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There are a list of companies claiming to provide liquidation for employees who have ISOs in private startups but don't have the means to exercise them (because of the ridiculous amount of phantom tax you would pay due to your AMT the next year):

  • EquityZen
  • Equidate
  • ESOFunds
  • 137Ventures

Maybe SecondMarket and SharesPost fall into this category as well.

But for all of these companies like EquityZen, they claim that they can front you the money to buy your stock but you would owe them some % every year in loan interest. I've heard that the numbers can come out to basically taking off 33% of your total stock share after a few years. However, even still, the employer would still have to approve of the services for the employee to actually go on EquityZen to sell. So my questions are (hopefully someone reading this has had experience and can speak to that):

  1. Are these companies legitimate? i.e. if for some reason the stock value drops to 0, but you've borrowed like $4 million, can they somehow try to collect that money even though in the contract it says that they won't?
  2. for EquityZen, i think you have to go through the employer's approval, and my understanding is that most employers don't allow these services. so in that case, is there even any use at all for these services? like do people actually even use these services?
  3. If you were forced to use these services (i.e. you were about to get fired or had to quit and lose ALL your shares, would these companies suddenly change the terms?)
  4. If you took out a loan with these companies, but then your employer decides to stay private forever, what happens to your loan?
  5. Are these services basically like loan sharks?
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Full disclosure: I’m an intern for EquityZen, so I’m familiar with this space but can speak with the most accuracy about EquityZen. Observations about other players in the space are my own.

The employee liquidity landscape is evolving. EquityZen and Equidate help shareholders (employees, ex-employees, etc.) in private companies get liquidity for shares they already own. ESOFund and 137 Ventures help with option financing, and provide loans (and exotic structures on loans) to cover costs of exercising options and any associated tax hit.

EquityZen is a private company marketplace that led the second wave of VC-backed secondary markets starting early 2013. The mission is to help achieve liquidity for employees and other private company shareholder, but in a company-approved way. EquityZen transacts with share transfers and also a proprietary derivative structure which transfers economics of a company's shares without changing voting and information rights. This structure typically makes the transfer process cheaper and faster as less paperwork is involved. Accredited investors find the process appealing because they get access to companies they usually cannot with small check sizes.

To address the questions in Dzt's post: 1). EquityZen doesn't take a 'loan shark' approach meaning they don't front shareholders money so that they can purchase their stock. With EquityZen, you’re either selling your shares or selling all the economic risk—upside and downside—in exchange for today’s value.

2). EquityZen only allows company approved deals on the platform. As a result, companies are more friendly towards the process and they tend to allow these deals to take place. Non-company approved deals pose risks for buyers and sellers and are ultimately unsustainable. As a buyer, without company blessing, you’re taking on significant counterparty risk from the seller (will they make good on their promise to deliver shares in the future?) or the risk that the transfer is impermissible under relevant restrictions and your purchase is invalid. As a seller, you’re running the risk of violating your equity agreements, which can have severe penalties, like forfeiture of your stock. Your shares are also much less marketable when you’re looking to transact without the company’s knowledge or approval.

3). Terms don't change depending an a shareholder's situation. EquityZen is a professional company and values all of the shareholders that use the platform. It’s a marketplace so the market sets the price. In other situations, you may be at the mercy of just one large buyer. This can happen when you’re facing a big tax bill on exercise but don’t have the cash (because you have the stock).

4). EquityZen doesn't offer loans so this is a non issue.

5). Not EquityZen! EquityZen creates a clean break from the economics. It’s not uncommon for the loan structures to use an interest component as well as some other complications, like upside participation and and also a liquidation preference. EquityZen strives for a simple structure where you’re not on the hook for the downside and you’ve transferred all the upside as well.

  • firstly, thank you for the disclosure, and the ample explanation. this is exactly what I was looking for. I've spoken with someone from your company already a little while ago as a preliminary research. I've learned a lot more since. Are you also available to answer private inquires offline (email or phone)? – Dzt Feb 18 '15 at 23:04
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Stuff I wish I had known, based on having done the following:

  1. Obtained employment at a startup that grants Incentive Stock Options (ISOs);

  2. Early-exercised a portion of my options when fair market value was very close to my strike price to minimize AMT; made a section 83b) election and paid my AMT up front for that tax year. All this (the exercise and the AMT) was done out of pocket. I've never see EquityZen or Equidate mention anything about loans for your exercise. My understanding is they help you sell your shares once you actually own them.

  3. Stayed at said startup long enough to have my exercised portion of these ISOs vest and count as long term capital gains;

  4. Tried to sell them on both EquityZen and Equidate with no success, due to not meeting their transaction minimums.

    Initial contact with EquityZen was very friendly and helpful, and I even got a notice about a potential sale, but then they hired an intern to answer emails and I remember his responses being particularly dismissive, as if I was wasting their time by trying to sell such a small amount of stock. So that didn't go anywhere.

    Equidate was a little more friendly and was open to the option of pooling shares with other employees to make a sale in order to meet their minimum, but that never happened either.

    My advice, if you're thinking about exercising and you're worried about liquidity on the secondary markets, would be to find out what the minimums would be for your specific company on these platforms before you plunk any cash down.

  5. Eventually brought my request for liquidity back to the company who helped connect me with an interested external buyer, and we completed the transaction that way.

    As for employer approval - there's really no reason or basis that your company wouldn't allow it (if you paid to exercise then the shares are yours to sell, though the company may have a right of first refusal). It's not really in the company's best interest to have their shares be illiquid on the secondary markets, since that sends a bad signal to potential investors and future employees.

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