Founder and Employee Stock Option Loans and Stock Loans
Capital Solutions for Shareholders
Lexus Capital was founded with the mission of helping private company founders, employees and early investors achieve liquidity and diversification from their highly concentrated, illiquid shareholdings. Alan Donenfeld, Founder of Lexus, realized that founders and employees would create more value for all shareholders if they could realize on some of the significant value they had created prior to a sale or IPO. The receipt of some early liquidity may encourage the shareholder to work patiently to affect a longer-term vision for the company, rather than to advocate for a shorter-term exit such as a premature trade sale.
Sales of Shares for Cash
Lexus Capital is a private investment fund that provides liquidity to founders, ex-employees and other early investors who would like to realize the value on some or all of their stockholdings in a highly appreciated private company. We can acquire the stock through a direct purchase of the stock. We will work with the company, its investors and the company's legal counsel to appropriately deal with a right of first refusal or other issues that may come up. A sale for cash may significantly accelerate the liquidity in the stockholding as a shareholder may be restricted from selling stock for six months or more after an IPO.
Loan Against Shares or Loan to Exercise Options
Lexus provides non-recourse loans to current and former employees of VC-backed companies. The Lexus loan provides liquidity for any purpose and can provide partial liquidity for just a portion of the owners stock. Since the loan is not a sale of the stock, the owner is not subject to a right of first refusal, and the proceeds are not taxed as a sale. If the stock is worth less upon maturity of the loan, then Lexus, not the employee, bears the loss. However, Lexus will participate in the upside of the stock.
Lexus provides loans to pay for the cost of exercising stock options. By exercising options early, the holder will be eligible for long term capital gain treatment. When and if the company has a liquidity event, such as a merger, sale, or IPO, we will participate in the gain.
Exchange of Shares in Lexus for Shares in the Company
Lexus can exchange shares of private stock held in a company for limited partnership interests in Lexus Capital LP. The private shares can be held by a founder, member of management, ex-employee or an early investor in a company. This exchange of your shares for our "shares" is typically a tax-free exchange. The exchange provides you with diversification as Lexus holds a portfolio of other high-quality VC-backed companies.
The exchange of your shares for our shares can be combined with a loan and / or a sale of your shares for cash to provide the optimal combination of liquidity, diversification, reduction of taxes or deferral of taxes, and the ability to sell when a right of first refusal might exist.
It should come as no surprise to a founder or employee of a venture-backed company that other shareholders and stakeholders in the company would have concerns regarding the sale of stock by an insider. In public markets, insider buying and selling is closely regulated, tracked and generally seen as an indication of insider concern regarding the company’s prospects. It is no different in a private company – and sometimes worse. Since the shares in privately held companies are not actively traded in an open market, the ability for some people to achieve a liquidity event while others (i.e. venture investors) may not be able to do so, can cause some consternation. Furthermore, since management and employees are crucial to the ongoing growth of a company and in achieving a liquidity event, many companies and investors are concerned that allowing employees to sell their shares before an exit event will diminish their motivation. That being said, there are several situations when it is reasonable for employees, management and founders to search for some liquidity through a secondary transaction.
- Changes in personal financial or family situation: To the extent that an employee faces financial challenges such as having a child, moving to meet the requirements of a growing family, or unexpected health care expenses, parental obligations or tuition, it is often reasonable to search for some liquidity from their ownership in a privately held company.
- Differences of opinion amongst the founders, management and investors on when to sell the company: The decision to sell a company early versus taking more capital and building the company for long-term success often highlights the risk/return differences between investors and management teams. Allowing some liquidity to founders or early employees can reinvigorate their desire to build the company and aim for a larger exit by relieving some of their financial concerns and providing a capital cushion for their family.
- Employee departures or changing roles inside a company: When a founder has been replaced as CEO or an executive’s role inside the company has been changed, it is expected that, concurrent with that event, an employee wishes to sell some or all of their stock. In these situations, it may be prudent, as part of any termination arrangement, to provide the employee the ability to sell a portion or the entirety of their shares in the company and for the company to cooperate with one or two sophisticated institutional buyers in that process, including waiving any transfer restrictions on the shares (assuming the employee or founder is leaving on good terms).
- Diversification: A founder or employee whose net worth is either entirely or significantly held in a single private company and who has worked at the company for several years (i.e., at least four years) has a strong rationale to sell a minority portion of their stock in the company. As long as a meaningful amount of stock is still held by that employee or founder such that their interests are still aligned with the company’s goals, providing some liquidity to a long-time employee is often entirely appropriate.
- Tax planning, estate planning or other financial planning needs: Many early employees who own a substantial number of options may want to exercise those options for tax planning purposes. It may be a very sensible request for an employee to ask permission to sell some of their options through a secondary transaction in order to get capital to exercise their remaining options. Similarly, a secondary transaction can help an employee manage the sale of their stock to optimize capital gains tax, AMT laws, or aid in estate planning.
- Expiring stock options or other stock awards: Due to the extended liquidity timelines for venture-backed companies, employees frequently find themselves holding stock options or other stock awards that are close to their expiration date. In these situations a company may choose to allow an employee to sell a portion of options on the secondary market to provide capital so that they can exercise their remaining holdings.