If you’re looking to finance a purchase, whether it’s a car, a house or your stock options, it’s a big decision. And just as important is finding the right financing partner to work with. Interest rates are an important factor, but chasing the lowest rates doesn’t always lead you down the best path. You could find the cheapest way to finance a car but end up covering unexpected expenses down the road because the salesperson was dishonest about the car’s condition or wasn’t fully transparent about the terms of the deal.
If you’re considering financing to exercise your stock options, then finding the right provider is especially critical. Stock options hold the power to unlock life-changing wealth. At the same time, exercising options could be one of the biggest financial decisions you ever make.
Let’s walk through a few things to keep in mind when identifying the financing right partner.
- Look for a financing provider that is knowledgeable and transparent. A good provider puts your interests first and is a stand-up partner throughout the whole process.
- Steer clear of anyone who rushes you, prevents you from shopping around or offers sketchy guarantees about your future gains.
- Ask questions about how the firm operates and how its deals are structured.
4 positive attributes to seek out
1. Knowledgeable. Stock options are a complex topic with many moving parts, so a good partner should be able to answer any and every question you may have. Specifically, the provider should have a deep understanding of how things work from your perspective as a startup employee.
How can you tell if a firm is knowledgeable? A good partner will be able to provide you with the right questions to ask your financial advisor or tax professional. If some members of the provider’s team have credentials (like CFP, CPA or CFA), that’s also a bonus.
Another good indication: They can provide a 360° understanding of the situation — they’re not strictly focused on how things look from their side of the table.
Lastly, trust your gut. When you ask questions, do you feel the answers are complete, appropriately detailed and accurate?
2. Transparent. A good financing provider will make every effort to be fully transparent. Solid partnerships are built on trust, and trust can’t exist without transparency.
How can you tell if a firm is transparent? A good partner will explain how each component of the financing deal works and what it means for you in terms of potential upside, downside and costs. Too much jargon can get in the way of transparency by making you feel intimidated or like you don’t understand the topic.
Education also plays a role. Does the firm lob over docs stuffed with fine print and leave you to wade through the details? Or are resources and helpful information readily available along the way?
3. Puts your interests first. If your financing provider doesn’t put your interests first, it’s difficult (maybe even impossible) to imagine a positive partnership.
How can you tell if a firm puts your interest first? A good partner will recognize the fact that you’d be better off taking a different path — and then be forthcoming about it. For example, a good provider will tell you if a cashless exercise is likely a better choice for you than using their service to finance your stock options. It’s also helpful to consider how staff is paid and how the company earns money.
You can learn more about a firm’s interests and how they may compete with your own by evaluating its structure. Companies that operate as registered broker-dealers are bound by the SEC’s Regulation Best Interest (Reg BI), which means they have to act in your best interest when they make recommendations.
Registered broker-dealers also have to provide you with a brief relationship summary, known as Form CRS. It contains information about the firm’s services, fees and conflicts of interest.
Not all firms that provide financing for stock options are registered broker-dealers, which means they aren’t bound by Reg BI. You can use FINRA BrokerCheck to see if a company is a registered broker-dealer.
4. A stand-up partner throughout the whole process. From the initial consultation to final paperwork after your company’s exit, there are numerous steps involved in financing your stock options. The process can unfold over the course of a year or more, and a lot of money is involved — so now’s not the time for a flaky partner.
How can you tell if the provider will be a stand-up partner? This is another time to trust your gut: Does the team treat you well? Are they available and responsive? Reputation and track record matter, too.
3 Characteristics to avoid
1. Forcing you to sign something that prevents you from shopping around. A good financing partner won’t make you sign an exclusivity agreement in order to get a proposal.
2. Rushing you to close the deal. Working quickly can be great; time is of the essence in some cases. Ultimately, though, it’s your timeline, not theirs.
3. Offering sketchy guarantees about how much you’ll gain. No one knows how things will work out for your company.
Who are you dealing with?
Getting a good grip on how a firm operates and how its deals are structured can help you identify the possible advantages and disadvantages of a partnership.
A good partner will be registered as a broker-dealer, which means the firm is allowed to bring together buyers and sellers of private securities contracts. Typically, these contracts are between startup employees and institutional investors that seek to acquire exposure to the startup company.
Some firms take “creative license” to provide financing without being a broker-dealer or being associated with one. In other words, they find ways to skirt around the restrictions. From a legal and regulatory perspective, their deals aren’t supposed to happen, which means startup employees are left vulnerable to more risks and less protection.
Be sure you’re working with a registered broker-dealer. Ask the company about its registration(s) and verify with FINRA BrokerCheck.
In order to identify the right financing partner, it’s also important to get clarity around the deal structure. Not all structures are built the same and you may be left bearing all the risk if something goes wrong.
A good partner will be able to confirm that its deal structure has been vetted by tax and legal professionals. They’ll also confirm that a tax pro has provided an opinion on the structure. It’s smart to also ask which tax and legal entities provided the vetting, so that you can determine if they’re reputable reviewers.
We are startup employees who, frustrated by the complexity of equity compensation, decided to build software to help you do better than we did. We are committed to helping startup employees understand, maximize and unlock the value of their stock options and shares.
Officially, we’re known as Secfi Securities, LLC. We operate as a broker-dealer. We work solely on an agency basis — we don’t trade principally for our own account. We are SEC-registered and a FINRA member. As such, we’re subject to review and examination by these various regulators and subject to their laws, rules, regulations and bylaws, as applicable.
Additionally, our employees who solicit, propose and/or consummate transactions with customers are registered representatives with FINRA and certain states and jurisdictions, and must meet certain exam qualification and continuing education requirements.
Learn more about your financing options by talking to one of our Equity Strategists. A live member of our team is happy to answer all your questions then send you a detailed financing proposal that models out your specific scenario.