ESPP Modeling Template

I think a lookback is an attractive feature, although it makes valuation a bit more complicated due to both the call and put provisions. Personally, I don't think 5% is that large of a discount to lure as many employees as you might be desiring (although, I'd take a guaranteed 5% return any day, assuming a 6 month offering period).

Obviously, if you increase the discount, you are going to increase the comp expense. The lookback provision will do the same. I don't believe the contribution limits change ($25,000 per tax year). It is hard to say what would happen to share usage. Presumably, if the plan is more attractive, you will have greater participation resulting in greater share usage, but that also depends on stock performance. I've seen people drop out of plans when stock prices fall, even though they still have a guaranteed positive return.

These plans are great because they offer a guaranteed return (assuming people sell immediately following the purchase). The challenge with them is the post-tax withholding. For your normal employee, it can be painful to have 5% or 10% or 15% of their NET pay withheld. The plan needs to offer an extremely attractive return to entice people to bear that pain. Similar to any stock comp plan, the company can also incur significant comp expense, which might never be realized by the employee in a period of falling stock price.

There is no real model. Participation rates and drop-out rates vary far too much. Holding those constant, your simplest approach is to change the model to account for changes in discount rate and inclusion of a lookback feature. That will allow you to isolate their impact. After that, you'd have to re-model for changes in anticipated participation, drop out rates, etc. Assuming you are using a large bank to administer the plan, they might also be able to provide advice on industry standard and the impact of different discount rates and lookback features.

No silver bullet here.