B O R R O W E R G U I D E : S T O C K O P T I O N S

S T O C K O P T I O N S 1 0 1

R E V I E W T H E A G R E E M E N T

H O W M A N Y D AY S D O Y O U H AV E T O E X E R C I S E Y O U R O P T I O N S ?

Y O U T Y P I C A L LY H AV E 3 0 O R 9 0 D AY S T O E X E R C I S E Y O U R O P T I O N S O R R I S K L E AV I N G

T H E M O N T H E TA B L E .

A R E T H E O P T I O N S G R A N T E D I S O ( I N C E N T I V E S T O C K O P T I O N S ) O R N S O ( N O N - Q U A L I F I E D

S T O C K O P T I O N S ) ?

M O S T T E C H S TA R T U P S U S E I S O — T H I S I S I M P O R TA N T B E C A U S E T H E R E A R E D I F F E R E N T

TA X I M P L I C AT I O N S F O R N S O .

W H AT ’ S T H E S T R I K E P R I C E P E R S H A R E A N D W H AT ’ S T H E F M V ( FA I R M A R K E T VA L U E ) P E R

S H A R E ?

T H E S T R I K E P R I C E I M PA C T S T H E C O S T T O E X E R C I S E ; T H E F M V I M PA C T S Y O U R TA X

S I T U AT I O N .

TA X C O N S E Q U E N C E S

• In addition to the cost to exercise your options, you also have to pay tax on any “gains” from the purchase.

• With NSO, you’ll have to pay an AMT (Alternative Minimum Tax). This is equal to ~35% of the gain (the total FMV of the shares minus the total exercise cost).

• If you sell your stock in the same tax year as you exercise it, you won’t have to pay an AMT but will have to pay ordinary income tax (~50%) on the gain.

I S O E X A M P L E

• You just hit the 4 year mark and you’ve now vested all of your 25,000 shares of UnicornInc. They’ve also just raised an additional $1.5B at a $40B valuation (a whooping $50 per share)! You’re worth 1.25 million!

• You’re leaving to found your own startup, and want to exercise your shares. The strike price is $1. You’ll need $25,000 to exercise your options.

• You’ll owe an AMT of $428,750 next April.($49 gain per share x 25,000 shares x 35% AMT)

Y O U R S O L U T I O N S

• Get a loan from a special fund or a bank.

• Sell stock to exercise option price using a platform.

• Take out a loan from a friend or coworkers.

C O M PA R I N G S O L U T I O N S

S P E C I A L F U N D O R B A N K L O A N

S E L L O N S E C O N D A R Y E X C H A N G E P L AT F O R M

F R I E N D S , FA M I LY, C O W O R K E R S L O A N

P R O S FA S TL O W E R Y O U R O V E R A L L R I S K

G O O D R AT E

C O N SF U L L R E C O U R S E D E B T,

H I G H C O S T

S TA R T U P S A R E S AY I N G ‘ N O ’ T O

S T O C K S A L E S .T I M E C O N S U M I N G

T H E I R M A I N G O A L M A K E M O N E YN E W I N V E S T M E N T S

F O R A C C R E D I T E D I N V E S T O R S

H E L P Y O U

F U N D I N G / PAY M E N T P R O C E S S

M O N T H LY PAY M E N T S

C O M P L E X L E G A L PA P E R W O R K , W I R E

T R A N S A C T I O N S , C A P I TA L G A I N S TA X

A U T O M AT I C PAY M E N T ( I F Y O U U S E W E F I N A N C E )

W H AT I S W E F I N A N C E ?

W E F I N A N C E I S A C R O W D F U N D I N G P L AT F O R M F O R Y O U R L O A N S

• It’s a loan on your terms. You set the interest and length. We believe in relationships, not credit scores.

• WeFinance is free for you and your lenders, and payment and repayment is completely automated.

I S O E X A M P L E ( B A N K L O A N )

• You get a loan for $450,000 from the bank at 5% interest to exercise your options and to pay your AMT.

• Ideal outcome: UnicornInc does their IPO next year. You sell your shares and pay off your loan.

• Bad outcome: UnicornInc dies. You now hold shares worth nothing and you have a bank loan to pay off.

I S O E X A M P L E ( S E C O N D A R Y M A R K E T )

• You go to HR about using SecondMarket or SharePost to sell some of your shares on the secondary market to pay for the exercise price and AMT tax.

• Ideal outcome: HR says yes. UnicornInc and you complete significant paperwork to process transaction.

• Bad outcome: HR says no (following the lead of Dropbox, Uber, and Airbnb).

I S O E X A M P L E ( W E F I N A N C E )

• You decide to crowd fund a loan from your coworkers, friends, and family.

• Ideal outcome: You crowd fund a flexible loan with people you know. After the initial setup, the monthly transactions are automated and headache free.

• Bad outcome: Your campaign fails, in which case you can still get a bank loan.

H O W T O G E T F U N D E D

B U T F I R S T O F F…

• These explanations are only useful if your listing is getting shared beyond your immediate network.

• If you’re reaching out to people who know you well, some of these might not apply — just explain what the money is for and why you’re able to pay it back!

N E T W O R K

• Reach out to people who might be able to help…

• Do you have friends who know you and have the cash to help?

• Coworkers/founders you’ve worked with?

• People who are confident about the long-term potential of the company?

B A C K G R O U N D

• Start with your background…

• How long have you worked there? What are you planning to do after?

• What did you study? Where?

• Why are you trustworthy?

E N D O R S E M E N T S

• Ask family, friends, and coworkers for endorsements…

• Why are they reliable?

• Why should you lend them the money?

• Why are they worth the risk?

L O A N T E R M S

• Explain your reasoning for the terms…

• Why x% interest?

• Why x months?

• Why the deferral?

S H A R I N G

• When you share your listing…

• Present yourself as an investment opportunity. It’s not a handout — it’s a loan with interest.

• It’s a win-win situation. Why give money to the bank when you can give it to people you know?

• The more you share, the more likely you will succeed (and take control of your finances and situation in a responsible way!).

Q U E S T I O N S ?

S E B A S T I A N @ W E F I N A N C E . C O