ESPP Quick Start Guide

Last updated: January 26, 2025 • 2 min read for busy professionals

Sometimes you just need the essentials—fast.
Our Quick Start Guides are designed for exactly that. In just 2 minutes, you’ll grasp the basics of key equity compensation topics. Ready for more? Dive into our calculators for personalized insights or explore our comprehensive guides to dig deeper.

Remember: An ESPP with 15% discount means a guaranteed 17.6% return if you sell immediately. That’s hard to beat!

The Essentials

An Employee Stock Purchase Plan (ESPP) lets you buy company stock at a discount (typically 15%) through payroll deductions. Think of it as buying dollar bills for 85 cents – with potential for even better returns.

Three Things You Must Know

1. The Discount

  • Standard discount is 15% off market price
  • Money is deducted from your paycheck
  • Purchases happen on set dates (usually every 6 months)
  • Maximum contribution: $25,000 per year (IRS limit)

2. Look-back Provision

  • If your plan has this (most do), you get the discount on the lower of:
    • Price at the start of offering period
    • Price at purchase date
  • Example: Stock was $100, now $120
    • Without look-back: Pay $102 ($120 – 15%)
    • With look-back: Pay $85 ($100 – 15%)
    • Actual discount = 29% off current price!

3. Tax Impact

  • The 15% discount is always taxed as ordinary income
  • When you sell:
    • Sell immediately: Pay taxes on the discount
    • Hold 2 years: Potentially better tax treatment on gains
    • Any additional gains = capital gains
  • Tax note: Even though you don’t pay taxes at purchase time, the discount is considered compensation and will be taxed as ordinary income. Your employer typically handles withholding, but verify this to avoid tax surprises.

Quick Decision Framework

Participate in ESPP if:

  • You can afford the paycheck deductions
  • Want guaranteed returns (from discount)
  • Company offers look-back provision
  • Have emergency savings in place

Skip or Limit ESPP if:

  • Need full paycheck for expenses
  • No emergency fund
  • Company doesn’t offer good discount
  • Already too concentrated in company stock

Common Pitfalls to Avoid

  • Not participating (it’s usually free money!)
  • Contributing too much of your paycheck
  • Forgetting tax implications
  • Missing qualifying holding periods

Next Steps

Immediate Actions:

  • Check your plan’s features:
    • Discount percentage
    • Look-back provision
    • Purchase dates
  • Calculate sustainable contribution
  • Set up payroll deduction
  • Plan your sell/hold strategy

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