This link has an overview of the funding process. If we decide to proceed with a transaction, the ESO Fund will provide you with the funds to pay the cost of exercising your stock options and may provide you with additional liquidity for tax obligations. No repayment is due unless and until there is a liquidity event involving the company that issued the shares, such as an acquisition or IPO. You may terminate our agreement by paying us back at any time before final liquidity under the terms of our agreement.
You do as the person who exercised your stock options. We enter into an agreement directly with you regarding the repayment, which can be from the proceeds from the sale of the stock or your own resources.
Many venture backed companies fail and investors lose their entire investment. Many option holders have paid to exercise their options, only for the stock to become worthless. Moreover, the IRS still collects AMT tax from optionees based on the exercise price even if the stock subsequently collapses in value. The ESO Fund assumes the financial risk associated with exercising stock options and will not seek repayment from you should your stock become worthless. If you are concerned about high taxes resulting from the exercise, then you can also request a larger advance from ESO to cover your tax needs. The funds advanced by ESO for both the exercise and the taxes are on non-recourse terms.
No, in a secondary market sale, you forfeit all future profits in exchange for a fixed price at the time of the sale. Rather than giving away all potential future value of your shares via a secondary sale, a transaction with the ESO Fund allows you to retain the upside potential.
No, we prefer stock that still has substantial appreciation potential. If your stock has not yet appreciated significantly, you should consider obtaining an advance from ESO instead of selling it. By doing so, you retain the possibility of unlimited appreciation upside while recouping your cash and passing the risk of company failure to the ESO Fund instead.
It is common to exercise early in an effort to qualify for long term capital gains tax treatment and to avoid future increases in fair market value that subject you to a very large AMT bill. AMT depends on your option grant and financial situation. Please see our Alternative Minimum Tax resource page for more information.
You can sell your stock at any time subject to your company’s transfer restrictions. However, the repayment of your advance will also be due at that time. Our advances are automatically due after your IPO lockup expires.
The minimum requirement is that your stock grant is issued by a company primarily funded by institutional venture capital. The most important criteria are the prospects of the venture backed company itself. The company should have an innovative business with a large potential market, outstanding management, a well funded business plan, and experienced investors. To transact with the ESO Fund, you must be a United States Citizen or Permanent Resident residing in the US and pass a credit and criminal background check.
Yes, if we approve the risk profile of your stock then we can advance enough money to cover both your exercise and the associated taxes. However, it is your responsibility to determine your correct tax needs and request an advance of sufficient size from ESO. Your company may allow 5-year deferrals of NSO taxes by making an 83(i) election.
No, it cannot serve the purpose of taking some money off the table on a non-recourse basis so that you essentially guarantee a minimum return on your stock. Our advances are typically only for the cost of your exercise and taxes. As such, you haven’t secured a meaningful profit except perhaps for a small amount when we over estimate your actual tax needs.
Yes, but this is likely to have negative tax consequences to you because RSUs are taxed at high ordinary income tax rates when liquidity occurs. Since RSUs are a form of deferred compensation, cash advances against future income are considered personal loans and are generally not tax deductible. However, if you use the cash advance to make investments, the cost of the advance might be deductible against the future gains from that investment.