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I would strongly advise everyone to max out their ESPP contributions (you can contribute a maximum of 15% of your salary, up to the IRS mandated $25,000 limit).

I would strongly advise everyone to max out their ESPP contributions (you can contribute a maximum of 15% of your salary, up to the IRS mandated $25,000 limit). Why? Because it's a amazing investment that, if you sell stock immediately on reception, is risk free. I'm going to assume you know how ESPPs work, google them if you don't. Let's do the math: consider a typical ESPP (yours may vary) with a 3 month purchasing period, 15% discount, and no lookback policy. Assume you are contributing $5000 this purchasing period. $5000 buys n units of stock at at a price of m dollars with a 15% discount: 5000 = .85mn Immediately sell each unit of stock for m dollars for a total return of mn dollars: 5000 = .85mn => mn = 5000 / .85 = $5882.35 You made $882.35 in "profit". Not bad at all, but not much in the grand scheme of things either. But! That's a return rate of 882.35 / 5000 = 18% in just 3 months. If you could turn around and reinvest that money in the ESPP 3 more times (4 investment periods, each 3 months long, for a total investment period of a year), you would get a yearly return of (1 + 18%)^4 = 94%. 94%! Risk free! If that seems to good to be true, the catch is in the first paragraph. An ESPP might provide 94% yearly returns, but the amount you can invest is relatively small. But it's free money, and I encourage everyone who can to take it. Edit: some people have rightfully pointed out that "risk free" is an exaggeration due to the possibility of significant price swings in the time between the stock purchase on your behalf and you selling the stock. You may also be unable to sell immediately due to black-out periods. Also, this isn't financial advice and I'm not an expert.

jldugger 4y ago
Technically, not all ESPPs work like your example. And realistically, we're talking about $2,000 every six months, and half that after taxes. For the kind of person who can afford can afford to max it out, this is less exciting. I won't say no to an extra 2k a year but it's not a exactly a deal breaker if I'm changing jobs.
- lapetitejort 4y ago
  My numbers make it less appealing. Purchase plan every six months, 5% off the price, combined with a confusing and restricting insider trading policy.
  - op00to 4y ago
    red hat?
jakub_g 4y ago
Mandatory gotcha counterpoint: it's risk free assuming immediate execution, which is not the reality. Between the time ESPP is finished at price X and the time your shares actually land on your account in Etrade / other broker so you can sell, there are several days of processing time, during which the stock can easily go down 10%+ in the "current economic climate". Then, the upside might be taxable (depending on your country) and suddenly the 15% becomes 0% or negative. (Source: saw it happen.) The good thing though is that you may withdraw all the money until a few days before offerring time end. Useful in situations of uncertainty like here.
- darkwizard42 4y ago
  Not just this, but also blackout windows. I've seen ESPP shares be granted during hold periods and then you have to incur even MORE risk! Source: experience with Lyft ESPP
  - jakub_g 4y ago
    Ouch, ESPP that you can't immediately sell are indeed really bad especially when everything is on fire.
    - codingmatty 4y ago
      I've heard that Cloudflare has a mandatory 1 year holding period on their ESPP
  - hammock 4y ago
    Seems like you ought to be able to file for a trade well in advance of the blackout window, i.e. you were going to sell x shares no matter what. Probably not the case, just saying it could/should be
beembeem 4y ago
Having a lookback increases the upside massively. It's almost an entirely different investment product versus the vanilla - take an X% discount every couple months.
darkwizard42 4y ago
As noted in a few comments below already there are risks still. Immediate execution isn't always possible due to the processing time of shares to your brokerage account and then execution of the trade, but also if your company grants the ESPP shares and it coincides with a black-out period. This adds to the risk you might be taking on. Still usually an amazing return for the time/effort required, but caution all around.
- op00to 4y ago
  I've never had an ESPP purchase coincide with a black-out period. If it does, that's pretty shitty of your employer.
  - TSUTiger 4y ago
    Be a financial insider, be subjected to black-out periods. It's typical.
  - darkwizard42 4y ago
    Can confirm this happened at Lyft multiple times. Obviously it is possible for the employer to avoid this, but it is no guarantee.
BeetleB 4y ago
> You made $882.35 in "profit". Not bad at all, but not much in the grand scheme of things either. But! That's a return rate of 882.35 / 5000 = 18% in just 3 months. If you could turn around and reinvest that money in the ESPP 3 more times (4 investment periods, each 3 months long, for a total investment period of a year), you would get a yearly return of (1 + 18%)^4 = 94%. 94%! Risk free! First rule of finances: When comparing options, never compare rates. Compare absolute amounts (i.e. Dollars). Yes, it's a great rate, but there are other investment schemes that can make you a lot more money at a lower rate. (Of course, I participate in ESPP and am not trying to dissuade anyone).
UncleOxidant 4y ago
> I would strongly advise everyone to max out their ESPP contributions (you can contribute a maximum of 15% of your salary, up to the IRS mandated $25,000 limit). IIRC we used to be able to contribute more than 15% of salary. I recall nearly doubling my base salary in the late 90s by putting something like 25% in. That was a particularly sweet ESPP in that they set the price to be the lowest in the last 2 years. Now I think it's always the lowest in the quarter or half that you're participating in so not nearly as lucrative as it used to be.
- beembeem 4y ago
  I believe the current IRS restriction on the plans themselves is 15% deferral of paychecks, unfortunately. Sounds like a sweet deal you had!
codingmatty 4y ago
The problem with this lately has been sharp declines causing people to hit the IRS limit, which is based on the FMV on the initial offering date, and thus end up not being able to purchase as much as they expected. So the effective return on the money they set aside is way lower, and they could have paused contributions to put that money to work elsewhere. Example: Stock @ $100 on the offering date and you are able to contribute $10,000 for 6 months. Stock dips to $25 on the purchase date. With the IRS Limit of $25k, you are only able to purchase 250 shares max ($25k/$100). Thus with a 15% discount on $25, you'd only be able to buy $5312 worth (250 * 21.25) and get a refund of $4688. In total of cash and stock, you'd have $10,938, which is still a gain, but only half the gain you expected. Obviously, this is somewhat of an extreme example, but not wholly unprecedented in the current markets. And as stock prices remain low, the IRS limit isn't as far away as you'd expect for some stocks.
Psyonic 4y ago
Not all ESPP's can be sold instantly. At Asana we have to hold ours for a year before selling, so it's not risk free money.

jldugger 4y ago

Technically, not all ESPPs work like your example. And realistically, we're talking about $2,000 every six months, and half that after taxes. For the kind of person who can afford can afford to max it out, this is less exciting. I won't say no to an extra 2k a year but it's not a exactly a deal breaker if I'm changing jobs.

lapetitejort 4y ago
My numbers make it less appealing. Purchase plan every six months, 5% off the price, combined with a confusing and restricting insider trading policy.
- op00to 4y ago
  red hat?

jakub_g 4y ago

Mandatory gotcha counterpoint: it's risk free assuming immediate execution, which is not the reality. Between the time ESPP is finished at price X and the time your shares actually land on your account in Etrade / other broker so you can sell, there are several days of processing time, during which the stock can easily go down 10%+ in the "current economic climate". Then, the upside might be taxable (depending on your country) and suddenly the 15% becomes 0% or negative. (Source: saw it happen.) The good thing though is that you may withdraw all the money until a few days before offerring time end. Useful in situations of uncertainty like here.

darkwizard42 4y ago
Not just this, but also blackout windows. I've seen ESPP shares be granted during hold periods and then you have to incur even MORE risk! Source: experience with Lyft ESPP
- jakub_g 4y ago
  Ouch, ESPP that you can't immediately sell are indeed really bad especially when everything is on fire.
  - codingmatty 4y ago
    I've heard that Cloudflare has a mandatory 1 year holding period on their ESPP
- hammock 4y ago
  Seems like you ought to be able to file for a trade well in advance of the blackout window, i.e. you were going to sell x shares no matter what. Probably not the case, just saying it could/should be

beembeem 4y ago

Having a lookback increases the upside massively. It's almost an entirely different investment product versus the vanilla - take an X% discount every couple months.

darkwizard42 4y ago

As noted in a few comments below already there are risks still. Immediate execution isn't always possible due to the processing time of shares to your brokerage account and then execution of the trade, but also if your company grants the ESPP shares and it coincides with a black-out period. This adds to the risk you might be taking on. Still usually an amazing return for the time/effort required, but caution all around.

op00to 4y ago
I've never had an ESPP purchase coincide with a black-out period. If it does, that's pretty shitty of your employer.
- TSUTiger 4y ago
  Be a financial insider, be subjected to black-out periods. It's typical.
- darkwizard42 4y ago
  Can confirm this happened at Lyft multiple times. Obviously it is possible for the employer to avoid this, but it is no guarantee.

BeetleB 4y ago

> You made $882.35 in "profit". Not bad at all, but not much in the grand scheme of things either. But! That's a return rate of 882.35 / 5000 = 18% in just 3 months. If you could turn around and reinvest that money in the ESPP 3 more times (4 investment periods, each 3 months long, for a total investment period of a year), you would get a yearly return of (1 + 18%)^4 = 94%. 94%! Risk free! First rule of finances: When comparing options, never compare rates. Compare absolute amounts (i.e. Dollars). Yes, it's a great rate, but there are other investment schemes that can make you a lot more money at a lower rate. (Of course, I participate in ESPP and am not trying to dissuade anyone).

UncleOxidant 4y ago

> I would strongly advise everyone to max out their ESPP contributions (you can contribute a maximum of 15% of your salary, up to the IRS mandated $25,000 limit). IIRC we used to be able to contribute more than 15% of salary. I recall nearly doubling my base salary in the late 90s by putting something like 25% in. That was a particularly sweet ESPP in that they set the price to be the lowest in the last 2 years. Now I think it's always the lowest in the quarter or half that you're participating in so not nearly as lucrative as it used to be.

beembeem 4y ago
I believe the current IRS restriction on the plans themselves is 15% deferral of paychecks, unfortunately. Sounds like a sweet deal you had!

codingmatty 4y ago

The problem with this lately has been sharp declines causing people to hit the IRS limit, which is based on the FMV on the initial offering date, and thus end up not being able to purchase as much as they expected. So the effective return on the money they set aside is way lower, and they could have paused contributions to put that money to work elsewhere. Example: Stock @ $100 on the offering date and you are able to contribute $10,000 for 6 months. Stock dips to $25 on the purchase date. With the IRS Limit of $25k, you are only able to purchase 250 shares max ($25k/$100). Thus with a 15% discount on $25, you'd only be able to buy $5312 worth (250 * 21.25) and get a refund of $4688. In total of cash and stock, you'd have $10,938, which is still a gain, but only half the gain you expected. Obviously, this is somewhat of an extreme example, but not wholly unprecedented in the current markets. And as stock prices remain low, the IRS limit isn't as far away as you'd expect for some stocks.

Psyonic 4y ago

Not all ESPP's can be sold instantly. At Asana we have to hold ours for a year before selling, so it's not risk free money.