Funding your stock option exercise with ESO Fund offers you free leverage and diversification because you can place your freed up cash into another investment.n
Get ESO Fund 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.
Stock options certainly 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.
Why an ESO Fund Deal Makes Sense For You
A deal with ESO Fund makes sense because it gives you free leverage and diversification by allowing you to invest your money alongside ESO Fund's investment in your stock options.
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 Fund 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 made it more valuable than what it was because you have used ESO Fund's non-recourse funding to create value. Even if the private stock collapses to zero value, you still have 100% of your other investment.
Investing Your Own Money
Letting ESO Invest For You
- You Cover $50,000 Options Exercise
- ESO Covers $50,000 exercise
- You Cover $10,000 Taxes
- ESO Covers $10,000 Taxes
-You get 100% of Stock Value at Exit
- You Get 65% of Stock Value at Exit (ESO Taxes 35%*)
- Hold for 3 years
- Hold for 3 years
- You Invest $0 to Reduce your 3% Mortgage
- You Invest $150,000 to Reduce your 3% Mortgage
Expected Fair Value = $50% of your Stock's Exit Value
Expected Final Value = 32.5% (50% of 65%) of your Stock's Exit Value + $163,500 additional equity in your home ($150K at 3% interest for 3 years)
Whether it is better to invest your own money or let ESO make the investment ultimately depends on whether 17.5% of the stock's exit value is more valuable than the $163,500 of extra cash benefit. The difference of 17.5% (50% – 32.5%) of stock value equates to how well $26,250 (17.5% of $150K) 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 Sept. 30, 2016, the best performing vintage year ever recorded for venture capital and private equity was 1991 where upper quartile funds achieved an ROI of 3.54x and median funds achieved 2.44x.** Moreover, their average time to exit was considerably longer than 3 years for early stage companies. As such, your particular circumstance would have to be significantly above average to justify carrying the additional personal risk.
*All offers are individually tailored and these numbers are for the purpose of example only. Although 35% of total proceeds is typical for ESO clients, 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 September 30, 2016. 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 funding from ESO Fund and use that money to exercise your options. No repayment is due unless and until there is a liquidity event involving the company that issued the shares, such as a sale or IPO. 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, by leveraging ESO Fund's funding you can diversify your risk by investing in other assets instead. The combination of equity in your startup company purchased with ESO Fund'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.
Funding from ESO Fund to exercise your options can provide you with significant upside with minimal risk. If you'd like to know more about how ESO Fund can help your financial situation, please contact us.
Frequently Asked Questions
What does ESO Fund do?
ESO Fund helps startup employees exercise their stock options without risking their own cash. We provide non-recourse funding, covering 100% of the exercise cost and taxes, so employees can retain ownership and benefit from future upside. If the company doesn’t succeed, you owe us nothing—we take on all the risk.
Does ESO Fund require a credit check?
Yes, ESO Fund requires a Background / Credit Check as part of the eligibility process.
How does non-recourse funding work at ESO Fund?
ESO Fund provides non-recourse funding, meaning you can exercise your stock options without personal financial risk. If your company fails or never exits, you owe nothing.
Are there any hidden fees with ESO Fund’s funding?
No, ESO Fund has no hidden fees. The funding structure is transparent, with no interest or unexpected costs.
Does ESO Fund take ownership of my shares?
No, ESO Fund does not take ownership of your shares. You retain ownership, and ESO Fund only receives a portion of the upside if your company exits. No share transfer is required while the company is still private.
Get Started with ESO Fund
Equity decisions are complex, but you don’t have to navigate them alone. ESO Fund has been helping employees unlock the value of their hard-earned equity for over a decade. Whether you’re exercising, planning for taxes, or looking for liquidity, we’re here to provide clear, non-recourse funding solutions tailored to your situation.
This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!
