Author Topic: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?  (Read 8370 times)

optionsguy

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Hey all,

  • I am working at a growing startup and have stock options
  • I have been exercising my ISO stock options up to this point (2 years)
  • The difference between my strike price and the fair-market value is now extremely high
  • I want to continue to exercise my options next year, but it's going to be a 100k+ tax bill
  • My net worth is ~800k, ~100k in 401k, Roth IRA and Cash, and the other 700k is in options
  • While that 800k net worth is great, almost none of my assets are able to be put up as collateral
  • AGI for this year will be ~200k+

Well aware of the risks in doing this, and have decided to go forward and exercise as much as possible, as soon as possible.

My question is: how do I get a loan for 100k+, that I would use exclusively for my tax bill, if I have almost no assets I can put up as collateral? Where's the best place to find the best rate for something like this? I went to the best local credit union in town and the best rate was ~7% APR. My credit score is 800.

LendingTree? Prosper? Something else? Would love your feedback!

iamlindoro

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #1 on: August 20, 2015, 12:05:38 AM »
Just to make absolutely sure, your company is publicly traded, right?  Because if not, STOP!!!  Having been the recipient of huge options grants for a number of companies that were "sure to IPO soon," I am deeply grateful that I never exercised a single share.

If public, then why not buy in tranches?  Buy what you can, sell at large profit, buy next round, repeat as necessary.

electriceagle

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #2 on: August 20, 2015, 03:09:21 AM »
Just to make absolutely sure, your company is publicly traded, right?  Because if not, STOP!!!  Having been the recipient of huge options grants for a number of companies that were "sure to IPO soon," I am deeply grateful that I never exercised a single share.

If public, then why not buy in tranches?  Buy what you can, sell at large profit, buy next round, repeat as necessary.

There are secondary markets for some nonpublic companies.

Your main point still applies. Sell stock to pay the taxes. Nobody wants to end up writing off losses at $3k/yr for 33 years just because Uber for Chipmunks (clickanut.com) didn't work out.

Wile E. Coyote

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #3 on: August 20, 2015, 05:20:46 AM »
Have you checked to see if your employer plan allows for cashless exercises?  It's fairly common.

NorCal

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #4 on: August 20, 2015, 07:09:54 AM »
With over 87% of your net worth in a single company, STOP exercising now.  The incremental tax savings you get by exercising now is not even remotely worth the risk of having that much of your net worth in a single company.  And there is no way in hell that the risk of taking a $100K loan to offset tax liability is a good idea. 

The ONLY way this makes sense is if you can get some liquidity on the shares and sell soon after.  If it's a public company, this should be easy.  If it's private, you'll likely have to get approval.

Remember, having the option works to your benefit.  There is no need to exercise unless you are at the risk of losing them when you leave the company.  Start saving some cash now so that you can pay the tax bill if you ever decide to leave the company.

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #5 on: August 20, 2015, 08:21:27 AM »
Thanks for your replies:

  • The company is not public, and won't be for many more years. But they likely will within the next 5 years.
  • There is no legitimate second market for shares that I would ever use. I plan on holding until the IPO.
  • Cashless exercise is not possible.
  • There IS a need to exercise because the fair market value continues to go up, and I don't plan on being here during the IPO. The company uses the standard agreement of needing to exercise all your shares within 90 days of leaving the company. I'm having this conversation now so I can avoid the proverbial 'golden handcuffs' later

Appreciate all your concern :)

Now - does anyone have a recommended way I can get a lower interest rate loan if I have high income / high net worth but no collateral?

Thanks!

Hey It's Me

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #6 on: August 20, 2015, 08:58:43 AM »
Just to make absolutely sure, your company is publicly traded, right?  Because if not, STOP!!!  Having been the recipient of huge options grants for a number of companies that were "sure to IPO soon," I am deeply grateful that I never exercised a single share.

If public, then why not buy in tranches?  Buy what you can, sell at large profit, buy next round, repeat as necessary.

There are secondary markets for some nonpublic companies.

Your main point still applies. Sell stock to pay the taxes. Nobody wants to end up writing off losses at $3k/yr for 33 years just because Uber for Chipmunks (clickanut.com) didn't work out.

I was so hoping this was a real thing...

dapperdanj

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #7 on: August 20, 2015, 12:22:31 PM »
I debated answering this post, because I'm fairly sure you're not going to listen to me, but I need to do some warm-up writing, so here we goes.

Don't do this. I'm pretty sure I know you, because I was you in 1999. Let me make a few guesses (and I haven't looked at your forum profile):

You're in your mid-20s. You live in San Francisco or the Peninsula, South Bay. You work for a startup that has been dubbed a unicorn by the pliant tech press. You have a bunch of options, and you're trying to figure out the tax advantages of buying now, holding for a year, assuming an increase, and then selling after. Instead of paying 39% on those, you'll pay gains and save 20% or whatever.

A few Yes/No questions that you should ask yourself:

Do you work for Uber or Airbnb?
Do you work for Pinterest?


If either of those was "yes," then stop right now. Most of the value that those companies will generate has already been factored in, and any IPO won't gain anything. If you work for Pinterest, those options aren't going to be worth all that much. Then read on.

Does the company you work for make money by selling things for more money that it costs them to create and market them?
I am fairly sure your answer here will be "no." You're at a startup and they're growing and burning cash. What this means is that you've got about a 10% chance of this particular unicorn returning value over and above the private financing. A bunch of these companies will fail. Others will be absorbed at a loss into other, larger organizations. It's going to be rough, but it's definitely happening within your five-year window. So, given that:

Can you accept a 90% chance that you'll be paying back that loan with your salary?

I got a solicitation for a $100k personal loan the other day. Interest rate was 10%. That's a monthly payment of around two grand. Given that your company has a 90% chance of failure, which will mean that you won't have  a job, you're now putting yourself in a situation where you have $100k in savings (well, really, probably about $80k if you bring in penalties for cashing out a 401k early to pay your rent), $100k in debt, and a bunch of worthless stock.

Again, I'm not sure that you'll listen to me - everyone has to learn their own lessons, after all. But here's a good, solid life lesson:

Don't take out loans in order to gamble. Back during the last tech boom, I lost half of what I had because I was putting everything into overvalued dotcoms (and those were already public - I was able to sell at a loss instead of losing everything). A friend of mine did the same, but margin-traded. I learned a lesson, he got a bankruptcy. Don't do it.

In your position - 200k in income, plenty of it disposable - I'd probably throw more into those stock options, too. But do it with your own money.

shotgunwilly

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #8 on: August 20, 2015, 02:28:00 PM »
Just to make absolutely sure, your company is publicly traded, right?  Because if not, STOP!!!  Having been the recipient of huge options grants for a number of companies that were "sure to IPO soon," I am deeply grateful that I never exercised a single share.

If public, then why not buy in tranches?  Buy what you can, sell at large profit, buy next round, repeat as necessary.

There are secondary markets for some nonpublic companies.

Your main point still applies. Sell stock to pay the taxes. Nobody wants to end up writing off losses at $3k/yr for 33 years just because Uber for Chipmunks (clickanut.com) didn't work out.

I was so hoping this was a real thing...

I knew I couldn't have been the only one that immediately stopped reading, pulled up a new tab, and typed the url in.

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #9 on: August 23, 2015, 08:33:52 PM »
Thanks so much for your response, really appreciate it. I don't work for either of those companies but appreciate your feedback.

My interest in exercising early has less to do with the marginal gain on taxes, and more about flexibility. I don't plan on being around during the IPO, and want to do what I can now to exercise as many as possible, before it becomes even more difficult. We use the standard agreement of needing to exercise within 90 days of leaving. So with that said, it makes a lot more sense to exercise now rather than later (assuming the fair market value continues to go up, which is a GIANT assumption, but one I'm willing to make).

Also, after re-reading your post, it's not clear to me that you understand how options work. While you mentioned that "the value is already factored in" to the three big tech company examples you used, the point of options is that you're granted them while they're at a much lower valuation, and they increase dramatically. That's where I stand now. Your point makes sense if I was taking out a loan to buy a company that's going public, not if I was granted many options at a low valuation a few years ago that are now worth a lot.

You had mentioned you invested in (and were burned by) public tech companies in the first dot com crash. That's a good example of the value already being factored in. This isn't. What companies were you investing in in the late 90s that you got burned by? And do you really think Airbnb and Uber have a 90% chance of failure? That seems pretty unlikely at this point.

I don't mean to sound disrespectful, but you sound jaded by the bubble that you bought into and lost money in, which is probably pretty natural.

I debated answering this post, because I'm fairly sure you're not going to listen to me, but I need to do some warm-up writing, so here we goes.

Don't do this. I'm pretty sure I know you, because I was you in 1999. Let me make a few guesses (and I haven't looked at your forum profile):

You're in your mid-20s. You live in San Francisco or the Peninsula, South Bay. You work for a startup that has been dubbed a unicorn by the pliant tech press. You have a bunch of options, and you're trying to figure out the tax advantages of buying now, holding for a year, assuming an increase, and then selling after. Instead of paying 39% on those, you'll pay gains and save 20% or whatever.

A few Yes/No questions that you should ask yourself:

Do you work for Uber or Airbnb?
Do you work for Pinterest?


If either of those was "yes," then stop right now. Most of the value that those companies will generate has already been factored in, and any IPO won't gain anything. If you work for Pinterest, those options aren't going to be worth all that much. Then read on.

Does the company you work for make money by selling things for more money that it costs them to create and market them?
I am fairly sure your answer here will be "no." You're at a startup and they're growing and burning cash. What this means is that you've got about a 10% chance of this particular unicorn returning value over and above the private financing. A bunch of these companies will fail. Others will be absorbed at a loss into other, larger organizations. It's going to be rough, but it's definitely happening within your five-year window. So, given that:

Can you accept a 90% chance that you'll be paying back that loan with your salary?

I got a solicitation for a $100k personal loan the other day. Interest rate was 10%. That's a monthly payment of around two grand. Given that your company has a 90% chance of failure, which will mean that you won't have  a job, you're now putting yourself in a situation where you have $100k in savings (well, really, probably about $80k if you bring in penalties for cashing out a 401k early to pay your rent), $100k in debt, and a bunch of worthless stock.

Again, I'm not sure that you'll listen to me - everyone has to learn their own lessons, after all. But here's a good, solid life lesson:

Don't take out loans in order to gamble. Back during the last tech boom, I lost half of what I had because I was putting everything into overvalued dotcoms (and those were already public - I was able to sell at a loss instead of losing everything). A friend of mine did the same, but margin-traded. I learned a lesson, he got a bankruptcy. Don't do it.

In your position - 200k in income, plenty of it disposable - I'd probably throw more into those stock options, too. But do it with your own money.
« Last Edit: August 23, 2015, 08:43:51 PM by optionsguy »

Cpa Cat

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #10 on: August 23, 2015, 09:17:55 PM »
If you can knock the Federal portion of tax debt down to under $50,000, I'd lean on an IRS installment agreement for the rest. Under $50,000 and you can basically set up an installment agreement automatically online. Over $50k and not only is it not automatic, but you have to give them a statement of assets and such.

You'd have to pay it off in 72 months, but the IRS offers favorable interest rates.

It's a little risky, but borrowing against your 401k is an option (or maybe not, if you're planning on leaving - depends on your timeline). As is pulling contributions from your Roth.

What does your saving rate look like? Can you actually afford to do this? The minimum payment on $50,000 of tax debt on an installment agreement is around $700/mo, and you're looking at more than doubling that. How much cash can you save between now and April 15? If you can afford the $1500+/mo payments, then you should be able to sock away at least $12,000-$15,000 between now and when your tax bill is due. If you can't, then your chances of defaulting seem too high for what you're planning.

Goldielocks

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #11 on: August 23, 2015, 09:28:06 PM »
If you can recoup your $ to pay off the debt within 6 months or so (timing is everything), then the balance transfer credit cards would love to hear from you.   If I can get $20k available without much trying, you may be able to swing $50k to $60k, or more, across a couple of cards.

Also look around the secondary loan market -- maybe for a higher interest (but lower than bank cc %) you can find a independent lender for the money directly -- may not be easy as they seem to want to base it on student loans or a property lein of some sort.

What about a car Lien?  If you drive an extravagant vehicle...?

bacchi

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #12 on: August 23, 2015, 10:14:53 PM »
Also, after re-reading your post, it's not clear to me that you understand how options work. While you mentioned that "the value is already factored in" to the three big tech company examples you used, the point of options is that you're granted them while they're at a much lower valuation, and they increase dramatically. That's where I stand now. Your point makes sense if I was taking out a loan to buy a company that's going public, not if I was granted many options at a low valuation a few years ago that are now worth a lot.

I think the point is that, for those companies, there won't be an IPO bounce. They're already valued fairly (or over-valued); holding on until IPO won't give you anything over a private sale. Exercise, sell, pay the short-term tax. It's 19% over the LTCG rate but it's worth it to make sure that you get real money and not fancy toilet paper.

Of course, there is this: http://www.crowdfundinsider.com/2015/07/71105-sec-launches-probe-of-pre-ipo-tech-stock-sales-transactions/


TomTX

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #13 on: August 24, 2015, 05:22:55 AM »

You had mentioned you invested in (and were burned by) public tech companies in the first dot com crash. That's a good example of the value already being factored in. This isn't. What companies were you investing in in the late 90s that you got burned by? And do you really think Airbnb and Uber have a 90% chance of failure? That seems pretty unlikely at this point.

Not much competitive moat for either, just accrued recognition. Is Uber going to survive the transition to automated cars? Fully automated cars are going to be available for ownership (ie not just pilot programs) in 2-10 years - I'm thinking 5 is most likely. At that point, it wouldn't be hard for any of the car rental companies (Budget, Avis, Enterprise, etc) to get into taxi service - it's just short-term rentals. They already have physical infrastructure in place. Or the established taxi companies. They'd love to cut out the actual taxi drivers - and are typically well connected into city politics, have a central garage/repair depot, et cetera. Hell - Google (Alphabet) could decide to seriously undercut pricing on Uber and roll out their own fleet just for the data acquisition and advertising opportunities.

chesebert

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #14 on: August 24, 2015, 07:27:20 AM »
No real advice. All I can say is being a minority ordinary shareholder in a private company with investors holding preference shares with governance and veto rights and first and possibly second dibs on trade sale proceeds really sucks. And we all know private company "valuation" is really accurate. Have you done your own valuation (do you know how to value private companies?) - becuase we all know appraisal firms/IBs are all really accurate with their valuation... Also, when was the last time you looked at your company’s certificate of incorporation and bylaws? Do you know your company's capital structure? How many rounds has the company raised?

To be honest, your worst case senario would probably be the investors looking to liquidate their investment and found a buyer willing to buy the company at or below your strike price. The investors probably all made out ok because they all have cumulating preferred dividends and got their multiples through the waterfall before anything is distributed to the ordinary holders (like you). The founders may be fine or may be screwed but you would certainly be screwed and get pennies on the dollar.
« Last Edit: August 24, 2015, 07:29:16 AM by chesebert »

geekette

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #15 on: August 24, 2015, 04:54:21 PM »
A hollow voice says "Fool".

Yes, I'm that old.

But seriously, what you're considering, nay, insisting on, is quite the dazzling gamble.

beltim

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #16 on: August 24, 2015, 05:20:43 PM »
Also, after re-reading your post, it's not clear to me that you understand how options work. While you mentioned that "the value is already factored in" to the three big tech company examples you used, the point of options is that you're granted them while they're at a much lower valuation, and they increase dramatically. That's where I stand now. Your point makes sense if I was taking out a loan to buy a company that's going public, not if I was granted many options at a low valuation a few years ago that are now worth a lot.

I think the point is that, for those companies, there won't be an IPO bounce. They're already valued fairly (or over-valued); holding on until IPO won't give you anything over a private sale. Exercise, sell, pay the short-term tax. It's 19% over the LTCG rate but it's worth it to make sure that you get real money and not fancy toilet paper.

Of course, there is this: http://www.crowdfundinsider.com/2015/07/71105-sec-launches-probe-of-pre-ipo-tech-stock-sales-transactions/

You're not reading the OP.  He is not able to do a private sale.  I don't know why people keep suggesting it when the OP has very clearly ruled it out.

Optionsguy: How long a term do you want to be able to pay the loan over?  That may have a major impact on the answer to your original question.

rmendpara

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #17 on: August 25, 2015, 08:03:14 PM »
Feel free to buy as much as you can with your own cash, but you're climbing down a muddy hole when you start borrowing money to exercise or trying other things.

Other options include a 401k loan (likely very low interest), but this will also be due in full if/when you quit... so not really a great opportunity there.

To me, the personal loan seems like the "best" decision. 7% per yr is nothing if the shares do well, but it could be salt in the wound if your shares end up being underwater if/when the company goes public.

If it were me, I'd strike a middle ground.
- Try to exercise 100-150k through your income and cash savings
- borrow 100-150k at 7% to exercise another tranche (either now, or before you quit)
- prosper/lending club are fine options, though likely a slightly higher interest rate and you also can't borrow more than like 25k (I think?)... so doesn't really solve much of the problem

This way, you can at least de-risk a little bit. If anything you can also hold off on exercising anything until the day actually comes that you plan to quit in the next 1-2 years. In the interim, stock away cash (stop investing beyond your 401k) and hold off on borrowing anything for a bit of time.

If anything the further you delay exercising the better it is since you may have a liquidity event or the company may announce plans to go public... or the company could raise more funds and you would have another estimate on fair value... or the company could make another announcement giving you insight into their financial stability. I don't see much of a hurry to exercise soon. Whether you pay ordinary taxes by selling immediately (if you exercise) or holding and paying 20% LTCG won't make as big a difference as having additional certainty in the value of the options and the potential timing of a liquidity event. It may cost you half the value in taxes, but it's better than taking on EVEN MORE risk by borrowing money or something very risky like that to exercise and hold illiquid shares.

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #18 on: August 25, 2015, 08:57:19 PM »
Such good advice - thank you so much!

Is 7% about the best I can do for a loan of that size with no collateral?

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #19 on: August 27, 2015, 12:36:13 AM »
@Beltim - I plan on paying down the 100k within 1 year - but to be safe I'd probably setup a 3 year payback window. What would you recommend I look at?

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #20 on: August 27, 2015, 12:43:36 AM »
I guess the other thing I should have brought up, is that since these are an ISO options exercise, this payment is an AMT prepayment. Once the company actually goes public, and I eventually sell (which I probably wouldn't do for another 10 years at least), the AMT credit is applied at the time of the sale.

seattlecyclone

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #21 on: August 27, 2015, 01:42:31 AM »
I guess the other thing I should have brought up, is that since these are an ISO options exercise, this payment is an AMT prepayment. Once the company actually goes public, and I eventually sell (which I probably wouldn't do for another 10 years at least), the AMT credit is applied at the time of the sale.

Please rethink the part I bolded above. You're planning to go into debt to buy these options. You will have more than all of your money invested in this one company. It's a risky bet, but you're in a unique situation and I don't think exercising your options now is a completely crazy thing to do if you want the flexibility to change jobs without forfeiting all you've earned thus far. However, if this bet pays off you will have completely won the game, so you should stop playing. Sell the stock shortly after the IPO and invest the proceeds in the market. It's reasonable to spread the sale out over a couple of years so you don't have to pay taxes on hundreds of thousands of dollars in capital gains all in one year, but you should diversify a significant chunk of your shares as soon as you have held them long enough to get favorable tax treatment (two years from option grant date, one year from exercise) and have an opportunity to sell them for a fair market price.

As to your comments about how the AMT works with ISOs, it's not quite as simple as you make it out to be. You won't necessarily get the AMT you paid back right away in the year you sell. The way it works is that the AMT you pay on ISO exercises can be claimed as a credit in future years, but only to the extent that your "regular" tax exceeds your tentative AMT in a given year. It may take you many years to get all of your AMT back, if it ever happens.

Here's an example: suppose that in 2015, you exercise a bunch of ISOs and pay $100k of AMT on top of your regular federal tax. Suppose the IPO happens in 2017 and you sell most of your shares. You owe a bunch of capital gains taxes under the regular tax system that year, and your total tax bill under that system comes out to $150k before considering AMT. Your capital gains are lower in the AMT system since your AMT basis in these shares is higher. Your tax bill under the AMT system would only be $125k. Because you have $100k of AMT credit stored up, you get to claim the $25k difference between your AMT and your regular tax as a credit against your regular tax, bringing the total you pay down to $125k. You have now used up $25k of your $100k, leaving $75k of AMT credit remaining to apply to future years.

clifp

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #22 on: August 27, 2015, 02:26:22 AM »
I am assuming you've tried a bank and they said no. Have you looked at Prosper or LendingClub, the three year payback period for most of their loans seems like a good fit.

I personally was one for two exercising ISO in order to save money on taxes,and I spent most of the 2000s slowly recouping the prepaid AMT taxes. The second company went bust despite inventing the spreadsheet and at one point being the largest PC software company.

The IRS option sounds interesting, but I really don't think they are in the business of doing that.


Finally,I might personally be willing to lend you as much as $50,000 but the interest rate would be high 12%.

optionsguy

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #23 on: August 28, 2015, 01:33:38 PM »
Has anyone used SoFi? I found a fix rate 3 year loan for 100k at 5.5% - not sure if I could do much better than that without collateral.

Paul der Krake

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #24 on: August 28, 2015, 01:58:45 PM »
Has anyone used SoFi? I found a fix rate 3 year loan for 100k at 5.5% - not sure if I could do much better than that without collateral.
If you do find better than that, please let us know. That already sounds like a bargain for an unsecured 6 figure loan.

forummm

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #25 on: August 28, 2015, 02:07:01 PM »
Has anyone used SoFi? I found a fix rate 3 year loan for 100k at 5.5% - not sure if I could do much better than that without collateral.

They give reasonable interest unsecured $100k loans that aren't a student loan refi? Wow.

dragoncar

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #26 on: August 28, 2015, 03:46:14 PM »
I don't have any options, but I don't see why it's beneficial to exercise now.  Can someone explain like I'm five?

It was mentioned above, but did you try smaller banks with high value clients?  Maybe First Republic?  If you can find someone that will take accept illiquid shares as collateral, the rate will be much lower.

It's too bad you don't have much in the way of public shares.  If you did, I'd say move them to Interactive Brokers and take out a margin loan on them at like 1.6%.

Otherwise, save up and exercise next year once you have the $100k.  At $200k income, you should be able to save $100k in no time flat.

Random question, when you say $700k assets is "in options" do you mean you have 700k in shares, or just that the value of your options would be $700k if fully liquidated?  What will it cost to exercise the options besides the tax bill?

Just to make absolutely sure, your company is publicly traded, right?  Because if not, STOP!!!  Having been the recipient of huge options grants for a number of companies that were "sure to IPO soon," I am deeply grateful that I never exercised a single share.

If public, then why not buy in tranches?  Buy what you can, sell at large profit, buy next round, repeat as necessary.

There are secondary markets for some nonpublic companies.

Your main point still applies. Sell stock to pay the taxes. Nobody wants to end up writing off losses at $3k/yr for 33 years just because Uber for Chipmunks (clickanut.com) didn't work out.

I was so hoping this was a real thing...

I knew I couldn't have been the only one that immediately stopped reading, pulled up a new tab, and typed the url in.

Me too, thanks
« Last Edit: August 28, 2015, 03:49:57 PM by dragoncar »

iamlindoro

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #27 on: August 28, 2015, 04:07:35 PM »
Random question, when you say $700k assets is "in options" do you mean you have 700k in shares, or just that the value of your options would be $700k if fully liquidated?  What will it cost to exercise the options besides the tax bill?

As I read it, OP is basing the $700K "value" on whatever the latest valuation of the company is-- which, as anyone who's ever seen how pre-IPO companies are valued, is frankly terrifying.

OP, I know that you're disregarding this, but your options are effectively worth 0 right now.  Their value is completely theoretical since they cannot be liquidated at this time.  There is neither a public nor a secondary market for them.  Look at it this way-- A company compelling enough to be accepted by Y Combinator has about a 7% chance of a successful exit.  Those are companies which already have some chance of success that is greater than average (Y Combinator has about a 3-5% acceptance rate).

The odds of this being a gamble that pays off are vanishingly slim.  EVERY company that grants options bamboozles employees with tales of how much those options will be worth in an "inevitable" IPO.  I worry that you're seeking this loan with false expectations, and a tiny bit worried that you figure it's a gamble with an escape in the form of bankruptcy if necessary.
« Last Edit: August 28, 2015, 04:10:16 PM by iamlindoro »

mm1970

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #28 on: August 28, 2015, 04:35:46 PM »
I'm pretty conservative, and I wouldn't do it.

I've got options in my start up, and I've been here 7 years.  I almost exercised my options in preparation for quitting (we have the same 90 day deal), because the value of the company and my stock had gone way up from my strike price.

But you know, the market shifted and our timelines shifted, and now we are looking at "a few more years", and thus ... everything is being repriced, and my current options are worth nothing.  They essentially have to reissue everything and oh, I get to start over on the timeline for vesting.

I have a friend who borrowed money to exercise his startup -to -public options (by then we were public) in 2000 and he lost money.  His strike price was half a penny, and the stock started the year at $100.  By the time all was said and done the stock was $20 and he owed more in taxes than he got by selling the stock.

So simply DON'T DO IT.

Unless you have enough to write off the losses later.

seattlecyclone

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #29 on: August 28, 2015, 05:57:04 PM »
I don't have any options, but I don't see why it's beneficial to exercise now.  Can someone explain like I'm five?

Two main reasons:

1) The OP expects to leave the company sometime prior to IPO. The options expire 90 days after leaving the company. If the OP wishes to avoid forfeiting their vested equity upon leaving the company, they will need to exercise their shares prior to IPO.

2) The company reports the shares' current fair market value to the IRS when employees exercise their options. The difference between this reported FMV and the strike price is taxable in the year of exercise. So far, the reported FMV has been going nowhere but up as the company has grown and new investors have signed on. The OP, assuming this trend will continue, wishes to exercise as soon as possible in order to get the lowest possible FMV, which will in turn decrease their tax bill.

worms

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #30 on: August 29, 2015, 02:36:46 AM »
I think everyone has said the same thing and I see that the OP's new thread correctly identifies that he has no collateral.  Sadly he/she hasn't linked that through to the options being currently valueless or at least un-valueable.  I don't think we are ever going to convince them that borrowing large sums to invest in nil value options is a sensible move.

I genuinely hope, though, that they are able to prove us all wrong and look forward to reading the "told you so" thread in a year or so's time!

dragoncar

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #31 on: August 29, 2015, 12:53:13 PM »
I don't have any options, but I don't see why it's beneficial to exercise now.  Can someone explain like I'm five?

Two main reasons:

1) The OP expects to leave the company sometime prior to IPO. The options expire 90 days after leaving the company. If the OP wishes to avoid forfeiting their vested equity upon leaving the company, they will need to exercise their shares prior to IPO.

2) The company reports the shares' current fair market value to the IRS when employees exercise their options. The difference between this reported FMV and the strike price is taxable in the year of exercise. So far, the reported FMV has been going nowhere but up as the company has grown and new investors have signed on. The OP, assuming this trend will continue, wishes to exercise as soon as possible in order to get the lowest possible FMV, which will in turn decrease their tax bill.

Thanks, #2 makes some sense, although it kinda defeats the advantages of having an "option" -- primarily that you can wait and see before you commit capital

#1 makes no sense.  I understand he has to exercise within 90 days of leaving, but that has no bearing on why it has to be "right now".  Again, there is an advantage to waiting until the 90 days is up because he will have more money saved up for the tax bill by that point.

I think everyone has said the same thing and I see that the OP's new thread correctly identifies that he has no collateral.  Sadly he/she hasn't linked that through to the options being currently valueless or at least un-valueable.  I don't think we are ever going to convince them that borrowing large sums to invest in nil value options is a sensible move.

I genuinely hope, though, that they are able to prove us all wrong and look forward to reading the "told you so" thread in a year or so's time!

Oh man, OP has three threads on this topic.  Can we get a mod up in here?

By the way, this is what I learned from the OP's other threads:

In January income ~$130k.  Now $200k+ -- that's a nice bump!
In June, OP is also a sole proprietor with $100k in profit -- is OP the owner of the very same startup or the startup is a side gig?
Oh yeah, OP also has a part time gig at a university

OP's life is confusing as hell to me.

I think this has been answered really well in the very first thread: http://forum.mrmoneymustache.com/ask-a-mustachian/getting-a-line-of-credit-or-loan-for-startup-stock-options/msg530649/#msg530649
« Last Edit: August 29, 2015, 01:01:17 PM by dragoncar »

seattlecyclone

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #32 on: August 29, 2015, 01:51:04 PM »
I don't have any options, but I don't see why it's beneficial to exercise now.  Can someone explain like I'm five?

Two main reasons:

1) The OP expects to leave the company sometime prior to IPO. The options expire 90 days after leaving the company. If the OP wishes to avoid forfeiting their vested equity upon leaving the company, they will need to exercise their shares prior to IPO.

2) The company reports the shares' current fair market value to the IRS when employees exercise their options. The difference between this reported FMV and the strike price is taxable in the year of exercise. So far, the reported FMV has been going nowhere but up as the company has grown and new investors have signed on. The OP, assuming this trend will continue, wishes to exercise as soon as possible in order to get the lowest possible FMV, which will in turn decrease their tax bill.

Thanks, #2 makes some sense, although it kinda defeats the advantages of having an "option" -- primarily that you can wait and see before you commit capital

#1 makes no sense.  I understand he has to exercise within 90 days of leaving, but that has no bearing on why it has to be "right now".  Again, there is an advantage to waiting until the 90 days is up because he will have more money saved up for the tax bill by that point.

#1 is why the OP might want to exercise the shares at some point before the IPO, which is risky in and of itself. It has no bearing on the "right now" issue per se. #2 is why the OP might want to exercise them right now as opposed to waiting until after leaving the company.

The reality is that the OP doesn't actually have to come up with the tax money until April, provided that he has enough withheld from his paychecks to meet the 100%/110% safe harbor. If the OP intends to exercise at some point before the end of the year, a sooner exercise might mean a lower tax bill. If the OP plans to stick around the job for at least a few more months, he might want to wait until January to exercise, when the taxes won't come due until April 2017.
« Last Edit: August 29, 2015, 01:54:15 PM by seattlecyclone »

mm1970

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Re: Getting a 100k Loan for Stock Options - What's the Best Way to Do It?
« Reply #33 on: August 29, 2015, 06:47:32 PM »
I think everyone has said the same thing and I see that the OP's new thread correctly identifies that he has no collateral.  Sadly he/she hasn't linked that through to the options being currently valueless or at least un-valueable.  I don't think we are ever going to convince them that borrowing large sums to invest in nil value options is a sensible move.

I genuinely hope, though, that they are able to prove us all wrong and look forward to reading the "told you so" thread in a year or so's time!
We have many former employees who bought all their vested shares (including someone who was employee #2), and after the most recent round ("washout round"), they are worth zero.