Why a senior startup leader facing a high tax bill used equity financing
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When John joined a startup, he was aware of his equity. Yet, like many startup employees, he just never made a plan for what to do with it and put it on the backburner. As his leading tech company saw explosive growth and began to inch towards going public, John became serious about exercising his stock options.
Although John had a Masters in Finance, he recognized that he didn’t have a solid grasp on the complexities of equity, especially when it came to the alternative minimum tax (AMT). What he had failed to anticipate is that by waiting to exercise, his cost ballooned alongside the company’s valuation. While that made his stock options more valuable, and his company closer to an exit, it also meant his barrier to entry was beginning to become insurmountable.
Thanks to Secfi, John found a solution that would allow him to exercise his shares, with all costs covered, including his AMT bill — all without taking on too much risk.
Once it was time to exercise his shares, he realized that he should have been more proactive about understanding equity. Despite his own financial background, he learned that there were certain complexities, like AMT, that he just didn’t understand. Mostly because he’d never had to deal with it before.
Leaders at his company did understand the complexities of equity and held “equity office hours” to help their employees. But John didn’t take advantage of the offering. “My company provided education, offering ‘equity office hours’ where we could submit any question, but I never bothered to participate. Honestly, I was stupid for doing that.”
Soon, John began looking around for financing options because he couldn’t afford the cost. “I had been thinking about how to finance for a few months, but I was just kind of frozen,” he said. “I didn’t know what to do about it, and I thought I was screwed, to be honest.”
When John first joined the startup, he was offered non-qualified stock options (NSOs). As the company matured, he was granted incentive stock options (ISOs), as well. But John realized that just to exercise his NSOs, he needed a substantial amount of cash.
He began thinking about financing options — personal loans, lines of credit, or other options. But he was nervous. He’d heard horror stories of people taking out loans in the hundreds of thousands to exercise their shares, only to have the shares tank and be worth much less than the loan. As a result, they’re stuck with a giant loan or line of credit that they still have to pay back.
“I remembered reading about other startup employees who had taken out substantial loans only to watch their shares tank and it seemed like a nightmare,” he said. “I honestly didn't even look deeply into personal loans or lines of credit because I just knew once you borrow that money, you're liable for it.”
John then saw an advertisement for Secfi, and it piqued his interest. It seemed like a low-risk way to finance his shares. He felt that the offering was unique and might be a good fit.
John began talking to the team at Secfi about financing and was impressed with what he heard. “I felt that what Secfi offered was so unique — they were willing to write off the loss — and that was it for me,” he said.
In some ways, it seemed too good to be true, but John ran through a number of scenarios with Secfi and got the answers he was looking for.
“When I first started talking to Secfi, I was very explicit about the scenarios that concerned me and we walked through them together,” he said. “I was like ‘wow, okay, I’m covered in these exact scenarios that seem risky to me.’”
Ultimately, Secfi offered financing with very little risk to him. His equity was the only asset on the table, meaning any other of his personal assets would never be at risk if his company never exited, or his shares were worth less than the amount he financed. And that was a primary reason he decided to move forward with Secfi.
John was impressed with Secfi’s offering, but he gained unexpected benefits, as well. The team was there to answer any questions he had about equity, which made him feel like he was in the driver’s seat again.
“I’ve had a lot of questions-- for example I wondered at what point does the share price have to be in order for me to not profit from this at all?– and the Secfi team walked me through the scenario, which helped me feel good about it,” he said.
Additionally, the team at Secfi recommended a new CPA, who has been helping John sort out the tax implications of buying and selling equity. That CPA has helped educate him on the ins-and-outs of AMT as well as the implication of long term capital gains.
All in all, financing with Secfi gave John a way to finance his options with little risk– plus some unexpected perks.
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