For startup employees, selecting to exercise stock options is usually a big decision. It requires bearing in mind a bunch of things including the corporate’s probability of an exit and private circumstances. While exercising after an exit might help to cover costs, it could also result in higher taxes. That’s why many startup veterans decide to exercise their options before an organization goes public.
While this may increasingly seem complicated, exercising options is usually simpler than it sounds. There are also several ways to finance the expense if you happen to decide to exercise before an IPO. Below, we break down what they’re and easy methods to determine which one is true for you.
Borrowing From Friends and Family
A standard strategy to finance the acquisition of shares is by borrowing funds from family and friends. Depending in your equity package and the number of individuals you select to borrow from, this could possibly be a viable option, especially if you happen to decide to exercise only a portion of your shares.
In case your equity package is more substantial, otherwise you’re anxious about burdening family members with the expense, other financing options could also be more appealing.
Taking Out a Personal Loan
One other popular type of financing is a private loan. This might be a superb option if you happen to’d wish to borrow a bigger sum of money and if you happen to’re comfortable committing to a monthly repayment schedule.
Nonetheless, it’s value noting that the interest paid on personal loans could make exercising your options rather more expensive. In keeping with Experian, the common rate of interest of a private loan is 9.41%. Because of this you’ll be paying a premium to finance the acquisition of your shares and inflating your costs in the method.
It’s also necessary to remember that private loan payments begin as soon because the loan is funded. If your organization doesn’t have an exit soon after you exercise your options, chances are you’ll have to pay back the loan without having the ability to unlock the worth of your shares. The identical is true if the corporate never exits—you’ll be answerable for the complete loan amount, plus interest.
Selling a Portion of Your Shares on a Secondary Market
When you’re hoping to cover your costs without having to borrow money, selling a few of your shares on a secondary market can provide help to get the funds you wish. This might be especially helpful if you happen to don’t mind liquidating a few of your shares, and if you happen to prefer to pay to your shares upfront.
Nonetheless, it’s necessary to remember that selling shares may lower your payout if and when the corporate goes public. Depending on the corporate’s exit value, this might mean losing out on substantial gains down the road. Selling your shares also carries a considerable tax burden. The portion of shares you sell can be taxed at the best possible tax rate.
Non-Recourse Financing
One other possibility is non-recourse financing. Designed to reduce costs and provide help to maximize the worth of your shares, this sort of financing doesn’t require upfront payment, and your equity is the one collateral. Payment is simply due if your organization gets acquired or goes public.
When you’re all in favour of non-recourse financing, working with an organization that makes a speciality of startups could make a giant difference. As a number one expert in startup equity, Secfi makes it easy to finance the acquisition of your shares and might complete financing in as little as three business days.
You’ll even have access to tools just like the Exercise Tax Calculator which may provide help to gain insights into your potential payout. Better of all, if your organization doesn’t have an exit, there’s no have to repay. Secfi will accept the loss with none added costs.
Although tapping into startup equity might be exciting, it could also feel overwhelming. Thankfully, there are a selection of options available to provide help to minimize costs and maximize returns. By weighing your decisions rigorously, you’ll have the option to exercise your options without the necessity to pay out of pocket.