Employee stock purchase programs - holy crap

I didn’t know how much money you could make of these things until recently. For example:

http://dellapp.us.dell.com/careers/working/benefits/index.asp

Stock Purchase Plan (SPP)
Dell’s financial performance is one of the biggest success stories of recent years. When you work for Dell, you’ll be able to purchase company stock at a 15% discount through our Stock Purchase Plan. (In fact, the discount could effectively be much more than this, if the stock prices increases during a set six month period.)

After taxes, immediately selling the stock results in a 42% annual gain, at a minimum. If it goes up over the offering period, you make even more money. There must be some huge tax benefits for companies to do this.

there’s no tax benefits to the companies – it’s just a cheaper way of compensating employees than cash, and it has the added benefit of aligning their interest with owners of the business (by making them owners).

Note - you’re getting an exaggerated perspective on the numbers – if the stock price goes down, as even Dell’s did during the bubble bust, you’ll lose money. The benefit to employees is solely the 15% discount (which is a taxable benefit to the employee).

No, it’s virtually impossible to lose money. They pick the lower stock price of the 1st day and last day of the offering, then discount it 15%. The only way to come out behind is if in the week or so between the closing and the sale the stock drops a ton, which is rather unlikely.

Surprising that there’s no tax benefits. Guess it’s kind of like the stock option dilution effect on outstanding shares.

Desslock is correct. You have to deduct off the tax impact of the 15% discount that is included in taxable income. You will also be taxed on the difference between purchase price and sale price plus you will probably pay some fees/commissions to sell the stock. It can still work out pretty good, but it can also be a minimal benefit in the right circumstances.

My company had a similar program for a few years but decided to stop it and offer better 401k options.

-DavidCPA

I have the spreadsheet I made sitting here in front of me. Assuming that you get the stock at 15% off the closing price and it doesn’t move at all, you net 12% profit after taxes - and that’s for cash you’ve given them between 3 weeks and 6 months. Withholding a constant amount every week for 6 months annualizes out to about 40%.

If you immediately flip it, you’re taxed as if they paid you the total sale price in cash - with the exception that you don’t need to pay FICA or Medicare on the 15% discount.

Example:
Starting price of $20; closing price of $10; you get the shares for $8.50. You give them 100 after-tax dollars twice a month for 6 months ($1200), they buy you 141.1 shares and you immediately flip them for $100 each ($1411). You owe your marginal federal rate on the $15 difference in price, and had to pay the broker $8 to sell. Nets out to a profit of 12% or so at a 28% marginal rate. Unless the stock price drops collapses in the couple of days between you getting them and selling them, you can’t lose money.

Weeks Orig Final Annual_Return
3 431.81 478.45 491.69%
5 431.81 478.45 190.57%
7 431.81 478.45 114.24%
9 431.81 478.45 80.87%
11 431.81 478.45 62.39%
13 431.81 478.45 50.72%
15 431.81 478.45 42.70%
17 431.81 478.45 36.85%
19 431.81 478.45 32.41%
21 431.81 478.45 28.91%
23 431.81 478.45 26.10%
25 431.81 478.45 23.78%
27 431.81 478.45 21.84%

Average Total Net Annualized
Length Withheld Rate
15 5613.53 6219.85 42.70%

At the end of the day you’re still investing your paycheck in your company, which can be a bad thing if you’re looking to diversify your earnings. Think about all those sadsacks who had their Enron 401Ks fully invested in Enron. The company went down and took not only their income, but their savings, too.

You also have to keep in mind that there are frequently rules against selling your employee stock purchase program-bought stock right away. So even if the stock went up between when you started and it gets purchased, it can still go back down before you can sell it. Or at any other point.

I think most investment advisors would caution against investing money you can’t afford to lose in your own company - there are no sure things.

Well, yeah, if you’re going to keep it. But there’s no holding period at my company; I’m just amazed you can get something this close to a sure thing.

Jason, you work for fucking Microsoft.

I’ve had stock options which turned out to be worthless, and I’m not the only one.

Yeah, the 15% thing is standard for the ESPP.

Of course when the stock loses 50 % of its value, it’s kind of… worthless.

I got my strike price at 116, and when they matured the price was 52.

ESPP has worked pretty well for me, but some people that i work with did very well with it. like, buying stocks at $12/share and immediately reselling them at $40/share.

is there a certain length of time you can hold the stocks to reduce the tax? i thought it was two years, has that changed?

Sorry - I didn’t see the statement you made about selling the shares right away. I don’t think that’s typical - there’s either a hold period, or you have to sell through a company agent, and they’ll only sell the shares during certain window periods, so there is downside risk.

Our company has something like this - it’s a one year period between your initial sign-up and the delivery. 15% discount off the price at the beginning of the period (not a choice of 15% at the first or last day.)

After taxes you can make a little money if the stock does OK, most years it isn’t all that big a deal - certainly not enough to pay for my kid’s college. The tough part is, that to sign up for enough to really make a decent return, you have a pretty big chunk taken out of your check each month.

Hmm, ok. Guess I got lucky.

Jason, are you going to use the money to do good in the world? You know, secretly using Evil Empire money to make things better and assuage your guilt feelings at the same time?

:wink: