Employee Stock Purchase Plans and their potential generous nature.

Nvidia and its parabolic stock movement have been a hot topic over the past year. Nvidia also happens to offer an Employee Stock Purchase Plan or ESPP for short. They have information posted on their website that explains the exact structure of their ESPP. Needless to say, it is a fairly generous plan.

So, let’s get into what an ESPP actually is. Essentially, it allows employees to defer a portion of their salary and then during a “purchase period” your money will purchase the company’s stock! Many publicly traded companies offer an ESPP.

Fairly simple and the name speaks for itself. However, these plans can get nuanced very quickly. Many of them offer a discount. Yes, that is right, a discount!

These discounts can range from 5%-15%. This makes it even more attractive to the employees. Not only can they get their hands on shares of the company, but now they can do it for 15% cheaper. 

An important note: The discount is relative to the offering price. This is usually set after you have enrolled in the plan. So, if the offering price was $20 and the stock now trades at $25, you are still getting the discount on the $20 share price. For a stock that is rising, this is awesome. If the stock is trading lower than the offering price, you get the discount on the fair market value. So, if the offering price was $20, now the stock trades at $15, you will get to buy 15% lower than $15.

This makes it nearly always a win-win for the employee. Either way, the employee is catching a discount on their company’s stock.

Now let’s make it even more nuanced. Let’s bring in look-backs. Look-backs are not always offered; however, if they are, they can be incredibly lucrative.

Nvidia, for example, offers a 24-month look-back. This means that when you lock in your offering price after you’ve enrolled, you get to purchase at 15% below that price 4 different times (twice per year). Here is a link to Nvidia’s ESPP.

Not every company is Nvidia, but let’s get this straight for a second. You lock in a price for 2 years and you get to buy the stock at 15% less than this price… Nvidia employees are absolutely loving this ESPP, I can promise you that.

Now there are, of course, some limitations. The IRS limits purchases to $25,000 worth of stock based on the offering dates’ fair market value. Essentially, this means that the true contribution limit is $21,250. The math behind that is below:

Hypothetical:

Fair Market Value of Stock: $100

Price After Discount: $85

Maximum Contribution based on FMV: $25,000/$100 = 250 Shares

Maximum Contribution after Discount: $21,250 or (250×$85)

There you have it. But let’s take a deeper dive into the potential for an Nvidia employee who enrolled in their ESPP a few years back. Nvidia states that the offering price is set the first trading day after the month you enroll. You can enroll in February or August of each year.

So, this essentially means that March 1 or September 1, will be your offering price. Let’s say someone enrolled in February of 2023. This set their offering price just a tad under $24. We will use $24 because it is a round number.

This employee could be purchasing up to $21,250 worth of Nvidia shares at a price of $20.40 per share.

Let the records show that Nvidia is currently trading above $120…

Our hypothetical Nvidia employee’s maximum ESPP contribution of $21,250 just became ~$125,000.

And there you have it. An ESPP can be insanely lucrative. One note, when participating in an ESPP with the sole goal of selling down shares to take advantage of the 15% discount, please keep in mind trading windows, this can affect your ability to sell stock at publicly traded companies.

If you thought the ESPP was a bit nuanced, the taxes associated with ESPP shares can be even more nuanced. I am not going to get into the tax side of ESPP as I am not a tax professional, I’ll leave qualifying and disqualifying dispositions of ESPP shares to the tax pros.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!