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Free Leverage and Diversification

Get an Advance from ESO to Exercise Your Stock Options

For people who work in private, venture-backed companies, stock options may represent the most potentially valuable asset they have. Note that key word—potentially.

But stock options aren’t a sure thing. For every private company that goes public or is sold for high price, many more are liquidated and the people who own common stock or exercised their options lose 100% of their investment.

If you exercise your private company stock options with your own money, then you have 100% of your investment concentrated into a single, illiquid investment. If you let ESO make the investment for you and you invest your money into something else, you still have the majority of the financial benefit of your private stock plus the full value of the other investment. By doing so, you have not only diversified your investment but you've actually made it more valuable than what it was. Technically, your net worth has increased through leverage. This leverage isn't actually free but it is conceptually free because ESO advances are non-recourse. Even if the private stock collapses to zero value, you still have 100% of your other investment. Normally, leverage can not only amplify your asset value but it can amplify your losses as well. This happens because most loans are recourse loans. For example, auto loans and home equity lines of credit are recourse loans that you must pay back even if you lose the money by making an unsuccessful investment. This won't be the case with an ESO advance against your private company stock.

Investing Your Own Money Letting ESO Invest For You
  • $50,000 Option Exericse
  • $100,000 Taxes
  • Assume Chance of Success is 50:50
  • Hold for 3 Years
  • ESO Covers $50,000 Exercise
  • ESO Covers $100,000 Taxes
  • Assume Probability is 50:50
  • Assume ESO Expense is 35%*
  • You Invest $150,000 to reduce your 3% mortgage instead
  • Hold for 3 Years
Final Value = 50% of your Stock's Potential Value Final Value = 32.5% of your Stock's Potential Value + $163,500 additional equity in your home.
Difference of 17.5% of Stock Value equates to how well $26,250 of your original $150K investment performs. To match the guaranteed return of $163,500 from simply reducing your mortgage, it would have to yield an ROI of 6.2x. According to Cambridge Associates as of Dec 31, 2014, the best performing vintage year ever recorded for venture capital and private equity was 1991 where upper quartile funds achieved an ROI of 3.6x and median funds achieved 2.8x.** As such, your particular circumstance would have to be significantly above average to justify carrying the additional personal risk.
*All offers are individually tailored based on a fast appraisal of your company's risk profile and your total cash needs. 35% of total proceeds is typical for ESO clients but your actual cost by percentage is unknown until final liquidity is achieved.
**These figures are from the Cambridge Associates U.S. Private Equity & Venture Capital Index and Benchmark Statistics as of December 31, 2014. The industry results are reduced by fund manager fees and based on actual success rates that can be quite different from 50%.

Now there is a choice that allows option holders to obtain upside with minimal risk—obtain an advance from the ESO Fund and use that money to exercise your options. No payments are due unless and until there is a liquidity event involving the company that issued the shares, such as a sale or IPO. Only at that time will ESO require repayment. ESO can also advance funds for potential tax liabilities associated with the stock, such as Alternative Minimum Tax (AMT). Even if you can afford to exercise your options and pay your AMT, by leveraging ESO's funding you can diversify your risk by investing in other assets instead. The combination of equity in your startup company purchased with ESO's help and the assets you invest in directly can represent a safer and larger portfolio than if you merely invested in a single company.

An advance from ESO to exercise your options can provide you with significant upside with minimal risk. If you’d like to know more about how ESO can help your financial situation, please contact us at the ESO Fund.

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The ESO Fund and affiliated entities do 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 the cash advance recipient.