No other employee benefit does more to incentivize top talent than employee stock options. These options give employees the opportunity to have a stake in the company they help build, potentially earning them a sizable windfall once the company’s value rises.
Yet the hypothetical best case scenario for employees is often at odds with the reality of exercising stock options.
Luckily, ESO Fund provides a solution for startup employees—one that removes the risk of exercising stock options and gives employees the benefits. To understand how ESO Fund has created over $1 billion in wealth for its partners since 2012, we first have to start with how stock options work, and what the potential risks are that employees should note before exercising their options.
Employee Stock Options: The Basics
An Employee Stock Option grants the holder the right, but not the obligation, to purchase a set number of shares at a predetermined price, commonly known as the “strike price“. The idea is that over time, as the company grows and becomes more valuable, the market price of its shares will exceed this strike price. Employees can then “exercise” their options, buying shares at the lower strike price and potentially selling them at a higher market price, realizing a profit.
ESOs help level the playing field for hiring, attracting top-notch talent willing to bet on the company’s future. They symbolize not just a stake in the company, but a belief in its vision and potential.
While ESOs are often the most lucrative benefit in an employee’s portfolio, they’re not without risk. The private companies that go public or sell for a high price get great media coverage—meanwhile, the companies that are liquidated often go unnoticed. It’s in these latter cases where options owners can lose 100% of their investment.
Financial Hurdles Of Exercising Options
Ideally, startup employees would seamlessly exercise their options and enjoy the fruits of their labor. In reality, several financial barriers keep employees from maximizing their ESO’s potential:
- Upfront Costs. Employees still have to pay the strike price to exercise their options. This can present a challenge, especially amid cost of living increases.
- Tax implications. Options holders are often surprised by the Alternative Minimum Tax (AMT) fees that appear the following year. Having funds to handle taxes on top of the strike price makes exercising more costly.
- Liquidity challenges. Selling private company shares isn’t as easy as other assets. Acquiring the funds to exercise is often out of reach for startup employees.
Enter ESO Fund: A Beacon In The ESO Landscape
ESO Fund demystifies the options exercising process by covering the upfront costs and tax implications of ESOs. Employees are now able to take ownership of their assets without the financial burden.
Here’s how ESO Fund bridges the gap:
- Financing the Exercise: ESO Fund can front the money needed to cover the strike price, allowing employees to exercise their options without immediate out-of-pocket expenses.
- Handling Tax Liabilities: By estimating and covering the potential tax hit, ES OFund ensures employees aren’t blindsided by a surprise tax bill come April.
- Flexibility and Alignment: Rather than charging high interest rates or fees, ESO Fund aligns its interests with employees. Partnerships are focused on long-term mutual growth to build the employee’s success.
It’s important to note that employees retain ownership of their shares. ESO Fund simply takes on the risk, for a percent of the stock plus a return of the original investment. Options holders can close and fund in as little as 24 hours, with no impact to their credit score.
A More Equitable Future For ESOs
While ESOs provide substantial potential value to startup employees, the burdens associated with exercising these options have remained limiting. ESO Fund removes the financial risk that employees have long-faced and allows them to truly become owners of not only their company stock, but their futures as well. Get started with a free 15-minute consultation today.
