In this episode, we take a closer look at Employee Stock Purchase Plans and ask a simple but important question: are they worth the effort? Many people in tech see ESPPs during open enrollment, feel overwhelmed by the language, and quietly opt out. Why does that happen? Well, ESPPs sit in an awkward middle space. They are not large enough to feel exciting like salary, bonuses, or RSUs, but they are not simple enough to feel effortless. That combination often leads to avoidance.
We discuss why companies offer ESPPs in the first place. Some want employees to think and act like owners. Some use them as a light retention tool. Others simply provide a convenient, payroll based way to purchase company stock. Not all plans are created equal. Some include meaningful discounts and lookback provisions that can significantly improve the math. Others are more basic and function more like a structured stock purchase program. Understanding the specific mechanics of your plan is critical. Blanket assumptions do not work here.
We address one of the biggest sticking points, which is taxes. Many people fear making a mistake, especially around disqualifying dispositions. We clarify that a disqualifying disposition is simply a different tax treatment, not the elimination of the benefit. Even if taxes are higher, the discount does not disappear. We compare this to a 401(k) match. Taxes will apply eventually, but that does not make the match worthless.
We also talk about multi year offering periods and how they can create hesitation. Long timelines can feel binding, especially for those already concentrated in company stock. The plan’s timeline does not dictate personal behavior. You still have choices.
Amy encourages you to move from optimization to intention. ESPPs are rarely life changing on their own, but when structured with a discount, they can quietly add value. The key is clarity. When we understand the plan and how it fits into our broader compensation and concentration picture, the decision becomes lighter and more intentional.
(00:00) Introduction to ESPPs
(00:57) Why ESPPs Get Ignored
(03:11) Why Companies Offer ESPPs
(04:44) What Makes a Plan Valuable
(07:36) Key Variables
(08:48) Taxes and Disqualifying Dispositions
(11:17) Multi Year Offering Periods
(12:46) ESPPs vs RSUs and Other Compensation
(14:21) Optimization vs Intention
(16:21) How to Contact Thimbleberry Financial
[Music playing]
Jon Gay (00:09):
Welcome back to ThimbleberryU. I'm Jon Jag Gay, joined as always by Amy Walls from Thimbleberry Financial. Hello, Amy.
Amy Walls (00:15):
Hey, Jag. Good to talk to you.
Jon Gay (00:16):
Always a pleasure to be with you. Today, we're talking about employee stock purchase plans (ESPPs). We have talked about these in a number of episodes before, so I'd encourage you to check those episodes out. A little bit more of a deep dive today.
If you've worked in tech, you've probably seen these ESPPs come up during open enrollment. They're often explained quickly, wrapped in complicated language, easy to just kind of glaze over, especially if you already earn a strong income or receive equity.
So, today, we're going to ask a question that a lot of people quietly ask themselves when they see this paperwork: “Are ESPPs worth the effort?” Amy, it's one of those benefits I hear people either ignore completely or just maybe feel a little uneasy about. So, why do they get dismissed so often?
Amy Walls (00:57):
Jag, it's a great question, and I don't think we've ever addressed this before, so I'm glad we're talking about it today. What I'm going to say is that ESPPs sit in, what I'm going to call, an awkward middle space.
Just like in our life, it's no fun to live in limbo. ESPPs are kind of this weird limbo space many times or at least perceived that way.
Jon Gay (01:21):
If I had the rights to the music, I'd play the conga or something as we're talking about this.
Amy Walls (01:25):
(Laughs) Yeah. They just aren't big enough in terms of the value people get from them to feel exciting compared to salary, bonuses, or RSUs. They're not simple enough to feel effortless. They often show up (as you alluded to) during an already overwhelming time, such as open enrollment.
And once we make that initial like, “I can't deal with this now” decision, we've made a decision, so it's harder to get over that. High earners especially feel like they're chasing small dollars. And many people, I think, assume if this really mattered, it would be a lot more clear.
So, that's the awkward middle space that I'm talking about. There’s also fear of doing it wrong. Forgetting to enroll, forgetting to sell, not understanding the tax language, they’re rife with the opportunity for mistakes.
And especially for people in tech who maybe experienced some mistakes with stock options or such, “Oh gosh, this is another gotcha. I don't want to put my toes into the water there and get hit again.” And I think sometimes advisors reinforce this idea unintentionally.
Because if employee stock purchase plans aren't discussed, they just kind of fade into the background. And so, all of this together, I think, is the reason they get dismissed. This avoidance is about unclear value rather than a lack of sophistication.
Jon Gay (03:03):
Yeah. And I think probably the first step in unraveling that is zooming out for a second here. Why do companies offer ESPPs at all?
Amy Walls (03:11):
For different reasons for different companies. Some want employees to feel like owners. If you feel like an owner, you're going to care more about your work, you're going to put more attention and effort in, you're going to work on a better product, et cetera.
Some want retention through the offering periods. They're kind of like a little — let’s call them a “bronze” handcuff.
Jon Gay (03:35):
And not quite gold or silver because we're recording this during the Olympics. Okay, yeah.
Amy Walls (03:40):
And then some plans are really simply just about convenience. They are a payroll-based way to buy company stock. Now, for many of our listeners, they're probably understanding that there's a financial incentive to buying that stock because most of these are offered at a discount.
And that's true. But we've also seen employee stock purchase plans where there is no discount. It's simply a way for employees to be enticed into buying the stock for those reasons that we just talked about.
And it doesn't mean those plans are broken, they're just serving a different purpose. And that's really facilitation of purchasing the stock. My point is understanding the intent of the plan, how it works, and why they'd be offering it is really important.
Jon Gay (04:33):
Yeah. And that really explains why people have such different experiences, all those variables. So, what actually separates a plan that adds value from one that's easy to just kind of ignore?
Amy Walls (04:44):
Yeah, I think the biggest difference is whether there's a built-in advantage. Some plans offer a discount. Some reference earlier prices instead of just the purchase date. Let me explain that. Maybe the plan has a six-month purchase window.
And the plan says, “Well, you get a 15% discount off of either the starting date or the purchase date, which is the end date.” Well, in most markets, the price from six months ago is likely lower than the price today, if we think that the market is generally going up. So, if that's the case, 15% off of a price from six months ago could be lovely.
There was a company who had an office here in Portland, that we had quite a few clients who worked at. And they had a plan like this, but their plan actually gave a 15% discount off of the lowest price between the six-month start date and purchase date.
Well, there were a couple of windows over, I don't remember if it was two or three years where the stock price jumped 30% in those windows. That was huge. 15% off of a price that was more than 30% lower than it was on the purchase date.
What I'm getting at is those features of: what dates are we working off of? What's this discount off of? Which date or set of dates? They really quietly change the math. And that's true even if the dollars feel small. When you get a drastic swing in price, that makes the numbers bigger.
Now, other plans don't include those features, or they include some of them, but not others. And for the ones that are the most basic, participation looks like just buying stock. You could go to your brokerage account and buy the stock. Again, it's not wrong, it's just different. Understanding those differences, that's where the blanket opinions or ideas, assumptions really fall apart on if this is valuable or not.
The other thing I should comment here on value is that someone's past experience with an employee stock purchase plan may also color how they see their current and future employee stock purchase plans.
Jon Gay (07:28):
There's so many variables involved in the ESPPs. I'm going to tee you up for your favorite line when it comes to ESPPs, which is what?
Amy Walls (07:36):
It depends (laughs).
Jon Gay (07:37):
It's so many different things to consider. But I got to say, Amy, even when a plan looks decent, a lot of people still do opt out of them. What goes into that decision?
Amy Walls (07:45):
Effort. We all have decision fatigue. I mean, we've talked about that, and effort matters. Our time and attention are limited. As we've alluded to, employee stock purchase plans often come with some dense and heavy language.
Offering periods and look backs and qualifying versus disqualifying dispositions. That timing, especially when people are first receiving the information at open enrollment doesn't help. It’s just too much at once.
So, I think many people aren't rejecting the employee stock purchase plan outright, they're opting out because it feels safer than making a mistake because they are confused.
Jon Gay (08:35):
Oh yeah, I think that makes a really good point. I also want to say taxes, I think, seem to be where people really get stuck. Especially this idea that if you don't hold the ESPP shares long enough, it's not worth it. Let's dig into that a little bit.
Amy Walls (08:48):
Jag, I have taught you about these well for you to know about that.
[Laughter]
Amy Walls (08:54):
This is truly one of the biggest misunderstandings I see. And it's the concept of disqualifying dispositions- because that sounds like a mistake, and who wants to make a mistake?
So, this often comes because of what I alluded to earlier of someone feeling like they got caught, the “gotcha” of incentive stock options and the taxation. And so, disqualifying dispositions applies to employee stock purchase plan shares also.
But it's getting applied rigidly in the same way it applies to incentive stock options, and here's the catch: a disqualifying disposition is simply a change in tax treatment. So, when you have a qualifying disposition, the tax treatment is lowest. A disqualifying disposition, it’s higher.
But a higher tax does not erase the benefit. And I think that's what a lot of people hear, “Well, if I'm going to get a disqualifying disposition, there's no benefit to these.” Not true.
Jon Gay (10:00):
So what, is it throwing the baby out with the bath water at that point?
Amy Walls (10:03):
Exactly. If there's a discount, the discount still exists. Even if shares are sold earlier and you pay a slightly larger tax, the tax is still really on the value of the stock. Therefore, the discount isn't going to disappear.
The way I like to think about ESPPs (and I encourage many people to think about them), is it's similar to a 401(k) match. If your employer is matching your 401(k), then that money is going pre-tax, usually, into your retirement account.
But guess what? Years down the road when you pull that money out, you're going to pay taxes on it. Are we saying that because there is tax at ordinary income rates in the future, it isn't worthwhile to get the match on the 401(k)? No. No one's going to argue that.
Jon Gay (10:54):
(Chuckles) That’s a great analogy.
Amy Walls (10:56):
The same situation applies here. Taxes will apply no matter what. The value is still real. So, once people, I think, can wrap their heads around that, the pressure of mistakes drops significantly.
Jon Gay (11:11):
I like that, okay. Some ESPPs run over multiple years. How does that affect how people are thinking about participating?
Amy Walls (11:17):
Well, multiple year plans definitely add hesitation. Long offering periods can feel binding. And two-year language, which is often what I see here (and it's as a way to combat some of that tax noise) can feel like a requirement at that point, and I think that you can just feel boxed in.
It's especially uncomfortable for people who are already concentrated in that company stock. Plus, they're working there adding to that concentration. So, often with these longer plans, there's confusion between plan mechanics and personal obligation. But the plan timeline doesn't need to dictate behavior.
Just like we just talked about, you can choose to still have it be a disqualifying disposition versus a qualifying disposition. It's okay. The issue here, I think, most often is people opt out simply because they assume they're locked in.
And again, it's that flight or fight or freeze (as my kids love to add the third layer) and uncertainty is causing freezing. And freezing says don't act.
Jon Gay (12:37):
Right. And most people in tech aren't looking at these ESPPs in isolation. How do you help them think about them alongside RSUs and all of the other acronyms they're (chuckles) dealing with?
Amy Walls (12:46):
Let me address that this way. Salary depends on the company; bonuses depend on the company. RSUs depend on the company. Stock options depend on the company. Employee stock purchase plans simply are another layer of exposure to the company.
And because it's smaller, there's this built-in reason to avoid it. It's not going to make a difference. Discomfort can be about concentration in this case. There’s lots of reasons that we come up with, or different individuals will come up with.
If we're talking about it alongside RSUs and everything else, it could be a concentration issue, not the ESPP itself. So, where is our real problem or concern, is what I'm getting at. Or if it's the ESPP itself, then that's probably an understanding item that we've already touched on a bit.
If it's concentration, well, then maybe it's a question of what is the bigger picture? How can these dollars — if we don't think of it as stock, maybe we think of it as temporary stock to get to dollars that were discounted, then the whole picture changes and the tone changes and decisions feel simplified.
Jon Gay (14:15):
I like that. So, if someone's listening and thinking, “Should I even care about my ESPP?” How do you help them frame the answer to that question?
Amy Walls (14:21):
First of all, are you thinking in terms of optimization or intention? And I'm going to say step away from the optimization. Yes, that is part of planning. And as a financial advisor, I just said, “Step away from optimization and move towards intention.” (Laughter)
Because when we operate and make decisions from the intention space with information, we often do a better job, increase flexibility, and see opportunities that we don't see if we simply approach things from optimization.
Another thing to think about is that ESPPs are rarely life-changing on their own. We've talked about they're little. They're incremental. But they're free money, like the 401(k), when they have a discount or oftentimes, are.
So, if your employee stock purchase plan works this way, they have the ability to quietly add value. For some others, they're going to add complexity. And if they are really adding complexity, let's take a step back and figure out what isn't understood about them or what system needs to be in place to make them executable and simpler.
That they are complex or that they add value; those are both reasonable conclusions. But what matters is understanding the plan and what it can do for you. And so, I think everything I've said is trying to drive at, Jag, clarity makes the decision lighter.
Jon Gay (15:58):
As with most things (laughs). It’s really helpful, Amy.
Amy Walls (16:01):
I’m a broken record (laughs).
Jon Gay (16:03):
No, you're not a broken record because you're right every time you say it. I think to wrap it up, these ESPPs don't need to be overthought. They probably just deserve more thought than they often get.
Amy, as we wrap up, if one of our listeners or viewers (I should say viewers because we're also on YouTube now) wants to contact you and your team at Thimbleberry Financial, how do they find you?
Amy Walls (16:21):
They can find us online at thimbleberryfinancial.com or they can give us a call at (503) 610-6510.
Jon Gay (16:30):
Great stuff, Amy. We'll talk again soon.
Amy Walls (16:32):
Sounds great, Jag.
[Music playing]
Voiceover (16:33):
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker, dealer, member of FINRA, SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research, Inc., a broker, dealer, member of FINRA, SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.