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Reasons to Use the Employee Stock Option Fund


FAQ

Q. How does this work?
Q. Who owns the stock?
Q. Is there any risk to the option holder?
Q. Is this the same as a secondary market sale?
Q. Is there a minimum or maximum transaction size?
Q. Can I sell my stock to the ESO Fund?
Q. Will I be subject to Alternative Miminum Tax (AMT)?
Q. Will ESO Pay my NSO Witholding Tax?
Q. How can venture-backed companies benefit from the ESO Fund?
Q. When can I sell my stock?
Q. What criteria do you look for in a transaction?
Q. What if I work for a publicly traded company?
Q. How can executive recruiters benefit from the ESO Fund?
Q. Can I get an ESO loan for options in a divorce settlement?

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Q. How does this work?

A. This link has an overview of the funding process. If we decide to proceed with a transaction, the ESO Fund will provide you with the funds to pay the cost of exercising your stock options. You are then obligated to deliver your stock to us within 30 days of when they become freely transferrable in exchange for a final payment reflecting the value of the stock at that time. You may terminate our agreement by paying us back at any time before under the terms of our agreement.

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Q. Who owns the stock?

A. You do as the person who exercised your stock options. We enter into an agreement directly with you regarding the sharing of proceeds, if any, from a liquidity event.

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Q. Is there any risk to the option holder?

A. Many venture-backed companies fail and investors lose their entire investment. Many option-holders paid to exercise their options in the dot-com boom, only for the stock to become worthless. Moreover, the IRS still collected AMT tax from the optionees based on the exercise price even though the stock had become worthless. The ESO Fund assumes the financial risk associated with exercising stock options, and will not seek payment from you should your stock sell for less than the amount of the original exercise price. If you are concerned about high taxes resulting from the exercise, then you can also request a larger advance from ESO to cover your tax needs. The funds advanced by ESO for both the exercise and the taxes are on non-recourse terms in case your stock fails to appreciate in value.

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Q. Is this the same as a secondary market sale?

A. No, in a secondary market sale, you forfeit all future profits in exchange for a fixed price at the time of the sale. Rather than giving away all potential future value of your shares via a secondary sale, a transaction with the ESO Fund allows you to retain the upside potential on a shared basis with the Fund.

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Q. Is there a minimum or maximum transaction size?

A. We will consider cash advances of up to a maximum of $3 million. On the other hand, there is no minimum size. We will gladly make advances of only a few thousand dollars.

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Q. Can I sell my stock to the ESO Fund?

A. No, we prefer stock that still has substantial appreciation potential. If your stock has not yet appreciated significantly, you should consider getting an advance from ESO instead of selling it. By doing so, you retain the possibility of unlimited appreciation upside while recouping your cash and passing the risk on to the ESO Fund instead. When considering a sale, be sure that you aren't holding restricted stock from an early exercise that is still subject to vesting. If so, don't forget to file an 83(b) with the IRS.

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Q. Will I be subject to Alternative Minimum Tax (AMT)?

A. It is common to exercise early in an effort to qualify for long term capital gains tax treatment and to avoid future increases in fair market value that subject you to very large AMT. AMT depends on your option grant and financial situation. Please see our Alternative Minimum Tax resource page for more information.

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Q. Will ESO Pay my NSO Withholding Tax?

A. Yes, if we approve the risk profile of your stock then we can advance enough money to cover your taxes as well. Technically, ESO is only advancing cash to you and you are dealing with your own taxes. It is your responsibility to determine your correct tax needs and request an advance of sufficient size from ESO. Although the ESO Fund faces the economic risk of your stock for you, it is not responsible for any shortfall in tax coverage that you may face from this transaction.

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Q. How can venture-backed companies benefit from the ESO Fund?

A. If your company is doing really well but circumstances are delaying your IPO, consider using the ESO Fund to provide partial liquidity for your employees.

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Q. When can I sell my stock?

A. If the company issuing the stock goes public, the ESO Fund will work closely with you to determine the best timing to maximize profits subject to trading restrictions such as the lock-up period and Rule 144. If the issuing company is acquired, the distribution of your proceeds is usually divided into 2 or 3 periods: initial closing of the transaction, performance earn-out, and the final distribution of the holdback escrow. Although most of the acquisition proceeds are usually received up front, the latter 2 events are usually a few years down the road. Partial redemptions authorized by the issuing company are also common when investor interest in your company is high. Selling your private stock on the secondary market is another possibility when permissible. All secondary sales and redemptions are subject to the minimum one year holding requirements for long term capital gains and SEC Rule 144.

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Q. What criteria do you look for in a transaction?

A. The minimum requirement is that your stock grant is issued by a company primarily funded by institutional venture capital. The most important criteria are the prospects of the venture-backed company itself. The company should have an innovative business with a large potential market, outstanding management, a well-funded business plan, and experienced investors. You are also required to be a United States Permanent Resident and pass a credit and criminal background check.

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Q. What if I work for a publicly traded company?

A. The ESO Fund does not loan against stocks in publicly traded companies because numerous companies such as your brokerage firm can already do this for you. However, if you are in the lockup period or an executive subject to limited trading windows, you can get a short term Bridge Loan from the ESO Fund.

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Q. How can executive recruiters benefit from the ESO Fund?

A. The ESO Fund can unlock the proverbial golden handcuffs that prevent job prospects from leaving their current jobs. See our recruiter resource page for more information.

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Q. Can I get an ESO loan for options in a divorce settlement?

A. Incentive Stock Options are usually not transferrable to other parties including spouses. However, you can use an ESO advance to exercise the options and then divide up the resulting shares of stock. Click for more information.

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The ESO Fund does not provide legal, financial or tax advice. The above transaction description is a general description only and all terms are subject to final documentation.