ESPP How-To #3: Calendar Your Bets & Play to Win

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Imagine a casino game that allowed you to bet once to get in the game and then withdraw your bet after you had more information and saw that you no longer wanted to take the bet.

To maximize your ESPP benefits, know your rights to make changes and withdrawals under your ESPP and calendar the key decision dates for those changes and withdrawals.

Changing Your Bets

The right to wait to make a final decision is always an advantage in a game, as the risk of loss or chances of winning change over time. In legal contracts, people often pay more for the right to make changes at a later time.

Your ESPP game may allow you to change your bets after the Offering Period has begun without charging you for the right to make this change. This gives you the opportunity to strategize for your purchases based on changes in the company’s stock price.

For example, if you’re following the stock price and find that the likely discount on the next Purchase Date will not be not high enough to make you want to make the purchase, you would want to cancel your bet and get a refund if your plan would allow it. If you’re following the stock price and decide you want to bet more to take advantage of an attractive Look Back discount (because of a low Offering Date market price), you would want to increase your payroll deduction percentage.

Even if your plan allows these changes, it will have very strict deadlines for each change. Calendar your decision dates for each possible change, follow the company’s stock price throughout each Purchase Period, and reconsider your bets as each Purchase Date approaches.   

Cisco Bet Change Opportunities

This timeline shows the timing of bet choices during a sample Cisco Offering Period.

Transient

Bet #1: Open Enrollment

Open Enrollment is the first phase of betting, as employees sign up to have a percentage of their income (1% to 10%) deducted at each pay period during the Offering Period (Contributions). This locks in their right to (automatically) purchase stock on each Purchase Date with a maximum Purchase Price of 85% of the market price on the first day of the Offering Period.

The only entrance time for playing an Offering Period is Open Enrollment, which takes place in the months before the start of an Offering Period. If employees don’t enroll and later find that the Offering Date market price was low and the Look Back discount is attractive, they’re out of luck as it’s too late to join that Offering Period.

Bet #2: Withdrawal During Purchase Period

Cisco’s ESPP includes the right to withdraw from the Offering Period (subject, of course, to strict timing deadlines). Withdrawing employees have the choice to (1) have all the Contributions accumulated during the current Purchase Period refunded (“withdraw-with-refund”) or (2) have those Contributions used for purchase on the next Purchase Date but cease all further payroll deductions (“withdraw-with-purchase”). Of course, purchases made on prior Purchase Dates are already final, and those funds will not be refunded.

The right to withdraw-with-refund makes it possible to monitor the stock price, predict the Purchase Price for upcoming Purchase Dates and choose not to make the purchase if the Purchase Price is unappealing.

For example, if an employee is not impressed with only a 15% discount, he or she could monitor the stock price and withdraw-with-refund during a Purchase Period in which he or she expects the market price on the Purchase Date to be less than the market price on the Offering Date.

However, withdrawal during a Purchase Period permanently removes an employee from the remainder of the Offering Period.

Bet #3: Decrease Payroll Deduction Percentage

Cisco allows employees to decrease their payroll deduction percentages, subject to strict deadlines. They can choose to have the decrease effective during the current Purchase Period or starting in the next Purchase Period.

Bet #4: Increase Payroll Deduction Percentage

Cisco allows employees to increase their payroll deduction percentages, subject to strict deadlines. However, payroll deduction percentage increases will not become effective until the following Purchase Period.

For example, an employee who is enrolled in an Offering Period during which the market price is rising above the Offering Date market price might want to increase his or her Contributions for the remaining Purchase Periods within that Offering Period to take advantage of an attractive Look Back discount.

Bet #5: Change Payroll Deduction Percentage for Next Offering Period

If an employee is still enrolled in the Cisco ESPP at the end of the Offering Period, he or she is automatically enrolled in the next Offering Period, which starts immediately after Purchase Date #4. If the employee chooses not to participate in the next Offering Period, or wants to increase or decrease the payroll deduction percentage for the next Offering Period, those changes should be made during Purchase Period #4.

Calendar to Win

Even if your plan allows these Cisco-style bet changes, like Cisco it will have very strict deadlines for each change. To take advantage of this flexibility and maximize your benefits:

Calendar your decision deadlines for each bet – open enrollment, withdrawal, decrease payroll deduction %, or increase payroll deduction %; Follow the company’s stock price throughout each Purchase Period; Make changes in your bets by the deadlines; and Be glad you played to win.

More in the ESPP How-To Series:

Intro To ESPPs

Timeline the ESPP

Know the Discount

Calendar Your Bets & Play to Win

Tax Basics

***

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.