A lookback is a provision in certain tax-qualified ESPPs. A lookback provision bases the purchase price not on the stock price at the time of purchase but, rather, on the price either at the beginning of the offering period or the end, whichever is lower. This is a good deal. It ensures a discount at purchase; and if the price has risen during the offering period, the discount from the market price on the purchase date will be even bigger.
Example: In your company's employee stock purchase plan:
Your company's stock price is $10 at the start and $12 at the end of the six-month offering period.
You have a 15% discount on the purchase date that is based on the lower of either the price on that date or the price at the start of the offering.
You buy the stock at 15% off the $10, i.e. $8.50 (29% discount from the $12 market price on the purchase date).
If the stock price is $12 at the start and $10 at the end, your purchase price is also $8.50.
There are no rules about whether there must be a lookback (though it must be the same for every ESPP participant). With mandatory expensing, some companies are eliminating lookback provisions in their ESPPs (see a related FAQ).
See a related article on all of the key dates and terms you must know before you participate in an ESPP.