ESPP (Employee stock purchasing program)

Employee stock purchasing programs are a way for companies to increase their employee buy in. They believe it helps employees have a stronger tie to the business outcomes and therefor have a stronger drive to see the company succeed. Whether or not that applies to you, an ESPP can be a really easy way to garner some extra cash!

ESPP almost always offer some form of discount to purchase the shares. It's pretty hard to motivate people to buy shares if there's no financial benefit (given you can buy them on the open market if there is no discount). Many companies do a flat % discount, others get more creative and do "lookbacks." These lookbacks have specific details about identifying a lower price and sets that as the purchase price. Even better is if companies combine the strategy!

Do make sure to read the fine print, however. Some ESPP also include restrictions on the sale of these shares. If there are no restrictions on the sale, then it's essentially free money! An example:

Evan's Company (NYSE: EVAN) offers an ESPP with a 6 month lookback period and a 15% discount. The only restriction is the amount per year that you can invest, set to $50,000 annually. EVAN has a solid business model, and in that 6 month period the share price went from $10 to $15. Given the lookback clause, the purchase price is set to $10 a share, a 15% discount is applied, and $25,000 of shares are purchased. This amounts to approximately 2,941 shares, each valued at $15 a share. The total value is $44,115 on an out of pocket cost of $25,000, or $19,115 in extra income.

Now, let's say EVAN falls on hard times because it turns out the CEO was just a smooth talker and the investors believed him. The share price goes from $15 to $8 in the next 6 months. This still benefits the employee because they get a 15% discount on $8 shares for the next $25,000 of shares purchased. The $25,000 purchases 3,676 shares at $6.80/share and is valued at $29,408 total.

The minimum value of this particular ESPP is (1 + 1/.85), or 117.65% on $25,000. If the stock increases over the offer period, it gets even larger!