ESO's Monthly Start-Up

March 2024

Know Your (Stock) Options

Last month, we touched on the three companies that we identified that are looking to IPO in the next couple of months. As we continue through 2024, we anticipate this number of companies looking to the public markets to continue to increase, and with it, the number of employees that will have to make decisions regarding exercising their stock options. ESO was featured in Fortune this past month, where we discussed considerations for these employees that are at companies that are looking to IPO. As we mentioned in the article, exercising your stock options can be expensive, and with rising cost of living continuing to impact the day to day lives of individuals, the cost benefit of tying up capital in illiquid company stock is high, especially when there is no guarantee that there will be a return on investment.

As such, there has never been a better time to explore stock option financing offerings. There are typically two options you can pursue for help funding your options, Debt Financing and Equity Funding options. Here is a quick breakdown of both:

Debt Financing: This is what you probably typically think of when you think of “financing”. A lender will give you a loan to exercise your stock options, and in return, you will pay interest on that loan. However, due to the risky nature of stock options, the interest rate on these vehicles is typically high. Additionally, if the company fails to exit, you’ll be left paying the loan off regardless.

Equity Funding: Instead of lending money and receiving interest payments, equity funding vehicles typically will take a portion of your stock option equity in lieu of this fixed payment. While this can provide downside protection in the case of the company not performing well, it also cuts into the upside a bit. Additionally, many of these vehicles are non-recourse, meaning if the company you have stock in goes to zero, you won’t be left with a loan for a worthless asset

Why this matters: Ultimately, the decision to use an alternative funding strategy for options exercise is one that depends on an individual’s specific circumstances. However, for many, they can provide a means to diversify risk and get liquidity.

Tips of the trade

A section where we provide helpful tips for anyone with stock options or shares at private companies.

Ways to Reduce Stock Option Taxes

As we approach tax season, we wanted to focus on ways to optimize your stock option related taxes.

Here is a quick reminder on how Stock Option Taxes work:

  1. Options are taxed when exercised:

    • ISOs taxed as AMT

    • NSOs taxed as ordinary income

  2. Shares are taxed when sold (either short or Long-Term Capital Gains):

    • ISOs taxed on the sale price minus the strike price

    • NSOs taxed on the sale price minus the FMV when exercised

So from the Stock Option Experts at ESO Fund, how can employees reduce their stock option related taxes?

The easiest way to eliminate Stock Option Taxes is to exercise your options while the FMV is still equal to your strike price. In this case, you would owe ZERO tax. This is most easily done by early exercising and filing an 83(b), though not all companies allow this.

The above is only possible for a short period of time and comes with the risk of exercising before your company has grown in value. The next best way to reduce stock option taxes is to exercise just enough ISOs annually to avoid AMT. We’ve covered this more thoroughly in past newsletters, but basically there are a certain number of ISOs you can exercise each year without owing any taxes.

While you’re still at the company, you have the flexibility to do both the aforementioned methods. However, once you leave your hand is forced to either exercise or forfeit the options.

If you have ISOs, the best way to reduce your AMT hit is to split your exercise between December of one year and January of another. This allows you to take advantage of the annual AMT exemption twice, but you either have to leave around the new year or anticipate your departure the December prior to leaving - this isn’t always trivial…

If you have NSOs, your best bet is to see if your company allows 83(i) elections. These tax filings allow you to defer NSO related taxes for up to 5 years, which can be huge, especially if the shares become liquid in the meantime.

Beyond the above, the most basic way to save on option related taxes is to hold your shares for more than 1 year post exercise in order to qualify for Long-Term Capital Gains. Alternatively, ESO Fund is happy to cover your stock option related taxes and fund your option exercise, risk-free.

For more nuanced methods check out our page: 17 Ways to Reduce Stock Option Taxes

Funding your option exercise can be expensive and a require a large capital outlay. Feel free to reach out to us to discuss your options for partnering with ESO to exercise your options risk-free.

The ESO Fund does not provide legal, financial, or tax advice.

Public Multiples Check-in

All three indices ended February in the green, with the S&P, Nasdaq, and Dow up 5.2%, 5.3%, and 2.2%, respectively. Additionally, multiples improved for most of the sectors that we track, with the Cryptocurrency sector seeing the largest improvement at a 47% increase. Enterprise SaaS is only sector seeing its multiple trailing the year prior, down 18%.

Why this matters: Market conditions appear to be showing continued improvement, and multiples increasing are a good sign for late stage companies looking to target an IPO soon. However, with the yield curve still inverted and the Fed not giving a target date for when rate cuts are expected, the market is still in a bit of a precarious situation.

February's Top Ten:

  1. One of the 2024 Top IPO contenders is officially off the ballot, with Stripe indicating that they will have a tender offer to provide liquidity to employees. This tender is going to be offered at a valuation of $65 billion, an increase from last year’s tender.

  2. Shein, another top contender for a 2024 IPO, has been facing increased regulatory scrutiny in the United States as relations between China and the US have grown tense. As such, the company is reportedly considering a London IPO instead. Other potential venues are reportedly Hong Kong and Singapore.

  3. Reddit is finally going public, having filed its S-1 a couple of weeks ago. The company is targeting roughly a $6.5 billion valuation, and while they are still unprofitable, the filing shows that they have grown revenues about 20% from the past year.

  4. In one of the wilder stories of the month, Sequoia Capital attempted a coup on Michael Mortiz, Klarna’s chair, by trying to oust him. Ultimately, the efforts backfired, in a matter of days they had to go on the defensive to apologize for the maneuver.

  5. How much does Sam Altman need in funding for OpenAI? Umm… checks notes $7 trillion dollars or so? Apparently that’s what its going to cost to build all the chip factories it needs to support its computing power.

  6. Canva, one of the top startups in the world right now, finds themselves without a CFO amid a major secondary share sale and ahead of its highly anticipated IPO. Damien Singh resigned from the company after they launched an internal investigation into alleged inappropriate behaviour.

  7. Bolt, once the $11 billion dollar e-commerce darling, slashes its share price 97% in a buyback. Tribe Capital has told its limited partners that it plans to sell shares back to Bolt at a price that implies a $300 million valuation, or just over half the per-share price the VC firm paid five years ago. Bolt is offering common-stock holders—current and former employees—a lower price for their shares.

  8.  Disney is taking a $1.5 billion equity stake in Epic Games, making it the company’s biggest jump into the gaming world yet. Notably for epic, the deal shows a sharp cut in its valuation, bringing it down to $22.5 billion compared to a valuation of $31.5 billion two years ago.

  9. GPU Cloud Prover Lambda Labs confirms $320 million in new funding this month. The deal was led by U.S. Innovative Technology, a fund run by billionaire Thomas Tull. The round values Lambda at a valuation of $1.5 billion.

  10. Thrasio, once a pioneer in consolidating Amazon sellers, has filed for Chapter 11 bankruptcy protection this past month. The company disclosed that it had reached an agreement with creditors to reduce its debt burden by approximately $495 million. Thrasio also announced that certain creditors have committed to injecting up to $90 million in fresh capital, earmarked for sustaining ongoing operations and supporting the brands within its portfolio.

Startups that are still hiring!

Open positions are per the company's website.

About ESO Fund

ESO Fund empowers startup employees to turn their stock options into reality. Since our inception in 2012, we've been dedicated to providing risk-free funding for the exercise of stock options, ensuring that individuals can seize the opportunities embedded in their equity.

Our mission is simple: to make equity compensation accessible and understandable. Through our innovative solutions, we've assisted countless individuals at 650+ companies in realizing the full value of their stock options, contributing to the success stories of numerous startup employees.

For more information on ESO Fund and how we can help fund your option exercise, please refer to our website at www.esofund.com!

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