When you exercise your stock options, you are making an investment in a startup company. It is conceptually similar to what Angels and Venture Capitalists do except that you, as a common stockholder, aren't entitled to much information or control over the company. Seed investing is believed to have a success rate of less than 10% and an average holding period of over 8 years. It can work for professional investors because of portfolio diversification and the potential payouts being higher than 10x. Unfortunately, employees have a portfolio of only one company when exercising options and it isn't always clear whether that one investment will be successful. Even the best companies that manage to reach an Initial Public Offering can still collapse in value before the lockup restrictions on employees are lifted and your shares are sold. Many other private companies are sold in private mergers and acquisitions but fail to pay off debt and clear the Liquidation Preferences that the lenders and venture capitalists have on the company with the result that common shareholders receive nothing.
Working with the Employee Stock Option Fund to cover some or all of your stock option exercise expenses is like getting insurance against this catastrophic risk. Unlike insurance, you aren't required to pay ongoing premiums because the ESO Fund can supply all of the capital and can wait out the long period of illiquidity. ESO is NOT like a pooled insurance fund where you contribute your stock to a pool of stocks in order to diversify across all of the stocks. Those vehicles are burdened by adverse selection and probably create more risk than they remove because the returns of your stock are diluted by the poor performing stocks in the pool. By letting ESO assist you, you avoid the risk of loss and yet still retain an opportunity to receive unlimited upside on your equity in your company. Please contact us for more information.