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 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.
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 Deal Makes Sense For You
A deal with ESO makes sense because it gives you free leverage and diversification by allowing you to invest your money alongside ESO'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 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.
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 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 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.