The IT company I am working for and others propose to employees to buy company stocks with a 15% discount (Employee Stock Purchase Plan). In my case, I can invest up to 10% of my salary into it.
On one side, it would result in an immediate gain of 17.65% (minus fees, and if possible; I have to check all the conditions). Moreover, the market going down for a while (but this is more speculation).
On the other hand, it seems that I would be wiser to invest in a diversified fund like VT (I have already invested quite a lot into it) instead.
Also, I have no idea whether this would be taxed at the revenue level or wealth one. Also, it is not clear if there would be a capital gain or not.
I assume you can buy from upto 10% of paycheck every month, right?
Do you need to hold the shares you buy for X number of years before you can sell them?
If you leave the company in Y number of years, then you likely get the full 15% discount only on those shares that have been held in your name for >= X years? For shares held for less than X years (when you leave), is your discount proportionally reduced (and it could likely be a forced sale for those shares for you at the end of the job - check conditions)?
If answer to all 3 questions is yes, and X ~ 3 years, and you are fed up with your job / company in 2-3 years and leave, how much would you gain at all? other than paying commissions for buy & sell transactions for the broker that your employer chose? Or worse : getting fired because your company (and its stock) is going downhill while the rest of market is doing OK.
It is likely be taxed as wealth, Capital gains tax likely be zero. Dividends taxed as incomes (35% taxes withheld that you could claim back)
P.S.: I myself participated in such scheme with my employer. For me the discount was 20%, X = 4 years, and in Y = 1+ years I got sick of the line management and quit!
Can you push your boss / company to get stocks for free?
It’s a good gesture from their side and a retention plan if there is a vesting period.
My wife get every now and then 8% for free as she performed well.
If you need to buy at discount and it’s having a vesting period, I wouldn’t do it, basically they are retaining you at your expenses. I would actually your boss, what do I need to do to get stocks for free so at least you set a bar.
Other thing if your company is a seed stage where upside is enormous
If you can immediately sell the stocks upon vesting, then it’s a no brainer. I used to work at a well known tech company in Zurich that had the exactly the same conditions you describe (maybe it’s the same one, who knows ;)) and I could (and did) sell immediately upon vesting.
In my case the year was divided into two 6 month periods. 10% of the gross salary would be deducted each month – taxes/AHV etc would be paid on this at source still.
At the end of the 6 months the purchase price would be the lower of the beginning and end prices minus the 15% bonus. So in the worst case you got a 15% bonus if the stock price went down, but potentially more if the stock price went up.
Since you already paid taxes on the withheld salary, you don’t pay anything for them. But you still have to pay taxes for the >= 15% bonus so some of the stock units would be sold to cover this automatically. However it would be relatively little (unlike when RSUs vest and ~40% are sold to cover taxes).
If you left before the end of the 6 months then you didn’t get any stock, the withheld salary was just returned to you in the last paycheck. Also you were able to stop paying into the plan at any time, so if you know you are leaving you can stop paying in so that your contributed salary is not locked up until the last paycheck.
So in my case it was a no brainer to max out the employee stock purchase plan.
For me it’s a no-brainer. The only con is that you are locking away 10% of your cash salary for a period between 1 and 6 months, IMVHO this is well compensated by the guaranteed return of at least 15%.
Now that I think about it, when my ESPP stocks are released I pay taxes on the gain they had during that period (plus the 15% discount), this is something I would not have to pay if I had invested directly the money on my own but I guess the 15% discount still covers it well (at least for me who just buys broadly diversified ETFs).
If you hold US stocks on IB, you probably filed a W-8BEN (otherwise you’d be withheld 30%). It’s pretty standard, no downsides (everyone with RSU from US companies files it for instance).
Do you mean that you have guaranteed 15% discount at the day where it vests? So only risk is having the stock go down by more than 15% before you can sell it?
That risk seems low, depending if you’re subject to a trading window (some companies enforce windows where trading your employer stock is not allowed). Personally I’d do it and sell as soon as possible to diversify (similar to how I handle RSUs).
So the 15% discount is guaranteed on the day where you buy your stock with your payroll (every month). Longer than that I have no idea. If it was the case as @Quack I guess it would be written and it would make sense to hold as long as possible. Maybe I should ask to be sure about that. And no trading window.
I think now the question is between selling directly (with the fee of 20$ …) or holding.
If you are worried about the $20 sell fees: can you transfer or ask to hold the shares at IBKR instead? Do you have to hold the shares at a specific broker, and if so what are the fees charged by that broker. Some have significant fees as far as I know.
Just a few questions you can ask them before deciding.