Taking a Look at Outset Medical's New Cashless ESPP

The structure of ESPPs has been largely the same since Section 423 was enacted in the 1960s. I think that these plans are long overdue for some fresh ideas, one of which is to rethink how participants can finance their purchases.

In a recent edition of the Equity Expert podcast, I talk with Cally Bruce of Carver Edison about how they are helping companies to add a cashless financing method to their ESPP and Lori Serrano of Outset Medical, one of Carver Edison’s clients that has implemented cashless financing.

For this blog entry, I offer some highlights of our conversation.

The Inequities Inherent in ESPPs

At the start of our conversation, Cally points out one problem with ESPPs, which is that they are inherently unfair to some employees. Requiring employees to contribute to the plan through payroll deductions can preclude lower-paid workers, employees who are new to the workforce (and thus, still trying to achieve financial stability), and employees with competing financial objectives (such as paying down debt) from participating.

Offering a way for employees to participate without having to contribute through payroll deductions makes the plan more accessible to all employees.

The Boost

Cally refers to the cashless funding that participants receive as “the boost.” Participants sign up to contribute what they feel comfortable with in terms of payroll deductions and then Carver Edison provides “the boost”—the funds that supplement what the participants are contributing. These boost funds are wired to the company at the time of the purchase. The participants then sell enough shares to pay back the funds contributed on their behalf by Carver Edison. Because the purchase price will be less than the current value of the stock, the participants will sell only a portion of the shares purchased using the boost funds.

The whole transaction is very similar to a same-day-sale exercise with Carver Edison facilitating the sale. But instead of selling all the shares acquired, employees sell just enough to cover the purchase price and keep the rest. Cally says that participants who elect to supplement their contributions with the cashless funding are walking away with, on average, 50% to 150% more shares (and sometimes as much as 200% to 300% more shares) than they'd otherwise be able to afford with their payroll contributions.

Outset’s Decision to Reimagine Their ESPP

Outset Medical went public in September 2020, just six months into the COVID pandemic in the United States. Lori says that while it wasn’t a great time to go public, it gave them an opportunity to rethink all their benefits, including their ESPP. Employee attitudes and goals had shifted as a result of the pandemic and Outset wanted to respond to employees’ new priorities.

Part of the reimagining of their benefits was to take a hard look at their ESPP, with the goal of making it as inclusive as possible. Outset Medical has revolutionized kidney dialysis by replacing the room full of equipment normally needed for this procedure with a device the size of a wine cooler. It enables patients to perform dialysis in their homes. Lori explains that the core of their employee population are frontline workers involved in manufacturing, servicing, and selling their dialysis machines. Many of these employees have not previously had an opportunity to participate in an ESPP.

Outset’s New ESPP

Outset’s prior ESPP had a six-month offering and a lookback. They went for broke with the new ESPP and asked their executive committee and their board to approve a 24-month “Cadillac” ESPP with a look-back, four six-month purchases, and an automatic reset. And on top of that, they asked for the new plan to offer cashless participation. To their surprise, both requests were approved.

Lori’s team called the new ESPP “the Bugatti Plan,” because, with its cashless participation feature, it is a step above a Cadillac ESPP in the benefits that it offers to employees. Lori says that one of the things she is most proud of about it is its inclusivity—all employees can participate, regardless of their financial situation.

Selling the New Plan to Management

Lori says that when they approached their management team and board with their recommendations for the new plan, they expected to face concerns about both the dilution and expense of the plan. To address this, they attempted to forecast the share usage and cost of every situation that might occur; in the end, the knew the potential cost and dilution for approximately eight different scenarios. This information was very helpful to their management and board.

Ultimately, the final questions from the board focused on how the plan would affect employees. Lori says that it is the first time she has really seen a board put the employee experience ahead of cost and dilution.

Lori also points out that investors are generally very supportive of ESPPs and rarely vote against them. This helped allay their concerns about the plan’s share usage.

Outset’s Participation Increases

With the new plan in place, Outset’s participation increased from around 50% to a very impressive 90% of their employees. Lori notes that 70% of employees elected to utilize the cashless participation.

To learn more about cashless ESPPs, listen to the full podcast.