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Insuring Against the Risk of Loss

Exercising stock options is essentially making an investment in a startup company. It is conceptually similar to what Angels and Venture Capitalists do except that you aren't entitled to much information or control over the company. Seed investing is believed to have a success rate of less than 10% and an average holding period of over 8 years. It can work for professional investors because of portfolio diversification and the potential payouts being higher than 10x. Unfortunately, employees only have a portfolio of only one company when exercising options and it isn't always clear whether that one investment is certain to be successful. Even the best companies that manage to reach an Initial Public Offering can still collapse in value before the lockup restrictions on employees are lifted and your shares are sold. Many other private companies are sold in private mergers and acquisitions but fail to clear the Liquidation Preference that the lenders and venture capitalists have on the company before the common stock is entitled to any proceeds.

Letting the ESO Fund cover some or all of your stock option exercise expenses is like getting insurance against this potential risk. Unlike conventional insurance, you aren't required to pay ongoing premiums because the ESO Fund can supply all of the capital and wait out the potentially long period of illiquidity. ESO is NOT like a pooled insurance fund where you contribute your stock to a pool of stocks in order to diversify across all of the stocks. Those vehicles are burdened by adverse selection and probably create more risk than they remove because the returns of your stock are diluted by the poor performing stocks in the pool. In contrast, the ESO method shields you from other stocks in our Fund. By letting ESO assist you, you avoid the risk of loss and yet still retain an opportunity to receive unlimited upside on your equity in your company. Please contact us at the ESO Fund 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 between ESO and loan recipient.