Borrowing from Employer to Buy Company Stock

A family member recently started a new job and told me about a benefit the company offers to buy company stock that I hadn't heard of before.

He is allowed to take out a company loan (min $10,000 in $2,500 increments) at a fixed 3% interest to buy company stock. Furthermore if he hits certain performance targets, the company will forgive up to 5% of the loan balance each year. It wasn't clear if there was a cap to the loan amount.

This benefit seems very different than traditional Employee Stock Purchase Plans (ESPP) offered by many large companies to encourage ownership among employees. Initially, I am really on the fence as to how beneficial this is. It sounds tempting if the company appears to be attractively valued and you were considering an investment in the company anyway. However, if the company is fairly priced all this will do if push you towards being more overexposed to your employer's stock performance than you otherwise should be.

Just like my employer's ESPP, this is a benefit that on the surface is not necessarily a no-brainer.

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Comments (4)

The idea is probably to get employees to immediately have a sizable vested interest in the company, making them care about the quality and quantity of their productivity in a big way, right away, rather than the slow & steady pace of an ESPP. Hence the partial debt forgiveness given certain performance targets. They're making sure that if they can sign you on to this program, you'll be quite the worthy employee (unless you're a total moron and didn't catch on to what's going on, in which case, they probably don't want you anyway). Pretty cunning on their part.

Posted by Jake Stichler | July 31, 2008 6:06 PM

What will happen if he leaves or if fired? Does he suddenly owe all the money he's borrowed within 30 days?

Overall I don't really think this is such a good idea. Almost sounds like a 401k loan!

Posted by MattC | August 1, 2008 7:54 AM

IMO I wouldn't take advantage of this option, from the standpoint that you are already heavily invested in the company you work for (it's your primary source of income) and you'd be better off diversifying.

In case you're wondering how I feel about a traditional ESPP, that I do take advantage of, 15% discount but sell the stock immediately upon receiving it.

Posted by Lev | August 1, 2008 2:29 PM

Sounds like a great deal...would like to work for that company.

Posted by Andy | August 13, 2008 9:19 AM