Invest in Company Stock at a Discount vs. Index Funds?

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CaptainJ
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Invest in Company Stock at a Discount vs. Index Funds?

Post by CaptainJ »

Hi all, I'll be starting a job at a new company next month, and will have the opportunity to invest 10% of my salary in the company stock at a 20% discount in the share price. Currently, I've been investing my savings in a series of index funds with the following allocation:

50% US Equities
25% International Equities
25% US Bonds

The performance of the company stock has been relatively flat during the previous several years. Given this scenario, do you think it would be worth it to take advantage of this opportunity (i.e., buy company stock at a 20% discount), or would it make more sense to continue to put that 10% of my salary into the index funds that I'm already investing in? In case it matters, there is a 4-year vesting period on the company shares.

Thanks much for your help!
Chris K Jones
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Chris K Jones »

I have never had this opportunity, but would probably pass on it. Index funds give you wide diversification. Your company gives you none. Not only that, but you already have a lot bet on their future (your job). If I participated, it would be because I thought there was real opportunity in this company and it would be only a small part of my portfolio. Best wishes.
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retired@50
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by retired@50 »

Is it 10% of your salary or nothing?

Can you put 2% of your salary toward the company stock? Is there a 401k?

Regards,
This is one person's opinion. Nothing more.
exodusNH
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by exodusNH »

CaptainJ wrote: Thu Jan 14, 2021 11:56 am Hi all, I'll be starting a job at a new company next month, and will have the opportunity to invest 10% of my salary in the company stock at a 20% discount in the share price. Currently, I've been investing my savings in a series of index funds with the following allocation:

50% US Equities
25% International Equities
25% US Bonds

The performance of the company stock has been relatively flat during the previous several years. Given this scenario, do you think it would be worth it to take advantage of this opportunity (i.e., buy company stock at a 20% discount), or would it make more sense to continue to put that 10% of my salary into the index funds that I'm already investing in? In case it matters, there is a 4-year vesting period on the company shares.

Thanks much for your help!
Would you invest in it if you didn't work there? Do you have to do the full 10% or can you choose a lower percentage? If the company went out of business, you'd lose your job and the stock. What happens if you leave the company before your stock vests?
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bertilak
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by bertilak »

CaptainJ wrote: Thu Jan 14, 2021 11:56 am Hi all, I'll be starting a job at a new company next month, and will have the opportunity to invest 10% of my salary in the company stock at a 20% discount in the share price. Currently, I've been investing my savings in a series of index funds with the following allocation:

50% US Equities
25% International Equities
25% US Bonds

The performance of the company stock has been relatively flat during the previous several years. Given this scenario, do you think it would be worth it to take advantage of this opportunity (i.e., buy company stock at a 20% discount), or would it make more sense to continue to put that 10% of my salary into the index funds that I'm already investing in? In case it matters, there is a 4-year vesting period on the company shares.

Thanks much for your help!
I'd take the free money. Even if the company stock price stays flat for four years you have a respectable (if not spectacular) return with that 20% discount, especially if there are dividends involved.

Once the four years are up you can put the money wherever you want.
Last edited by bertilak on Thu Jan 14, 2021 12:03 pm, edited 1 time in total.
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JD2775
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by JD2775 »

It sounds like you are referring to a ESPP, or something similar. My company just started this on Jan 1st, 15% discount and a % of your pay taken out each paycheck after taxes. I was hesitant but I went ahead and did it.

20% is an even better deal. I guess it depends on how this is structured. Can you buy the stock anytime you want at 20% discount? Or is it an actual ESPP setup?

10% of your salary is significant though, if you can't change that. I did 6%
exodusNH
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by exodusNH »

bertilak wrote: Thu Jan 14, 2021 12:01 pm I'd take the free money. Even if the company stock price stays flat for four years you have a respectable (if not spectacular) return with that 20% discount, especially if there are dividends involved.
20% is certainly spectacular if you look at the history of the stock market and not just what's happened over the last couple of years.

However, how old is this company? What industry? Will it be around in 4 years? Look at something like Nikola...
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bertilak
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by bertilak »

exodusNH wrote: Thu Jan 14, 2021 12:05 pm
bertilak wrote: Thu Jan 14, 2021 12:01 pm I'd take the free money. Even if the company stock price stays flat for four years you have a respectable (if not spectacular) return with that 20% discount, especially if there are dividends involved.
20% is certainly spectacular if you look at the history of the stock market and not just what's happened over the last couple of years.

However, how old is this company? What industry? Will it be around in 4 years? Look at something like Nikola...
20% would certainly be spectacular for one year, but over 4 years I think it is closer to "respectable." Maybe "highly respectable." :D
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CaptainJ
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by CaptainJ »

JD2775 wrote: Thu Jan 14, 2021 12:03 pm It sounds like you are referring to a ESPP, or something similar. My company just started this on Jan 1st, 15% discount and a % of your pay taken out each paycheck after taxes. I was hesitant but I went ahead and did it.

20% is an even better deal. I guess it depends on how this is structured. Can you buy the stock anytime you want at 20% discount? Or is it an actual ESPP setup?

10% of your salary is significant though, if you can't change that. I did 6%
Thanks for all your feedback so far. You're exactly right that this is basically an ESPP. To answer your other questions, I don't have to invest the full 10% of my salary; 10% is just a cap. Also, I would have the opportunity to invest once a year on a specified date. If I decide to withdraw the funds before the vesting date, then the 20% discount would probably not apply.

This is a veteran and prominent company in the pharma industry, so it should have a stable future. I would probably not invest in them if I was not an employee, since I generally prefer to put my savings into index funds. Basically, my sole reason for investing would be to get the 20% stock price discount, but I'm still trying to decide if the discount outweighs the higher returns that I would get from putting those savings into index funds.

Any additional thoughts you guys have would be much appreciated!
JD2775
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by JD2775 »

CaptainJ wrote: Thu Jan 14, 2021 12:52 pm
JD2775 wrote: Thu Jan 14, 2021 12:03 pm It sounds like you are referring to a ESPP, or something similar. My company just started this on Jan 1st, 15% discount and a % of your pay taken out each paycheck after taxes. I was hesitant but I went ahead and did it.

20% is an even better deal. I guess it depends on how this is structured. Can you buy the stock anytime you want at 20% discount? Or is it an actual ESPP setup?

10% of your salary is significant though, if you can't change that. I did 6%
Thanks for all your feedback so far. You're exactly right that this is basically an ESPP. To answer your other questions, I don't have to invest the full 10% of my salary; 10% is just a cap. Also, I would have the opportunity to invest once a year on a specified date. If I decide to withdraw the funds before the vesting date, then the 20% discount would probably not apply.

This is a veteran and prominent company in the pharma industry, so it should have a stable future. I would probably not invest in them if I was not an employee, since I generally prefer to put my savings into index funds. Basically, my sole reason for investing would be to get the 20% stock price discount, but I'm still trying to decide if the discount outweighs the higher returns that I would get from putting those savings into index funds.

Any additional thoughts you guys have would be much appreciated!
I was in the exact same boat you are. 100% index investor, but I decided to give it a shot (@ 15% discount). Stable company as well. I may actually up my % as time goes along, we will see. In my case there are two 6 month offering periods per year, and a 1 year holding period per batch. I will just keep selling after the holding periods are up to buy more VTSAX in taxable. That's my plan anyway
AlexanderTheMediocre
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by AlexanderTheMediocre »

My current company ESPP only requires a six-month lockup w/ 15% discount, so I definitely have less time risk involved. That said, if I were subject to your terms at my current company (4 year lockup and 20% discount), I would definitely do it.

If you are reasonably happy with how things are going and future outlook, I would do this with money that does not fit into retirement vehicles. Max out all of your retirement options (401k/Roth/etc) first and then put taxable money into this. You can always split the difference only do 5% instead of 10%, etc. Ultimately, this will be a small % of your portfolio either way so it probably doesn't matter that much!
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by campy2010 »

What are the details of the ESPP plan? How often is the money invested? What share price is used? Is there a holding period?

For big pharma, I would probably participate if the holding period is reasonable and not too long.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by JD2775 »

AlexanderTheMediocre wrote: Thu Jan 14, 2021 12:59 pm My current company ESPP only requires a six-month lockup w/ 15% discount, so I definitely have less time risk involved. That said, if I were subject to your terms at my current company (4 year lockup and 20% discount), I would definitely do it.

If you are reasonably happy with how things are going and future outlook, I would do this with money that does not fit into retirement vehicles. Max out all of your retirement options (401k/Roth/etc) first and then put taxable money into this. You can always split the difference only do 5% instead of 10%, etc. Ultimately, this will be a small % of your portfolio either way so it probably doesn't matter that much!
I am wondering what the 4-year vesting period means though exactly. Is that regardless of employment? Meaning, if a person left the company at 3 and a half years they would lose out on the 20% discount? Or does it strictly mean the stock itself must be held 4 years regardless of employment with the company?

If it's the former, I would be more leery about joining this.
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CaptainJ
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by CaptainJ »

campy2010 wrote: Thu Jan 14, 2021 1:01 pm What are the details of the ESPP plan? How often is the money invested? What share price is used? Is there a holding period?

For big pharma, I would probably participate if the holding period is reasonable and not too long.

Thanks campy, please see my answers to your questions in an earlier post. The money is invested annually on a specified date (using the current share price), and the vesting period is 4 years.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by KlangFool »

OP,

Remember Enron!


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CaptainJ
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by CaptainJ »

JD2775 wrote: Thu Jan 14, 2021 1:11 pm
AlexanderTheMediocre wrote: Thu Jan 14, 2021 12:59 pm My current company ESPP only requires a six-month lockup w/ 15% discount, so I definitely have less time risk involved. That said, if I were subject to your terms at my current company (4 year lockup and 20% discount), I would definitely do it.

If you are reasonably happy with how things are going and future outlook, I would do this with money that does not fit into retirement vehicles. Max out all of your retirement options (401k/Roth/etc) first and then put taxable money into this. You can always split the difference only do 5% instead of 10%, etc. Ultimately, this will be a small % of your portfolio either way so it probably doesn't matter that much!
I am wondering what the 4-year vesting period means though exactly. Is that regardless of employment? Meaning, if a person left the company at 3 and a half years they would lose out on the 20% discount? Or does it strictly mean the stock itself must be held 4 years regardless of employment with the company?

If it's the former, I would be more leery about joining this.
Thanks for your feedback Alexander. It's my understanding (though I'm not 100% sure) that the vesting period only applies as long as the employee remains at the company. If they leave before the vesting period is over, then all of the shares are automatically liquified, meaning that I would receive the full price for all shares bought (including the 20% discount).
MathWizard
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by MathWizard »

CaptainJ wrote: Thu Jan 14, 2021 1:44 pm
JD2775 wrote: Thu Jan 14, 2021 1:11 pm
AlexanderTheMediocre wrote: Thu Jan 14, 2021 12:59 pm My current company ESPP only requires a six-month lockup w/ 15% discount, so I definitely have less time risk involved. That said, if I were subject to your terms at my current company (4 year lockup and 20% discount), I would definitely do it.

If you are reasonably happy with how things are going and future outlook, I would do this with money that does not fit into retirement vehicles. Max out all of your retirement options (401k/Roth/etc) first and then put taxable money into this. You can always split the difference only do 5% instead of 10%, etc. Ultimately, this will be a small % of your portfolio either way so it probably doesn't matter that much!
I am wondering what the 4-year vesting period means though exactly. Is that regardless of employment? Meaning, if a person left the company at 3 and a half years they would lose out on the 20% discount? Or does it strictly mean the stock itself must be held 4 years regardless of employment with the company?

If it's the former, I would be more leery about joining this.
Thanks for your feedback Alexander. It's my understanding (though I'm not 100% sure) that the vesting period only applies as long as the employee remains at the company. If they leave before the vesting period is over, then all of the shares are automatically liquified, meaning that I would receive the full price for all shares bought (including the 20% discount).
Typically vesting would mean that you get none of the 20%.

If the stock is not performing well, then a 4 year vesting, even with a 20% discount is not that great. Certainly not
a great risk/reward, since you are in a single stock, that if the company fails, you lose both stock and your job.
If you don't get dividends and if the stock is truly flat, then I would pass if it were me.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Da5id »

I think this may be a non-qualified ESPP, with non-favorable taxation? I gather the biggest discount allowed for a qualified ESPP is 15%. e.g. see 26 US Code 423 which says to be qualified:
(6)under the terms of the plan, the option price is not less than the lesser of—
(A)an amount equal to 85 percent of the fair market value of the stock at the time such option is granted, or
(B)an amount which under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time such option is exercised;
You might want to confirm that...
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by PA86 »

I certainly wouldn't want both my income and my investment portfolio tied to one company. If its just a small portion of your assets, maybe, but 10% of your pay is significant.
Last edited by PA86 on Thu Jan 14, 2021 2:05 pm, edited 1 time in total.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by permport »

CaptainJ wrote: Thu Jan 14, 2021 11:56 am Hi all, I'll be starting a job at a new company next month, and will have the opportunity to invest 10% of my salary in the company stock at a 20% discount in the share price. Currently, I've been investing my savings in a series of index funds with the following allocation:

50% US Equities
25% International Equities
25% US Bonds

The performance of the company stock has been relatively flat during the previous several years. Given this scenario, do you think it would be worth it to take advantage of this opportunity (i.e., buy company stock at a 20% discount), or would it make more sense to continue to put that 10% of my salary into the index funds that I'm already investing in? In case it matters, there is a 4-year vesting period on the company shares.

Thanks much for your help!
Take advantage of the discount and then sell as soon as you are able to without penalty! :mrgreen:
Buy right and hold tight.
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bertilak
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by bertilak »

KlangFool wrote: Thu Jan 14, 2021 1:40 pm OP,

Remember Enron!


KlangFool
One thing that makes Enron memorable is how rare that event is.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by KlangFool »

bertilak wrote: Thu Jan 14, 2021 2:08 pm
KlangFool wrote: Thu Jan 14, 2021 1:40 pm OP,

Remember Enron!


KlangFool
One thing that makes Enron memorable is how rare that event is.
bertilak,

Really?


Should I add a few more to the list of company stocks that folks bought too much and destroy their retirement in the process? Aka, a great deal in terms of ESPP of their times.

Nortel, Lucent Technologies, and so on.


Basically, many of the Telecom Stocks.

KlangFool
JD2775
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by JD2775 »

CaptainJ wrote: Thu Jan 14, 2021 1:44 pm
JD2775 wrote: Thu Jan 14, 2021 1:11 pm
AlexanderTheMediocre wrote: Thu Jan 14, 2021 12:59 pm My current company ESPP only requires a six-month lockup w/ 15% discount, so I definitely have less time risk involved. That said, if I were subject to your terms at my current company (4 year lockup and 20% discount), I would definitely do it.

If you are reasonably happy with how things are going and future outlook, I would do this with money that does not fit into retirement vehicles. Max out all of your retirement options (401k/Roth/etc) first and then put taxable money into this. You can always split the difference only do 5% instead of 10%, etc. Ultimately, this will be a small % of your portfolio either way so it probably doesn't matter that much!
I am wondering what the 4-year vesting period means though exactly. Is that regardless of employment? Meaning, if a person left the company at 3 and a half years they would lose out on the 20% discount? Or does it strictly mean the stock itself must be held 4 years regardless of employment with the company?

If it's the former, I would be more leery about joining this.
Thanks for your feedback Alexander. It's my understanding (though I'm not 100% sure) that the vesting period only applies as long as the employee remains at the company. If they leave before the vesting period is over, then all of the shares are automatically liquified, meaning that I would receive the full price for all shares bought (including the 20% discount).
That changes things, IMO. Unless you are sure you will be there for 4+ years I might pass on this. Think about it, if you leave (or get let go) at 3.5 years that is a lot of stock that's built up that is basically "wasted" when you could have been putting that money towards an index fund that entire time, earning interest (hopefully!)

For my plan, every 6 months I get the 15% batch of shares posted to my account. Once it is there, it's mine to do whatever I want with it (after the 1 year holding period). The only risk I have is the first 6 months, if I leave or get laid off. Then those built up shares are liquidated. 6 months is better than 4 years, in that regard.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by vineviz »

CaptainJ wrote: Thu Jan 14, 2021 12:52 pmBasically, my sole reason for investing would be to get the 20% stock price discount, but I'm still trying to decide if the discount outweighs the higher returns that I would get from putting those savings into index funds.
The discount is part of your compensation, so it’s hard to make a case that you should forgo it.

Regardless of historical performance, the expected return on the company stock should be roughly equal to market. I wouldn’t assume that the index fund will have a higher or lower future return.

As long as you make sure the company stock doesn’t grow to be too large a percentage of your overall net worth, it’d be irrational to not participate in the plan.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by AB609 »

4 years would too be too long for me. I participate in my company's program. We buy at the end of the quarter and there is no vesting period. I sell it as soon as possible so there is very little risk. Keep mind as well that the 20% discount you'll be getting is taxed as income, so your after-tax discount is somewhat less.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Wiggums »

I always sold my company stock (Given as part of the 401(k) match). They also offered us discounted stock. I watched the company stock go from $140 to 30’s with one expensive acquisition, possibly due to the debt load of the combined company.

In my case, I did significantly better By avoiding company stock.
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CaptainJ
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by CaptainJ »

Thanks for the feedback all! From your comments, it seems like there are some good arguments both for and against participating in the plan.

To summarize:

Pros: Company stock with 20% discount will likely exceed returns from index funds over the course of the holding period (4 years)

Cons:
  • Higher risk/volatility from investing in a single stock vs. index funds
  • Capital gains tax when selling
  • Long holding period of 4 years

Based on these pros/cons, I'm inclined to go halfway, i.e., invest 5% of my net salary in the ESPP plan (which is halfway between 0% and the max investment of 10%).

Does this seem like a reasonable approach? Any other suggestions/feedback would be welcome!
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by KlangFool »

CaptainJ wrote: Fri Jan 15, 2021 8:38 am Thanks for the feedback all! From your comments, it seems like there are some good arguments both for and against participating in the plan.

To summarize:

Pros: Company stock with 20% discount will likely exceed returns from index funds over the course of the holding period (4 years)

Cons:
  • Higher risk/volatility from investing in a single stock vs. index funds
  • Capital gains tax when selling
  • Long holding period of 4 years

Based on these pros/cons, I'm inclined to go halfway, i.e., invest 5% of my net salary in the ESPP plan (which is halfway between 0% and the max investment of 10%).

Does this seem like a reasonable approach? Any other suggestions/feedback would be welcome!
CaptainJ,

Can you max up your Trad 401K after putting 5% into this ESPP? If not, you paying a lot of taxes in order to contribute to ESPP.


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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Cycle »

I take the discount, I think it's 15%. 10% of my salary and I sell it as soon as it is long term capital gains and convert to a total world index
Never look back unless you are planning to go that way
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Jack FFR1846 »

If you really have to buy and hold the stock for 4 years, hard pass.

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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by masrepus »

The 4 year vesting would be the issue for me. You get the 20% discount, but that could easily go away over four years, or be better.

My company ESPP has a 15% discount with a 6 month hold. Previous company had no hold, so that was a no brainer. I sell as soon as I get the shares. The stock also has a 4% dividend, so I figure over 6 months I should still get a good part of the 19%, little less for taxes. But if over four years it doesn't sound like as good a deal.
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Re: Invest in Company Stock at a Discount vs. Index Funds?

Post by Steel Rain »

My wife and I both have programs like this. Hers is 10% discount and mine is %5, so not as good as yours. We max them, every 6 months, we get the shares and then immediately sell them and move the cash to a brokerage account and buy SCHB. The way I look at it is that its free money. The key is to sell it as soon as the plan allows you to and then get into a more diversified position.

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