ESPP (Employee Stock Purchase Plan)

An employee stock purchase plan lets you set aside a percentage of pay over an offering period and use it to buy company shares at a discount, commonly up to 15%. Many plans add a lookback, pricing the purchase off the lower of the share price at the start of the period or on the purchase date, which can make the effective discount considerably larger than the headline number.

A qualifying plan's discount is close to the most reliable return available in a compensation package, because it does not depend on the stock rising. The risk is not the discount, it's concentration: your salary, often your health coverage, and now a growing share of your portfolio all depend on one company. Many people sell at purchase to capture the discount and diversify, which is a decision about risk rather than a prediction about the stock.

The tax treatment depends on how long you hold. Sell immediately and the discount is ordinary income. Hold long enough to make the sale qualifying (generally two years from the offering date and one year from purchase) and part of the gain can be taxed at long-term capital gains rates instead, at the cost of carrying concentration risk for that period. The trade is real in both directions, so it is worth modelling rather than defaulting.