TLDR
Exercising employee stock options, but don't have the cash? ESO Fund can cover the cost of exercise plus taxes for you.
When leaving a startup many employees face the conundrum of how to pay for their stock option exercise in order to avoid expiration. If an employee either doesn't have enough liquid cash to cover the exercise cost (including taxes) or prefers not to over allocate into a single asset, they will need to look towards other means of raising capital. One of the most obvious paths in taking on debt in order to pay for the exercise. While personal loans and HELOCS are fairly widely available and great sources of cash in the right situations, they may not make sense as far as stock option exercise financing.
Any standard loan formats will be fully recourse and typically require monthly payments along the way. Stock options are far from a sure thing, and if things go south at the company it will be tough for the employee to cover the loan amount when the underlying stock is unsuccessful. Stock options are also illiquid, meaning the employee will need to pull from their cash reserves in order to cover the monthly payments on a loan. Finally, most Stock Option Plans at private companies directly prevent collateralization, pledging, hypothication etc of their private stock. This means the employee would likely need to breach their Stock Option Agreement in order to use the stock options as collateral.
Due to the rationale laid out above, loans are NOT an ideal source of financing for a stock option exercise. Luckily, ESO Fund has a solution that is risk-free and doesn't require monthly payments or collateralization of the shares.
Get Funding from ESO to Exercise Your Stock Options
For starters, ESO Fund's financing for stock options, shares, and RSUs is not a loan (See more on our IPO Lockup Loan Program). ESO Fund can offer cash against the value of your equity in exchange for a portion of the future upside. All funding is on a non-recourse basis, meaning if the company fails, ESO writes it off as a loss and you (the employee) do not owe us anything out of pocket.
A Formidable Hurdle
For people who work in private, venture-backed companies, stock options typically represent the most potentially valuable asset they have. Note that key word—potentially. Options in the majority venture-backed companies will end up worthless as the simple result of the company failing, whether at seed stage or Series C and later. Working with ESO Fund to finance the purchase of your stock options can eliminate the risk while allowing you to reap the rewards of any future liquidity events (IPO or M&A). Not to mention you will remain liquid and have the ability to take advantage of free leverage and diversification by investing your capital elsewhere.
Stock options aren't a sure thing.
For every private company that goes public or is sold for a high price, many more are liquidated and the people who own common stock or exercise their options lose 100% of their investment. Unlike investing in a public company where you may lose 50% or more of your investment if things go awry, when investing in startups you lose everything if the company cannot produce a liquidity event that is profitable for the holders of common stock. A very poorly understood problem is that all Preferred Stock owned by venture capitalists is paid off before common stockholders receive even one penny. In the Unicorn Age where companies have raised billions of dollars, this creates a formidable hurdle.
Options: To Exercise or Not to Exercise?
When people change jobs, they typically have at most 90 days to decide if they want to exercise their incentive stock options. For years, there were only 2 choices: exercise and take the risk of losing your investment or do not exercise and lose the options and the possible profits. Moreover, selling the shares will truncate any possibility of future upside and is usually prohibited or impossible for all but the largest shareholders at the most famous startups. Read more on when to exercise stock options.
New Option When Changing Jobs
Now there is a choice that allows option holders to obtain upside with minimal risk — obtain risk-free funding from the Employee Stock Option Fund and use that money to exercise your options. You retain title to the stock and ESO does not require any payments against the funding until liquidity. Most importantly, employee stockholders retain the possibility of enjoying future appreciation in value. ESO can also provide 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 that results in a significant bet on the company that may not be an inconsequential proportion of your net worth; by leveraging ESO's funding you can diversify your risk by investing in other assets instead, which can result in a safer and larger portfolio than if you invested in a single company (see modern portfolio theory for more on this topic).
Get the Cash Needed to Exercise
Funding from ESO to exercise your options can provide you with significant upside and there is no risk. If you'd like to know more about how ESO can help your financial situation, please contact us using the form below!
