How does an ESPP differ from a stock option plan?
Employee stock purchase plans tend to be viewed as a benefit while stock options are a form of compensation. From an employee perspective, there are some differences in operations, eligibility, and design.
- It is you who decides whether to participate in your company's ESPP (depending on the employee eligibility provided by your company's type of plan). With a stock option plan, the company decides whether you participate.
- The amount of stock you purchase under an ESPP depends on the structure of your plan, the amount of your payroll deduction, and the purchase price on the exercise/purchase date (see a related article); the amount of stock you purchase under a stock option plan depends on the size of your option grant.
- Your ESPP will have set offering and purchase periods, while a stock option grant has a set term in which you can exercise the options after they vest.
- The purchase price of stock under a tax-qualified Section 423 ESPP is typically discounted in some way from the market price at purchase. A nonqualified ESPP may have a discount, a match, or other features. By contrast, the purchase price of stock under a stock option plan is the fair market value on the date of grant.
See the FAQs in ESPP: Taxes for the key points in ESPP tax treatment, which also differs from that of stock options, particularly for a tax-qualified plan.