If your stock options have fully (or partially) vested and your company’s valuation has gone up, then you’re sitting on a pile of paper wealth.
And if you want to turn that paper wealth into actual wealth – but can’t afford to exercise your options on your own – you’ve got two alternatives:
- Sell your shares on a secondary market
- Finance the exercise of your stock options
Depending on your situation, one will definitely be better than the other.
In this post, we’re going to break down the differences between two secondary marketplaces: Forge Global (formerly SharesPost) and EquityZen. We’ll also look at one company that offers exercise financing – Secfi – to help you determine which one is right for you.
Here’s the bottom line, in our view:
- Forge Global (formerly SharesPost) and EquityZen are best for people who want cash now (and are willing to give up the potential upside of their options) or who think their company's value has peaked.
- Secfi is best for startup employees who think their company's value is going to continue to rise, want to exercise before an IPO and potentially save money on taxes, or who have only 90 days to exercise their options and need cash to do so.
- If you're considering Forge/SharesPost and EquityZen, just try both. While the design and functionality of Forge's platform is more advanced, in the end it's a matter of where you're able to get a deal. Not all companies are listed on both platforms, and they require different minimum sale amounts.
Before we dive into the advantages and disadvantages of these different platforms – and who they may or may not be a good fit for – let’s take a quick look at the general differences between selling your shares on a secondary market versus financing the exercise of your stock options.
Selling shares on a secondary market versus financing the exercise of your stock options
Secondary markets like Forge Global/SharesPost and EquityZen are platforms where you can buy and sell private company shares.
Essentially, you list the number of shares you want to sell, how much you want to sell them for, and then brokers help you to find an interested party who wants to buy them.
While you can get cash for your shares on a secondary market (if you find a buyer), there are downsides.
- Closing the deal can take weeks or sometimes months (even after finding a buyer). If you have a deadline to exercise your stock options, be wary not to run out of time.
- If you sell your shares on a secondary market and the value of your company goes up, you don’t share in the gains.
- You’ll probably sell your shares at a discount.
- Because you get the cash all at once, you have to pay taxes on your earnings at the highest rate possible (specifically, it's taxed as ordinary income).
- Sales on a secondary market requires approval by your company’s board of directors. Some companies don’t allow these kinds of sales.
Financing the exercise of your stock options is very different.
When you work with a financing company, they’re not buying or selling your shares. Instead, they’re giving you the cash you need now to exercise your stock options, while you still retain all rights and ownership of those shares.
So if the value of your company’s shares go up, you get to participate in that. And if you exercise early enough, you can end up saving big on taxes (thanks to the long-term capital gains tax rate).
Because most financing solutions are non-recourse (more on what that means later), you only have to pay it back once the company goes public or gets acquired. If that doesn’t happen – or even if your company goes bankrupt – you’re in the clear.
Lastly, with financing solutions you're often just working with one party (instead of looking for a seller on a marketplace). This can be nice if you're on a deadline.
With that in mind, let’s compare these alternatives head-to-head.
Secfi
How Secfi works
Because exercising stock options ends up costing way more than most people expect, it can quickly move out of reach for many startup employees.
And if you wait until an IPO to exercise, you may end up losing a lot of money on taxes.
To help startup employees in this situation, Secfi offers non-recourse financing.
Essentially, non-recourse financing is a cash advance that covers the cost of exercising plus any tax burden that exercising incurs (because yes – it stinks, but you’re probably going to pay taxes when you exercise).
You only pay that amount back when there’s an exit. If there’s no exit or the company fails, you don’t owe Secfi anything. And because your shares act as collateral for the amount financed, none of your personal assets are on the line.
How can Secfi afford to take all the risk?
We're selective. Because we partner with employees at companies that we believe are likely to have a successful exit, we both share in the potential gains.
That lets us spread the risk out over a number of different companies. So if your company goes downhill or never exits, we take the hit. Not you.
Advantages of Secfi
In addition to the non-recourse aspect of the financed amount, there’s a number of other benefits you get through financing with Secfi:
You get to share in the upside
If you sell your options on a secondary market, you get the benefit of getting a bunch of cash upfront. But if the value of your company continues to rise and your shares are worth way more tomorrow than they are today, you don’t get any of those gains.
With financing, you get to exercise your options and retain ownership of the shares.
So if you think that your company’s value is going to continue to rise, it’s may be in your best interest to hold on to those shares until there’s an exit.
You can prevent your AMT costs from exploding in the future
The single biggest surprise most employees face when they exercise is the size of their AMT (alternative minimum tax) liability.
For many employees at rapid-growth startups, that amount can easily soar past $100K or even $1M (yes, really).
Worse: the AMT is calculated based on the current fair market value aka 409A valuation (also known as fair market value). The higher the 409A valuation, the more AMT you’ll have to pay.
And because the 409A valuation keeps increasing as your company grows, then – assuming your company is doing well – the longer you wait, the more AMT you'll have to pay on exercise.
If your AMT bill puts exercising out of your reach, financing can cover the total cost of exercising before that bill grows any higher.
(Note: you use our free Stock Option Tax Calculator to figure out how much you’ll owe when you exercise)
You can tap into your options and get liquidity
It's frustrating when your stock options are worth a lot on paper, but you can’t tap into that liquidity. Especially if you want to buy a new house, renovate your existing home, or take care of unexpected expenses.
When financing your exercise, you can also get a cash advance on top of your exercise costs, which you’re free to use however you like. That way you won’t have to wait for an IPO to make use of the value of your equity. We call this liquidity financing.
It’s not as much as you would get by selling now on a secondary market, but you get to retain ownership of your shares.
There's no minimum transaction size
Unlike Forge/SharesPost and EquityZen, there’s no minimum amount for how much you finance. You can finance as much or as little as you like.
Many secondary markets will require a minimum of $100-$175K worth of shares to be sold.
If you're on a deadline, we can often get it done quickly
We won't leave you hanging. Just let us know you're on a deadline, and we'll either let you know upfront that we can't make your deadline, or we'll work hard to get it done in time.
For many companies, we can provide financing in a matter of days (because we've helped some of their employees before). For other companies we still need to do a risk assessment, which takes more time. We'll let you know either way so you can plan accordingly.
We offer free planning tools
Because our founder, Wouter, had to walk away from millions in equity when he left a former company, we wanted to make sure that no one else makes the same mistake.
That’s why we created a series of free tools to help you understand what’s going on with your equity:
Stock Option Tax Calculator
In order to find out how much exercising your options is really going to cost, you need to know what the tax liability is going to be. It's a complicated calculation by hand, but enter your details and this calculator tells you exactly that.
Stock Option Exit Calculator
Find out how much your options would be worth at different selling points (and, importantly, after taxes) by using this calculator.
Exercise Timing Planner
How much more would you earn if you exercise and hold onto your shares for at least a year (and unlocking the long-term capital gains tax savings) versus waiting for the IPO to exercise? This calculator runs the numbers and tells you the additional net gain you could make under various selling scenarios.
Disadvantages of Secfi
You get less cash upfront
While Secfi lets you tap into the value of your options through financing, you won’t get as much cash upfront as you would if you sold your options instead (even though in the latter case you would lose the upside).
Your exit may take awhile
The full truth is you don’t know when your company is going to IPO.
So if you finance instead of selling your options, you don’t know exactly when you’ll experience an exit. If you instead sell your shares on a secondary marekt, you get cash as soon as the deal is done (which is often a matter of weeks or months).
When Secfi is right for you
- If you think the value of your company is going to continue to grow, want to hold on to the upside, and want to get the most long-term value out of your options
- If, besides the costs to exercise your options, you don’t need cash right away and can afford to wait for the IPO or acquisition of your company
- If you don’t have the cash you need to exercise, but want to maximize your tax advantage and save money
- If you left your company and only have 90 days to exercise your options
When Secfi is not right for you
- If you think the value of your company has reached its peak and won’t go any higher
- If you are “cash hungry” and want to get your hands on as much cash as possible – right now
Forge Global (formerly SharesPost)
SharesPost merged with Forge Global in 2020 and now the combined company operates under the name Forge Global.
Forge/SharesPost acts as a marketplace for selling private company shares so startup employees can turn their equity into liquid assets (aka cash 💰).
It's an advanced platform that has the feel of a publicly traded marketplace.
Basically, you (as the seller) set the price and quantity you want to sell. A broker gets assigned to you, and they try to match you with a buyer. They don't always find one. In terms of time, the process can go quickly (especially for companies in popular demand) but can also sometimes take weeks or months.
As of 2020, Forge/SharesPost charged sellers a baseline fee of 5% for all transactions.
Advantages of Forge Global/SharesPost
You'll maximize the amount of cash you can get now
Startup employees that want cash now and don’t want to wait for an exit can sell their shares and gain liquidity.
This is especially ideal if the employee doesn’t feel confident in the future of their company and isn’t optimistic about the potential value of their shares.
Their platform is a well-designed marketplace
The process of selling shares, looking for a buyer and closing the deal can be messy, so it doesn't hurt to have a well-designed environment to place your listing. Forge also offers helpful visualization tools and some information on recent price points.
Disadvantages of Forge Global/SharesPost
You lose the upside of your equity
When you sell your stocks through a secondary market, you get immediate cash but you’re letting go of your ticket to the IPO.
Fair warning – you may wake up with a major case of FOMO one day if your company has a successful exit.
You need company approval
Many companies don’t allow selling shares on secondary markets. For those that do, company approval is required to sell on a secondary market.
It’s not always in a company’s interest to let their pre-IPO shares be traded, so many of them refuse.
You may run into ROFR
Many companies reserve the Right of First Refusal (ROFR). That means when you attempt to sell your shares, your company can step in and decide to buy the shares back themselves.
If that happens, you're still on the hook for the 5% fee to Forge/SharesPost.
You'll often sell your equity at a discount to its current value
Secondary markets tend to favor buyers, not sellers.
The buyers expect to make a profit on the deal, so you can expect to get somewhere in the range of 80% of your shares’ current value.
The money you make is taxed at the highest possible rates
When you make the transaction to sell your options, you're on the hook for the taxes for the money you just made. And unfortunately, your profit from selling your options will be taxed at ordinary income rates – the highest tax rate there is.
You won’t gain any tax benefits the way you could by exercising early, holding your shares for over a year, and then selling – in which case the money you make could be qualified as long-term capital gains and receive a more favorable tax treatment.
You'll have to sell at least $100,000 worth of equity
Forge/SharesPost requires a minimum selling amount of $100,000. Unfortunately, you can’t pool your shares with other shareholders to meet this minimum (like you can on EquityZen).
When Forge Global/SharesPost is right for you
- If you are in need of a large amount of liquidity right now, rather than waiting for a future IPO or exit
- If you don’t believe your company is going to increase in value and you want to unload your shares
- If you want to sell your equity, but your company isn't listed on EquityZen
When Forge Global/SharesPost is not right for you
- If you can't meet the minimum sale amount of $100,000
- If you want to maximize the amount of money you can get out of your options in the event that your company thrives and increases in value
- If you want liquidity, but don’t want to give up all of your potential longer term gains
- If you left the company and have a 90-day window to exercise your options
EquityZen
Founded in 2013, EquityZen is another secondary market similar to Forge/SharesPost.
It works basically the same way. You list your shares and a broker helps you find a buyer. As of 2020, EquityZen also charged a 5% fee on all transactions.
The biggest difference is that there’s a $175K minimum sale size (as opposed to $100K with Forge/Sharespost), but EquityZen allows sellers to pool their shares together.
Besides that, Forge/SharesPost offers a full-blown marketplace experience while EquityZen has a simpler messageboard-like look and feel.
Advantages of EquityZen
EquityZen has the same advantages as Forge/SharesPost: if you want to cash out as much as possible on short notice, you can use their platform to find a buyer and sell your equity.
Additionally:
You can sell a smaller amount of shares
If the shares you want to sell aren’t worth enough to meet the minimum amount on either Forge/SharesPost ($100,000), EquityZen allows you to pool your shares with your colleagues to meet their required $175,000.
Disadvantages of EquityZen
The disadvantages of EquityZen are similar to those of Forge/EquityZen:
- You lose the upside of your shares in a potential future IPO or acquisition
- You need company approval and might run into ROFR (Right of First Refusal) when trying to sell
- Buyers often only want to buy your equity at a discount to its current value
- The money you make is taxed at the highest possible rate – you won't be able to get the lower long-term capital gains rates
Additionally, you'll need to pool up with coworkers if the shares you personally want to sell are worth less than $175,000.
When EquityZen is right for you
- If you are in need of a large amount of liquidity right now, rather than waiting for a future IPO or exit
- If you don’t believe your company is going to increase in value and you want to unload your shares
- If you want to sell your equity, but your company isn't listed on Forge/SharesPost
- If you don’t have enough shares to meet their minimum selling requirement on your own, you can pool your shares with other employees looking to sell
When EquityZen is not right for you
- If you hope to gain more from your options if your company performs well in the future
- If you want cash, but don’t want to give up potential gains that may occur down the line
- If you are no longer with the company and only have a 90-day window to exercise your stock options
How to decide between Forge/SharesPost, EquityZen and Secfi
It really comes down to whether financing versus selling on a secondary market is best for you.
Secfi was built for startup employees who want to exercise their options before an IPO occurs, who are looking to save money on taxes (and increase their profit), and/or who only have 90 days to exercise their options and need cash to make that happen.
Sharespost/Forge and EquityZen are better options for startup employees who want to be more liquid as soon as possible, or who aren’t optimistic about their company’s future / don't believe in a successful exit like an IPO.
If you've decided that selling is right for you rather than financing, choosing between the two platforms often comes down to which one you can actually find a buyer on. Their platforms have slight differences, but your best bet is simply to try both.