Stock options vs ESPP.

5 Comments

1. AnonymousMay 29,2022 at 4:16PM UTC

   I’ll do my best ? Also, I am no tax expert or licensed broker.

   Stock options are shares of stock given to you at a specific price. Typically there are available for you to sell over a period of time, vesting schedule. Example:

   You are awarded 200 shares of AAPL at the price of $125 per share, on a vesting schedule of four years. That means you get. Chunk of shares over four years, 50 shares a year. Now if those shares at the time they become vested are at a market price of $80 per share,those shares are not worth anything. If the market price is $150 per share then they are in the green. If you decide to sell those shares then you would get the difference between the award price and the market price, $25 per share. So for 50 shares the total = $1250 before fees and taxes.

   ESPP is a benefit that gives employees the opportunity to buy shares of company stock at a discount, example 15%. Typically, you can’t purchase more than 10% of your pay per quarter. You pay for those shares through payroll deduction (usually after tax). The company will make a purchase of shares at the discounted price each quarter. You can then sit on them or sell them. Example:

   You elect 5% from each paycheck to buy shares, $2000 x .05 = $100. You get two paychecks every month = $200 a month, $600 each quarter. At the end of the quarter the company buys $600 worth of shares. At the time of the buy the stock price is $25 per share. The ESPP price is $25 x .15 = $21.25 per share. For $600 @ $21.25 per share you would have roughly 28 shares. If you were to sell those shares the next day and stock price that day is $30, your profit would be the difference between $30 - $21.25 = $8.75 for a total of $245 for 28 shares (28 shares x $30 = $840 - $595, what you paid = $245), which is more than any traditional savings account.

   Consult your tax person for the details of how much the tax would be on the gain.

   I know this stuff is confusing and overwhelming. I hope this helps. Some companies provide financial education through 401k plans. Check into that for help with your specific financial goals.

2. Alexis GladstoneMay 29,2022 at 5:15PM UTC

   This is a perfect explanation of the differences. Plus great advice on consulting a tax specialist.

3. AnonymousMay 29,2022 at 7:02PM UTC

   in google type stock options vs espp. See the search result from mystockoptions.com

   At the end of the article see FAQs under espp. If you have a CPA you should pick their brains on this topic. Also consider what the market is doing, we are heading into a scary recession where stocks are due to take a serious hit. Really think this thru and pay an unbiased professional if you need to and research online to draw conclusions for yourself. I suggest following rich dad poor dad on YouTube. In this economy I wouldn’t do neither but that’s just me

4. Barb HansenMay 30,2022 at 1:13AM UTC

   Spoon-fed explanation :)

   Stock options plans consist of three parts:
   1- How many stock options you get
   2- The stock option price
   3- The vesting period.

   The number of stock options you get is the number of potential stocks you can buy. If your stock options are 1000 common shares, you have the right to buy 1000 common stocks***.

   Stock option price.

   Which is: The price you get to buy the stocks at.

   When you are granted your stock options, you get a "strike price" for your stock. The strike price is set by the company based on many factors that don't really matter for this discussion but generally is a low price, so early employees are incentivized to stick around.

   So let's say you are granted the option to buy 1,000 shares. The day you are granted those options, the company sets the strike price at $1.00. So whenever you can buy those shares (which is your stock option vesting, more on that later), you have the "option to buy" those shares at 1.00 a share.

   It's called an "option to buy" because you don't have to buy the shares if you don't want to (you may not be able to afford the stocks or any other number of reasons)*

   In theory, stocks go up in price over time, so you'll be buying shares at a lower than market price (which is an excellent thing).

   Stock Option Vesting:

   Which is: The "When you get to buy the stocks" or when you get to "exercise your option" to buy the stocks.

   Because companies want you to keep working for them for a period of time, they have a "vesting period", usually four years, before you get all of your stock options, but they also want to reward you along the way (so that's the 25% at your first anniversary and 1/48 per month after that part of the vesting document)

   Example:
   You have the right to exercise an option to buy 1,000 shares. Your stock option vesting period is as follows:

   You have to wait until the first anniversary of your start date before you get the "right to exercise" to buy 25% of your stock options, which would be 250 shares (in my example)

   On your first anniversary, you have the ability to buy 250 shares at a 1.00 a share (remember from above that your "strike" price for your shares is the price of the shares when you got your stock option document, which for this example was 1.00)

   If, on your 1st anniversary, your companies stock price is $10.00 a share, you are buying your 250 shares for $250.00 (250 shares x 1.00 a share), and those shares are immediately worth $2,500.00 (250 x their current price of 10.00), which is a $2,250.00 profit for you minus brokerage fees (and there may be tax implications*).

   Each month after your 1st anniversary, you can, if you want to, buy 1/48th of your total shares until you run out shares to buy (or in your case 4 years).

   If you choose to not buy your stock at the end of each month, those shares remain yours, and you can buy them later**

   The short way to say what your plan is:

   You have 1000 stock options with a strike price of $1.00 over 4 years with a 1 year cliff. :-)

   A couple of other points:

   Every employees "strike price" (their stock option price) is different, depending on when they joined the company. The earlier you join a company, generally, the lower the strike price.

   I'm using 1000 shares at a $1.00 a share as an example - each company and each stock option plan is different.

   Stock options can be great benefits if the price of the stock goes up. Being able to buy a stock at $1.00 a share that immediately is worth $2.00 or $100.00 a share is fantastic, but there is no guarantee that stocks will go up in price.

   * Please consult a financial advisor/your accountant when you're able to "exercise your option to buy" your stocks to understand any liabilities you may face when buying and selling stocks.

   **Check your documentation if your options need to be exercised while the company employs you before choosing to not buy your stocks when/if you leave their employ.

   ***Most, if not all, ESOP (employee stock option plans) involve common stock instead of preferred stock. I'll let you look up differences between common and preferred stocks online as it's not relevant to your question, other than most ESOPs are common stocks.

5. AnonymousMay 30,2022 at 1:49PM UTC

   My friend did this 30 years ago, while working for 7-11. She is doing great now. I quit the job to pursue my counseling degree. LOL.