A company that is unwilling to simply give away shares of its stock through grants may nevertheless be interested in selling stock to its employees at an appropriate price. While the Tax Code authorizes- and provides significant tax advantages for a specific type of employee stock purchase plan (known as a qualified stock purchase plan, discussed under the company-wide plans section of this site), that program comes with a variety of requirements that some companies may find too restrictive. Companies that are willing to give up the tax advantages associated with a qualified purchase program are free to fashion their own direct stock purchase plan in which they offer select employees the opportunity to purchase stock on terms different from those required by the rules for qualified stock purchase plans. The flexibility of these plans has made them attractive to employers who want to create employee ownership only among a select group. They are increasingly being used in start-up situations where management employees are required or encouraged to purchase stock in the company (usually at low start-up prices) to ensure their commitment to the business vision.

Tax treatment of direct purchase plans depends on the features of the particular plan. Generally through these plans, employees purchase stock at fair market value, which has no tax consequence for the purchaser. However, if the stock purchased by employees is bought at a discount from fair market value, then ordinary income is charged to the employee equal to the amount of the discount. The employer receives a corresponding tax deduction in an equal amount. If the discounted stock is restricted (for example, through a vesting requirement), then tax will be deferred until the restriction lapses, unless a Section 83(b) election is made.

Because employees invest their own money when they acquire stock through a direct purchase plan, companies need to be sure that the stock offering qualifies for an exemption from federal and state securities registration requirements. Such exemptions are generally available for limited sales that are restricted to employees.

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