Aaron Shapiro’s quest to rethink employee stock purchase plans began with a startling insight: If only his mother had participated in one, she’d be a millionaire today.
A few years ago, she asked her son for financial advice and mentioned her employer’s ESPP, which she didn’t understand. So Shapiro, 26, who got his finance degree from Babson College, dug into the prospectus.
The employer, UnitedHealth Group Inc., allows workers to buy shares twice a year at a 15 percent discount. There’s no minimum holding period, meaning participants can sell the shares immediately and pocket the difference.
“It’s arbitrage in its purest form,” Shapiro said. “The money was just sitting there and could have been hers, if she’d just been able to afford payroll deductions.”
Shares of UnitedHealth have returned almost 4,000 percent in the past two decades, meaning his mother missed out on gains of more than $1 million.
Eureka Moment
Shapiro’s eureka moment prompted him to found Carver Edison, a fintech startup that provides interest-free loans to workers unable set aside money from their paychecks to buy stock on the cheap. The firm cleared a major regulatory hurdle in December, when the Internal Revenue Service determined that companies can let employees benefit from Carver’s loans without jeopardizing the tax-exempt status of their ESPPs. Eli Broverman, co-founder of robo-adviser Betterment LLC, led Carver’s latest funding round and is a member of its board.
Now Shapiro is seeking to persuade some of the roughly 4,000 U.S. companies that offer ESPPs to millions of workers to use Carver’s services and boost participation in the plans. Carver’s business model hinges on a little financial gymnastics that involves capturing a portion of an employee’s stock gains above a certain threshold and using that to sell options contracts to banks. In any scenario, Shapiro said, the worker will end up better off with one of Carver’s loans than without it.
Among his supporters is human-resources consulting firm Aon Plc, which struck a deal with Carver this year to present the concept to corporate clients.
Proponents of ESPPs hail them as a lucrative workplace perk that fosters a culture of ownership among employees and aligns their interests with those of shareholders. They’re also seen as a tool to help curb growing income inequality in the U.S. While real wages have largely remained stagnant for decades, long-term investments in equities have paid off handsomely, with the S&P 500 generating a total return of about 220 percent over the past 20 years.
Instant Disposals
Workers who opt into ESPPs agree to set aside part of every paycheck to buy company shares on preset dates, usually every three or six months. The shares are bought at a discount of as much as 15 percent to the market price at the start or end of each period, whichever is lower. Some companies require workers to hold the shares for a certain period of time, but most allow instant disposals, according to a survey by Fidelity and Radford, a unit of Aon.