stock options can act as golden handcuffs and why so many companies utilize them as a retention toolAs 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 handcuff
the holding requirement represents a period of illiquidity that can pose a significant financial burden to some employeesSEC Rule 144 governs the sale of restricted and control securities (here's a hyperlink to the SEC document). If you work for a venture-backed startup company that has not yet gone public, you will be purchasing restricted stock whe
An ESO transaction can provide employees with discretionary cashVenture-backed startups rely heavily on employee stock options to attract and retain top talent. Stock options give the employees a piece of the company's upside, letting them benefit with the company's success. However, the current environment for IPOs often makes for a very long time horizon to achieve liquidity and has given rise to secondary markets for private company stock. Rather
the seller receives the purchase price so there is no opportunity for continuing gainStock in venture backed private companies is generally illiquid. In other words, there is a limited market for the stock since it is not freely transferable or publicly traded. Owners of common stock in private companies such as founders, employees, consultants, and others who wanted to obtain cash for their stock have traditionally either had to wait for a company liquidity event (for example, a sale or IPO of the company) or sell the shares on the secondary market. The problem with waiting for a liquidity event is that for many private companies, there will never be a liquidity event because the company will fail. And with a direct secondary sale of common stock, most buyers are interested only in large blocks of stock in "almost public companies" and when the stock is sold, the seller receives the purchase price so there is no opportunity for continuing gain.
The Employee Stock Option Fund can significantly mitigate these risks by providing financing against the value of the stock. No payments are due unless and until there is a liquidity event involving the company that issued the shares, such as a sale or IPO. At that time, the owner of the stock and ESO share the upside of the liquidity event and ESO is repaid. An advance from ESO to provide liquidity on your existing stock allows owners of common stock in private companies to obtain immediate funds while retaining significant upside with minimal risk.
If you'd like to know more about how ESO can help you monetize your private company stock, please contact us at the ESO Fund.
Unvested assets don't have to be recognized as income as a safety measure for you. Venture-backed startup companies are big fans of using stock options as a major compensation tool to attract and retain employees. If your company's stock value rises over the years, you can avoid two major tax issues by having exercised early. However, since you haven't actually vested your stock and assuming your company even has an early exercise option, you would technically be holding restricted stock that