One fairly common incentive for employees is giving them the option to buy their employer’s stock, usually at a discount to market price.

Many employees take advantage of this perk, which at first glance seems like a pretty good deal. If you work for a company, generally you have a pretty good idea of how good of operators they are. Buying the shares at a discount gives you an instant return. Your employer takes the amount needed to buy the stock right off your paycheck. It’s a quick, painless process that seems like a pretty easy move.

Yet upon further thought, some weaknesses come up with buying your employer’s stock. Firstly, as an employee, you’re already very highly linked to the success of your employer. If everything is going good this isn’t a problem. What if you worked for Enron, Washington Mutual or any other company that went bankrupt? Not only would you lose your job, a chunk of your savings would be invested in now worthless stock.

Back when I worked at a grocery store, one of the perks the privately owned company gave store managers was the option to buy company stock. One of my co-workers asked my advice about it; I told him to stay the hell away from the stock. One issue I had with it was the above mentioned lack of diversification. The other issue I had was the lack of liquidity that a privately held company’s stock would have. How do they value the stock? Is he able to sell his stock to anyone, or only an insider? Will the company ever become public? These are all questions you need to be able to answer if you buy your privately held employer’s stock.

What if you worked for a company that gave you a 25% discount on every share you bought? Wouldn’t you be a sucker to not take a 25% guaranteed return?

If you work for a big company with a nice liquid stock, I’d be buying at least some of their stock. I wouldn’t let my position get to over 5% of my portfolio. Every year, I’d sell some to make sure I didn’t stay above 5% of my portfolio. Selling would have the additional benefit of locking in my profits. As long as you don’t let the position get to be too much of your portfolio, you’d be fine.

Oh, and it turns out that my former store manager actually got mad at me for advising his employee against buying their privately held stock.

Tell everyone, yo!