Own Stock or Contribute to ESPP?

Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.

Make yourself at home - we’ll get to whether to own stock or contribute to an ESPP in a moment.

But first - here are some links you may want to save for later.

Is It Worth Holding Employer Stock?

How Are Restricted Stock Units Taxed?

Are Employee Stock Purchase Plans Underrated?

Now, let's get on to the blog.

Own Stock or Contribute to ESPP?

Is it better to own stock or contribute to an Employee Stock Purchase Plan (ESPP)?

Contributing to an ESPP may be preferable.

There’s no guarantee and everyone’s situation is different.
Nonetheless, let’s check the math.

Stock and ESPP Situation

Tech employees often own company stock.

They may also have the ability to contribute to an Employee Stock Purchase Plan (ESPP) which offers a 15% discount off the lower of:

• the price at the beginning of six months and

• the price at the end of the six months

However, many employees aren’t contributing to the ESPP despite owning stock.

That may be suboptimal.

Let’s run a couple scenarios which compare:

• owning $10,000 worth of company stock with

• contributing $10,000 to the Employee Stock Purchase Plan

Scenario 1: Price Increases 10%

Let’s say a stock’s price is $100 and rises to $110 over six months.

If someone owns 100 shares, it would:

• grow to be worth $11,000

• appreciate in value $1,000

• gain 10%

Simple, right?

However, if someone were to instead contribute $10,000 to the Employee Stock Purchase Plan (ESPP) described above, it would buy:

• at $85 (15% off $100, the lower of the two prices)

• nearly 118 shares ($10,000 / $85)

That would:

• be worth $12,941 ($110 price * nearly 118 shares) and

• have a gain of $2,941 ($12,941 - $10,000),

• or 29%

For Scenario 1, the ESPP would earn roughly $1,941 more and an extra 19% return on the $10,000 investment!

Scenario 2: Price Decreases 10%

Let’s say a stock’s price is $100 and falls to $90 over six months.

If someone owns 100 shares, it would:

• fall to be worth $9,000

• depreciate in value $1,000

• lose 10%

Again, simple.

However, if someone were to instead contribute $10,000 to the Employee Stock Purchase Plan described above, it would buy:

• at $76.50 (15% off $90, the lower of the two prices)

• nearly 131 shares purchased ($10,000 / $76.50)

That would:

• be worth $11,765 ($90 price * nearly 131 shares) and

• have a gain of $1,765 ($11,765 - $10,000),

• or 18%

In Scenario 2, the ESPP would earn roughly $2,765 more and an extra 28% return on the $10,000 investment!

ESPP Better in Both Scenarios

To recap, with a 10%:

• Price increase - the ESPP would earn $1,941 more and an extra 19% return on the $10,000

• Price decrease - the ESPP would earn $2,765 more and an extra 28% return on the $10,000

In this case, it might make sense to sell some company stock and then contribute an offsetting amount to the Employee Stock Purchase Plan. However, doing so is not always appropriate!

Hey, thanks for reading my post on owning stock versus contributing to an Employee Stock Purchase Plan.

Just a reminder, I share a lot of resources that can help you.

Disclaimer

In addition to the usual disclaimers, neither this post nor this image includes any financial, tax, or legal advice.

This quick review ignores many factors including but not limited to the:

• ability to sell stock immediately, which may not be possible,

• tax impacts, since everyone’s tax situation is different,

• fact that fractional share purchases are rarely allowed with ESPPs,

• potential inability for someone to contribute due to various factors (such as alimony, childcare payments. etc.)...