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An Employee Share Purchase Plan (ESPP) is a beneficial benefit plan provided by many companies.

An ESPP is a benefit program that allows eligible employees to buy shares of their company at a discount through payroll deductions. In most cases, the maximum amount that any employee can contribute is 10% of their base pay. Your contribution is deducted from your pay each pay period and the stock is purchased at the end of each quarter. The employee purchases the stock at a discount, for example, 85% of the share price as of the end of the current quarter. Your company contributes the remaining 15%. Your shares are held in a special brokerage account in your name administered by a transfer agent such as Computershare.

Let’s suppose that the stock price your company stock was $20 at the end of the quarter. In this example you would purchase your shares at $17 (85% of the quarter-end price). You could then sell those shares at their current market value of $20 for an investment gain of 17.65% in just one quarter.

Because the bulk of our clients already have an enormous amount of their company’s stock in their 401(k) Investment Plan, we typically do not recommend that you hold onto your ESPP shares long-term. Instead, we recommend that you establish a systematic strategy to sell your ESPP shares each quarter as soon as possible after they are purchased. Once the shares are sold you can reinvest the proceeds each quarter into a more diversified investment vehicle, such as no-load mutual funds. This strategy allows you to take full advantage of this valuable employee benefit, while greatly reducing (but never eliminating) the downside volatility associated with holding the stock long-term.

This strategy is not entirely risk-free as there is a small window of time each quarter between the date that the stock is priced and the date the stock is delivered to your account and is available to be sold.

Employee Stock Options

Years ago, Fortune 500 companies only offered stock options to high-level officers and directors. Today, many Fortune 500 companies are offering this valuable equity participation tool to key employees throughout all levels of the company.

Stock options give you the right, but not the obligation, to purchase shares of company stock sometime in the future, at a price that is set today. For example, lets suppose you were granted an option to purchase 2,000 shares of company stock at a price of $100 per share. This $100 per share price is known as the "strike price". Lets also assume that 5 years from now the company stock is trading at $200 per share. The employee could exercise his or her right to purchase 2,000 shares at $100 and then immediately turn around and sell those shares at $200 (the current market price). This is known as "flipping" your option - a purchase and immediate sale. In this example the employee has realized a $200,000 pre-tax gain from this transaction.

Burns Matteson Capital Management is an associate member of the National Center for Employee Ownership. The National Center for Employee Ownership (NCEO) is a private, nonprofit membership and research organization that serves as the leading authority on employee stock option plans and other forms of employee ownership and equity participation

At Burns Matteson Capital Management, we work with our clients and their accountants to develop a long-term strategy for the exercise of their employee stock options. A long-term strategy is crucial to help diversify away some of the risk of owning a large concentrated equity position while being cautious of the income tax and alternative minimum tax (AMT) ramifications of our actions.

Our Employee Stock Option Planning and Advisory services are provided with no additional fees to our Comprehensive Wealth Management and Comprehensive Financial Planning clients. Other individuals may take advantage of these services "à la Carte" via a Specialized Financial Plan. Click Here to view an Adobe Acrobat file containing a few pages of a sample spreadsheet analysis for a hypothetical employee with multiple Stock Option grants. If you do not have the Adobe Acrobat reader loaded on your computer you can download it for free by Clicking Here.

401(k) Investment Plan

We can provide analysis and recommendations for your company sponsored retirement plan. This service can be provided as part of our Wealth Managment Services, as part of our Financial Planning services, or via an hourly consultative basis.

Equity Hedging

The long running bull market, intergenerational transfers of stock, and the increased use of stock options and restricted stock for employee compensation have produced an abundant number of investors who have large concentrated equity positions in their portfolios.

Many of our clients have accumulated a sizable amount of their employer's stock within their 401(k) Investment Plan and/or ESPP. These clients are excited about the future growth prospects of their company, but at the same time they are very concerned about having such a large portion of their net worth allocated to a single security. If you have more than $1.5 million allocated to company stock, you may be a candidate for some equity hedging strategies utilizing derivative instruments such as Equity Collars and Prepaid Variable Forwards.

Many high-net-worth investors with concentrated equity positions seek alternatives to the outright sale of their stock. These investors may desire to retain voting rights in the company, or they may simply be prohibited from selling their stock due to SEC restricted stock rules.

An Equity Collar is a hedging strategy that is comprised of two options - a short call and a long put utilized for a specific time period (such as 1 or 2 years). When implemented against a long stock position, a collar provides the investor with a minimum and maximum value for his or her concentrated equity position. The most widely used equity collar is known as a "zero-cost-collar". In a zero-cost-collar, the investor sells a call option against their stock, and with the premium received from the sale of the call option, the investor purchases a put option. The net cost to the investor is $0.

For example, a common equity collar strategy might provide the investor an upside "ceiling" of 120% of the current stock price, while limiting the investor's downside "floor" to 90% of the current stock price. If an investor owned $2 million of Corning stock and employed this hypothetical equity collar, the investor would participate in all of the upside growth of Corning up to a ceiling of $2.4 million, and would only participate in downside price movements of Corning to a floor of $1.8 million.

Whenever an equity collar is utilized, we must be mindful of potential tax problems. If an equity collar eliminates virtually all of the downside risk and/or upside potential of holding the stock position, the IRS constructive sales rules may be triggered. If a constructive sale is determined to have occurred, any built-in gain on the stock is recognized for tax purposes as if the stock was actually sold. In addition, equity collars trigger the tax straddle rules which may limit the investor's ability to take losses, and limit the investor's income tax deduction for any investment interest paid. The tax straddle rules also may prevent holding period accrual for the stock in situations where the stock has not already been held for a year (as in the case of newly exercised employee stock option shares).

A Prepaid Variable Forward contract is very similar to the equity collar strategy. The prepaid variable forward allows the investor to protect their concentrated equity position while still participating in potential future price appreciation of the security. The primary difference between the prepaid variable forward and the equity collar is that the financial institution that is entering into the prepaid variable forward contract with the investor will typically lend the investor an amount up to the downside "floor" of the prepaid variable forward contract. If the floor of the contract is 90% of the current market value of the stock, an investor with $2 million of Corning stock could immediately receive $1.8 million in cash at the time the prepaid variable forward contract was written. This cash could then be used to invest in a diversified portfolio to further hedge the concentrated equity position, or for other cash needs of the investor.


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