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With my new job I now have access to an ESPP plan. I know the usual thoughts are to participate, get the discount on the shares and then immediately sell. Unfortunately, my plan does not allow me to immediately sell shares. Instead I have a 1 year holding period required. The discount on the shares is 15%, which is considered income to me.

Based on the one year holding period and general risk of holding employer stock I was thinking about passing on this plan for now. Does anyone think it would be wrong to pass on it? Maximum amount to purchase per year is $10K.

Currently fully funding tax advantaged space. Will likely be phased out of Roth IRAs for 2014 but those amounts being funneled into taxable accounts instead (too much in Rollover IRAs to have a backdoor Roth make sense).

TIA!
Dawn
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It is common for Employee Stock Ownership programs to have vesting periods.

Much depends on the quality of the stock and their prospects. If its a good quality stock with good growth potential, it can be fine to buy. If its a small company with volatile stock prices it is risky.

Companies do this to encourage employees to own stock. They then share in the success of everyone's efforts. Similarly they would not do an ESPP offer at a time when they thought there was risk. They want buyers under the plan to prosper. But you know the company. You have to decide for yourself.
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Dawn
I've dealt with many Sec. 423 plans over the years, but I've never come across one that requires a post exercise holding period. Does the plan guarantee a future selling price that at least equals the exercise price?

The advantage of meeting the 12/24 month stock holding period following exercies is that the bargain element (the difference between the option price and fair market value of the stock on the exercise date) will be treated as capital gains rather than ordinary income. The discount will forever be ordinary income when the exercised shares are ultimately sold.

But without a guarantee on the future stock price, you would simply be taking a non-elective market risk of the price of the stock dropping below the exercise price...and the discount will still be ordinary income on the sale of the stock, regardless of the stock's price. This is quite a bit of risk for employees to be asked to take.

BruceM
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At a 15% discount, I would probably be all over that. Mine is only 5% and the purchase is only quarterly, so I pass.

If you are really concerned, you could buy a put in an outside account to protect you from losses at the time exercise.
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BruceM,

I think we are in agreement about the risks. My new employer is a foreign company and its shares are not registered under the securities act (they are ADS which are traded on OTC) which is why the one year holding period applies. It is not a vesting period, just the result of restricted shares. No guarantee for a minimum future selling price.

The other thing I don't like is that dividends are required to be reinvested (no discount) for non-retired workers.

My bonuses are partially dependent on share price increases so it is probably best to pass on this at this time.

I'd still be interested in other thoughts if anyone has them.

Thanks!
Dawn
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Dawn
Unless you are highly confident in the company's earnings growth, I too would pass.

I'm puzzled by why a company would undertake such a plan. If this is a qualified Sec. 423 (about 85% of such plans are), it must be non-discriminatory, meaning it is likely a number of employees would elect to participate who have never purchased stock and really don't understand market risk. If the economy were to slow through no fault of the employer and the exercised share price dropped below the discounted option price and they sold the shares after a year at a loss AND had to include the discount as income....I just can't help but think there would be a bunch of angry employees.

BruceM
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I'm not a big fan of the 1 year holding period either. My employer's plan does NOT have a holding period, so I take full advantage.
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If you are really concerned, you could buy a put in an outside account to protect you from losses at the time exercise.

Only if the company allows it. My current company has restrictions that prohibit me from buying puts on it's stock or selling shares of it's stock short in any account.

AJ
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Only if the company allows it. My current company has restrictions that prohibit me from buying puts on it's stock or selling shares of it's stock short in any account.

True, but in my experience such restrictions are usually placed on officers or higher.
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True, but in my experience such restrictions are usually placed on officers or higher.

Well, you must not have had any experience with my current company.

AJ
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Well, you must not have had any experience with my current company.

Are you in some sort of financial sales position? I see those restrictions in that industry as well much further down the ladder.
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Apple employees (I'm guessing just the salaried ones, but maybe all) are also not permitted to trade Apple options, at least not when I was there last decade.

-IGU-
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We don't have an ESPP, but we do have options. I am not allowed to buy or sell any of my company's stock during the period right before and right after when earnings are reported. This is true for everyone at this company, and they send out email messages to announce when the trading window is opened and closed so that there is no question about the time frame. They even remind people that if they have any sort of limit orders placed, they should cancel those so that they do not trigger during a closed trading window.
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Are you in some sort of financial sales position? I see those restrictions in that industry as well much further down the ladder.

A financial company, but in operations, not sales.

AJ
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Qualified Sec. 423 plans must exclude 5% shareholders and the plan may be written to exclude highly compensated employees.

And an ESPP is an options plan, although it must be nondiscriminatory, is limited to a max $25k and exercising is often automatic.

BruceM
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