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Employee Stock Purchase Plan (ESPP)

definition and explanation

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What is

Employee Stock Purchase Plan (ESPP)

An ESPP is a benefit offered by employers that allows employees to purchase company stock at a discount. This can be a great way to build equity in the company you work for and receive some tax benefits as well.

Employee Stock Purchase Plan (ESPP)

explained

An employee stock purchase plan (ESPP) is a benefit offered by many companies that allows employees to purchase shares of the company's stock at a discounted price. The discount is typically between 5% and 15% of the stock's market value.

ESPPs are a way for employees to share in the company's success and to build a personal financial stake in the company. They also provide a way for employees to buy stock at a discount, which can be a significant benefit if the company's stock price increases over time.

There are two main types of ESPPs:

  1. "Discount plans" allow employees to purchase shares at a set percentage below the stock's market value. For example, if the stock is trading at $100 per share and the discount is 10%, the employee would pay $90 per share.
  2. "Look-back plans" allow employees to purchase shares at the lower of two prices: the price at the start of the offering period or the price at the end of the offering period. For example, if the stock is trading at $100 per share at the start of the offering period and $110 per share at the end of the offering period, the employee would pay $100 per share.

ESPPs are typically offered to all employees, regardless of job title or salary. However, some companies may have different tiers of ESPPs, with different discounts or purchase limits for different employees.

There are some risks associated with ESPPs. The main risk is that the stock price could drop during the offering period, which would result in the employee paying more for the shares than they would have if they had purchased them on the open market.

Another risk is that the company could be acquired during the offering period, which could result in the employee's shares being converted to the stock of the new company. This could be a good thing or a bad thing, depending on the new company's stock price and the terms of the merger.

Overall, ESPPs can be a great benefit for employees, but it's important to understand the risks before participating.

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