price is set the same day.

Comment Number:
2
Written by:
Canadian Capitalist
Posted on:
September 17, 2007 at 12:16 pm

Why a one month delay? With a ESPP, there is no such thing as a vesting period. The stock was purchased with your money and the shares should be deposited in your account within a reasonable time. Is there another way to sell earlier? Maybe you can phone in the order?

Comment Number:
3
Written by:
Financial Jungle Guy
Posted on:
September 17, 2007 at 3:45 pm

Thanks for your responses.

How would the employer know how many shares to buy when the purchase is unknown?

The 15% discount is applied against either at the start or at the end of the 6-month ESPP period, which ever is lower. I suppose once the 6 month is up, there’re some overheads to calculate how much to buy and to deliver the shares to you.

Comment Number:
4
Written by:
White Eagle
Posted on:
September 17, 2007 at 9:53 pm

When I looked into a similar offer from my former high-tech employer, I also thought the 15% was easy money but then when I read all the details, I realized it wasn’t all that great. If I recall correctly, the 15% difference is taxable (can’t recall the reason) plus they would sell the shares at the end of the day (similar to a mutual fund) and they would determine the value of those shares based on some ridiculous formula that didn’t make much sense. On top of that, the company that took care of the program for the employer had a horrible track record (from everything I heard) when it came to addressing employees’ questions, concerns, and complaints. I’d recommend asking around the office to see if anyone had problems selling their shares immediately after the vesting period ended and if they were happy with the program. Hopefully, you can talk to someone fairly knowledgeable about their investments and can give you some sound feedback on the program.

Comment Number:
5
Written by:
Deborah
Posted on:
September 23, 2007 at 6:42 pm

I’d do the same kind of analysis on your company and make the decision based on whether you think they are going to do well or not.

If you think they are undervalued, then buy. If you think they are fairly recession proof, then buy. If you see problems in their financial statements then don’t buy.

Comment Number:
6
Written by:
EmperorCoder
Posted on:
October 15, 2007 at 12:35 am

I had a similar ESPP with my employer 6 months ago. With a one month “vesting” period as well.

The thing I did was I sold short the stock of my company on the same day that the ESPP trade happened, effectively locking in the 15% discount immediately. I covered the short one month later when the trade settled and I could actually sell the stocks.

Probably wouldn’t work with small cap companies as they might not always be shortable though.

Comment Number:
7
Written by:
Financial Jungle Guy
Posted on:
October 21, 2007 at 6:23 am

Shorting the stock? What a brilliant idea! The 15% reward is effectively guaranteed.

I missed my ESPP deadline while on vacation, but will implement your suggestion for sure in the next round.

Comment Number:
8
Written by:
Financial Jungle - » I’m Officially Retired Today…
Posted on:
April 4, 2008 at 1:02 am

[…] So right now, I’m sitting at home early stunned, and wondering, “What went wrong?” Was my performance unsatisfactory? Was my pay scale too rich relative to peers? Was I not getting along with co-workers? For sure it’s a tough decision for management to axe a selected group of individuals. I don’t envy their position. We let go some pretty solid people. I also don’t envy the colleagues who have multiple mouths to feed. Finally, I don’t envy the colleagues who have enrolled and kept the company shares from the Employee Stock Purchase Plan. […]

Comment Number:
9
Written by:
Dividend Growth Investor
Posted on:
June 14, 2008 at 6:41 pm

You could actually short the stock to lock the gains. But if you will probably pay margin rates for doing that. Yet you might still end up with a decent gain..