When Should You Sell ESPP Shares?
Employee Stock Purchase Plans (ESPPs) are popular. Since ESPPs provide opportunities for employees to purchase company stock at a discount, employees participate frequently. Data from 2020 show that roughly 50% of the largest 500 companies in the U.S. offer ESPPs and in certain industries like Information Technology, roughly 85% of companies offer an ESPP.
Since many of our subscribers are ESPP participants, we are commonly asked these two questions, “When should I sell my ESPP shares?” followed immediately with, “Should I sell my ESPP shares immediately after purchase?”
The purpose of this article is to help you answer these two questions and to help you determine whether selling all of your ESPP shares immediately after purchase is the best option for you or if it makes more sense for you to leave some or all of your company shares on the table.
That said, the short answer is that you probably should sell your ESPP shares immediately after purchase.
Why You Should Probably Sell ESPP Shares Immediately After Purchase
There are three major reasons for selling your ESPP shares immediately after purchase:
Reason #1 - You lock in your discount.
Employee stock purchase plans (ESPPs) typically offer a discount on company stock (somewhere between 5% up to 15%). During the company’s purchase period, the employee opts to have money withheld from their paycheck to be saved and allocated to purchase company stock at the end of the period (which is usually six months).
At the end of the purchase period, some companies will apply their discount to the lesser price between the end of the purchase period (aka the purchase date) or the beginning of the offering date (when you began participating).
Here’s an example:
Let’s say you work at a company whose ESPP has an offering period and purchase period every 6 months. This ESPP also lets you purchase at the cheaper of the beginning price or the ending price.
Here are the results if the company price moves up, stays flat, or drops.
As you can see, there is no scenario in which you don’t come out ahead if you sell immediately.
In fact, you’ve probably also noticed that in the two scenarios where the price stays flat and the price goes down that your percentage gain is actually greater than 15%.
Here’s the math behind the price stays flat scenario:
$20 - ($20 x .15) = $17 which means your current gain is $3.
$3 / $17 = 17.65%
In other words, no matter how your company stock moves, you’re guaranteed to get AT LEAST the discount the company is offering. This is why we recommend maxing out your ESPP if you can afford to.
In fact, there are even companies like Lendtable who will lend/advance you money so you can fully maximize your ESPP. We’ve written a breakdown of how their service works and what it costs.
Reason #2 - You can put funds to good use elsewhere.
If the discount your company provides is 15%, then by selling immediately after purchase, you lock in this 15% (which is higher technically, as we’ve illustrated above), and you can use the cash proceeds for something else.
Most commonly, we see people use the ESPP sale proceeds to create an emergency fund, pay off debt, use toward the downpayment on a mortgage, or simply reinvest in other places.
The idea is to use those proceeds from selling ESPP shares immediately to further other important long-term financial goals.
The big but to this, is that you you must put the cash to good use after selling. Selling just to leave the cash sitting there doesn’t do you much good unless it’s specifically designated to be your emergency fund.
To help you feel more confident in reinvesting your ESPP proceeds after selling, we highly recommend reading “The Bogleheads’ Guide to the Three Fund Portfolio.” (paid link) The idea behind this book is to teach you how to get great returns with very little work or stress. It’s a great introduction to investing if you’re not confident in your skills quite yet.
We’re also big fans of M1 Finance. They essentially build out the three fund portfolio for you, all you have to do is fund the account.
Reason #3 - It’s wise to avoid putting all your eggs in one basket.
There is wisdom in this over-used saying… especially when it comes to your company/employer stock. If you participate in a company’s ESPP for years and never sell, you risk becoming overly dependent on that company. And the bigger the chunk of your investments sitting in your ESPP, the greater the risk.
Of course, if you’ve worked at Apple for the last decade and have been making full use of your ESPP without selling anything, you’ve probably done quite well. The issue is that you can’t know whether you’re investing in the next Apple, or even whether Apple will continue to perform as well as it has in the past.
This is why it’s often wisest to sell immediately and move the proceeds into an investment that isn’t tied to just one single company. Investing in the top 500 companies in the U.S. through Vanguard’s S&P 500 ETF (VOO) or Vanguard’s ETF that invests across all major companies in the U.S. (VTSAX). Both of these funds are common places for people to put proceeds from selling their ESPP shares.
By investing in those funds, you may or may not get a better return than your ESPP shares might have, but you’re limiting your risk exposure significantly by investing across so many different companies.
Overall, selling ESPP shares is an excellent strategy as long as you’re putting the cash to good use elsewhere.
Why You Would Want to Leave Some/All of Your ESPP Shares Unsold
After reading our arguments for why you should probably sell your ESPP shares immediately, you’re likely wondering why you’d ever want to do anything else. So, here are the four main reasons why you might want to leave some/all of your ESPP shares unsold:
Reason #1 - You don’t trust that you’ll be diligent or disciplined enough to make good use of the proceeds after selling.
Many people struggle to use the proceeds from selling ESPP shares wisely. If you sell shares and the proceeds sit in cash or are spent on things that will not help you achieve other long-term financial goals (e.g., paying off debt, establishing an emergency fund, using toward a downpayment on a house, putting toward other investments, etc.), selling the shares isn’t really going to help you.
Reason #2 - You believe your company is the greatest thing on earth.
If you really love the company you work for and want to hold more of their stock, then it might be okay for you to leave some/all of your ESPP purchases where they are.
The biggest determinant of whether this is a good move for you or not is how your finances currently look. If you have student loan debt, car payments, don’t have an emergency fund, or aren’t investing in your 401(k) or other taxable accounts, then you might not want to go all-in on your ESPP. However, if your personal finances are in especially great shape, then you may be able to afford to take on a bit of additional risk.
Reason #3 - Your company’s stock price is likely to go up faster than other investments.
Of course it’s impossible to know how your company stock will perform in the future, but there are some companies whose stock has gone up more than the market has. Nvidia, Apple, and Tesla are good examples of this. All three of these companies have seen increases of more than tenfold what they were trading for ten years ago. If you were an employee who contributed to your ESPP at one of these companies and sold everything after purchase over the course of several years, you’d likely be looking back with some regret.
We recently completed an analysis showing how much money Adobe’s ESPP participants have made over the last 5 years if they didn’t sell, and it’s pretty shocking how much money can be made if you hold on to the right company.
We want to reiterate: It’s impossible to know how your specific company will do, but if you’re in an especially sound spot financially, you can likely afford to take on a little more risk.
Reason #4 Waiting to sell can save you a little in taxes.
The last reason to hold some ESPP shares is for tax purposes. You will save a little money by waiting until your ESPP shares are considered qualified.
We cover this more thoroughly in our “ESPP Basics” article, but the gist is that to qualify for potentially the best tax treatment, you’ll have to wait two years from the beginning of the offering period, and one year from the purchase date. To make determining this tax benefit easier, we’ve created an ESPP Gain and Tax Calculator that’s free to use.
At the end of the day, the tax savings of waiting to sell are significant and may be a legitimate argument for waiting. However, your tax situation shouldn’t be the main driver of your ESPP decisions.
When to Sell ESPP Shares - Our Recommendation
Owning company shares is a HUGE benefit, especially when you manage those shares to their greatest advantage.
In general, we like selling 80% to 90% of your ESPP shares immediately after purchase and using the proceeds to improve your financial situation in other ways.
This strategy allows you to remain invested in your company (and do so on an automated basis) while also providing the funds you need to achieve other important financial goals and protect yourself against unnecessary risk.
Owning shares can also serve as a great motivator as you go about your daily routine at work. You are more invested in your company because you are quite literally invested in it.
As always, if you have any questions you want to ask directly, please reach out to us at team@equityftw.com.