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Can I borrow to exercise my private company options?

Yes, you can use your options and related stock for financing the purchase price and taxes.

Can I borrow money to exercise my private company stock options?

  • Yes! In many circumstances you can utilize your private company shares that you receive from exercising your options as the collateral for financing both the purchase price and any related taxes that are due on exercise.
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Why would I borrow money to exercise my private company stock options today compared to waiting until there is a liquidity event?

  • There are several potential benefits to exercising your private company stock options and purchasing your shares today versus waiting, these include:
  • Minimizing your tax obligations related to the option exercise and future sale of shares, resulting in the potential for more wealth earned from your shares.
  • Presuming the share value increases over time, by purchasing your shares today, the difference (or spread), between the tax cost basis of your options and the fair market value at the date of your purchase, is taxed as compensation income and will be lower combined with any future appreciation being considered a capital gain. This allows you to lock in a lower purchase price and minimize your current tax obligations.
  • Additionally, you will achieve more favorable tax treatment on any future gains in the value of your shares (assuming the shares are held for at least a year and therefore being subject to the lower capital gains tax rates), and
  • Avoiding your options expiring with no value, which occurs 90 days or less following termination of employment or 10 years from the date of issuance (whichever comes first).
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Are there any tax benefits for exercising my private company stock options now versus waiting?

  • The taxes due on exercising private company stock options are calculated using the short-term capital gains rate (same as income tax rate) and are based on the difference (or spread) between:
  • the cost basis of your options, which is normally the strike price of your options that is most commonly set at the company’s fair market value (409A value) at the time your options were issued, and
  • the fair market value of your options on the date you exercise them.
  • From the date you exercise your private company stock options to the date you sell the related shares; any gains are subject to long-term capital gains tax rates (assuming at least a 1-year holding period).
  • Depending on the type of options you hold and the state you live in, the tax savings on any appreciation in the value of your options and/or related shares at long-term capital gains treatment versus short-term can be significant. The better your company performs, the larger the potential appreciation in value of your options/shares and thus the value of the tax savings. If your options are not exercised until your company experiences a liquidity event, the entire appreciation in value is taxed at the higher short-term tax rates. These higher taxes can be significant and affect the after-tax value you receive.
  • 3SPOKE’s non-recourse financing can be utilized to exercise your private company stock options and purchase the shares now. This establishes both a lower cost basis and your holding period for favorable tax treatment in the future. Depending on the amount and value of your holdings, this can potentially realize hundreds of thousands, if not millions, of dollars in more value from your stock-based compensation.
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What happens if my private company stock options expire?

  • If your options expire, they become worthless.
  • Expiration of employee stock options typically occurs at the first to occur of:
  • 90 days or less following the end of your employment with the company, or
  • after 10 years from the original grant date.
  • If you have worked as an employee at a company for years with the prospect of a financial windfall, this can be devastating. To prevent this from occurring you need to exercise your options, which means you must purchase the shares at the price they have been granted to you and pay the tax costs of the exercise, the combination of which can be substantial.
  • 3SPOKE’s non-recourse financing can be instrumental in assisting option holders with these costs and thus ensuring the options do not expire.
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Tax and Legal Advice Disclaimer
3SPOKE and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.