As an executive recruiter, you may often encounter a promising candidate who is reluctant to leave his or her current position because of vested stock options — even though the candidate may feel that your client’s job may have better potential. This psychological reluctance is the fundamental logic behind how stock options can act as golden handcuffs and why so many companies utilize them as a retention tool.
The Employee Stock Option Fund (ESO Fund) can help in those situations. ESO provides financing to current and former employees of private companies to allow them to exercise their stock options. This innovative service allows executive recruiters and their company clients to “take off the table” any discussion of increasing compensation or paying a bonus to a new hire to exercise options at the candidate’s former company. These valuable funds can be utilized for more important and tax-efficient expenses such as relocation or a bonus that is only taxed once. If a bonus is used to exercise options, it is taxed at the high ordinary income tax rate upon receipt and the option exercise itself is subject to more taxes. As such, bonus dollars need to be grossed up twice for taxes to cover exercises which means the bonus can be 3x to 4x higher than the actual dollars needed to do the exercise. Having ESO finance an option exercise will prevent all of these issues.
No repayment is due under ESO’s program until there is a liquidity event. ESO does not require a transfer of title or even a security pledge on the underlying stock. Candidates will retain the benefits of ownership such as voting but most importantly, the ability to benefit from future appreciation in value.
Moreover, an ESO advance allows the candidate to take a portfolio approach to private company stock. With the ESO program the candidate can retain stock in their old company as well as vest additional equity in the new company.
For more information regarding ESO funding and how we can help recruiters and their placement candidates, please contact us.