Options Options: New Products Emerging to Help Employees Take Control of Their Capital

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Amid the tightest job market in decades, the biggest hurdle facing most companies is attracting talent.

To stay competitive, private companies not only offer higher salaries to potential recruits, but also entice workers with larger equity compensation packages, often in the form of stock option awards. According to Jody Thelander, founder of compensation-focused firm J.Thelander Consulting, the trend has accelerated in recent months.

Yet exercising vested stock options and paying associated taxes is expensive. For employees who cannot afford to pay out of pocket, the question of how to fund option purchases has become more pervasive as startups stay private longer. And with the number of startups constantly growing, this is also becoming more widespread.

The issue gained attention following a recent offer by Ryan Breslow, founder of payments technology provider Bolt Financial, to provide loans to his employees to exercise their options.

While exercising options in a fast-growing startup can generate great wealth, paying out of pocket or financing the deal with a loan can be financially risky for employees. The company may never achieve an exit, and even if it does, it may be valued at less than the exercise price of the employee options. This is likely the case for some workers at new public companies whose stock prices have fallen, in some cases below their IPO prices.

To help counter these risks, venture capital-backed startups and companies structured as private funds have begun offering employees of promising startups a loan-like product to purchase stock options. . EquityBee, SecFi, Liquid Stock, Quid, and ESO Fund are just a few of the companies that offer these products.

A sort of non-recourse loan, the products give the employee the money to exercise their options in exchange for a certain number of shares – or its cash equivalent – ​​if the startup is acquired or goes public. If the exit is successful, the employee will share their profits with the vendor funding the stock option purchase. But if the startup fails or exits below the option’s strike price, the employee can walk away.

“We know how to price these trades in a way that creates a win-win situation” for us and the employee, said Greg Martin, co-founding partner of Liquid Stock, which is currently investing in a second fund that should be significantly larger than the company’s first $161 million vehicle.

While employees give up part of their benefit in exchange for financing from one of these vendors, many pre-IPO companies choose to refer their employees to an outside vendor rather than provide loans directly. according to Martin. The borrower-creditor relationship between employee and company, he said, could potentially become toxic.

Providers of these products sometimes require 40% or more of funded equity in exchange for funding the exercise of options. But in many cases, employees are encouraged to give up far less, and the cost of the product could be worth the peace of mind, Martin said.

Oren Barzilai, co-founder and CEO of EquityBee, a marketplace that connects startup workers with investors bidding to fund the purchase of stock options, said employees need a strategy to deal with the potential overexposure of their finances to an asset: the shares of their employers. .

“Employees should think like investors” when it comes to diversification, Barzilai said.

As the startup ecosystem grows, non-recourse stock option financing products seem likely to grow in importance, but providers of this type of financing say many employees are unaware of their existence. Because stock options generally must be exercised within 60 to 90 days of an employee leaving a company, many options are not exercised. Buying stock options early also has tax advantages, which can sometimes allow employees to hold stock long enough to benefit from lower long-term capital gains tax rates.

EquityBee estimates that approximately $60 billion in value of stock options become available each year and that approximately 55% of this value is unexercised.

“Our main competitor is the lack of knowledge and education about it,” Barzilai said. Employees of startups that have raised at least $50 million in funding from well-known venture capital firms are generally eligible to submit their options on EquityBee’s platform.

Liquid Stock’s Martin also said he wanted to raise awareness about the solution.

“What we really should be thinking about are ways to help employees exercise their options,” he said. “But let’s do it in a way that doesn’t create an uncomfortable conflict between the company and the employee.”

Related reading: IPO bonanza leaves out some tech workers on unexercised stock options

Featured image by Randy Faris/Getty Images

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