How It Works, Pros & Cons
Many employees of privately held companies receive stock options as part of their compensation. This is particularly common with startups. Options give you the right to purchase stock, usually at a discount, for a limited period. But what if you don’t have enough money to buy before the deadline?
This is a very common problem. An estimated 76% of employees with stock options never exercise them, often because they aren’t willing to take the risk or just don’t have the cash.
If you’re in this situation, Equitybee may help you obtain the financing you need to exercise your options. It can also effectively eliminate many of the risks of exercising private company stock options.
What is Equitybee?
Equitybee puts startup employees in contact with accredited investors who can help them exercise their stock options. Equitybee has a global network of qualified investors who may be willing to fund your stock purchase in exchange for a percentage of their eventual value.
Equitybee has participated in more than 4,000 financing deals in 600 startups worldwide.
💡 Tip: The percentage of your stock value you must give to investors is not published in advance. You will receive a custom offer from investors.
How Does Equitybee Work?
Equitybee functions in a straightforward manner. Here is a rundown.
- If you can’t afford to exercise your options, you fill out a funding request on the Equitybee site.
- If Equitybee decides to help you fund your stock purchase, it distributes the deal to investors.
- If an investor wants to fund your stock options, you receive an offer.
- You accept or reject that offer.
- If you accept the offer, the investor provides the funds to exercise your options.
- When there is an “exit event” – usually when the company goes public, merges, or is sold – the investor takes a share of the profits.
The percentage paid to the investor depends on the specific offer, but the investor always assumes all risks. If there is no exit event, the shares fall in value, or the company goes out of business, you owe nothing.
What Does it Cost?
There are costs for employees and investors.
There is no set fee. An investor will make you an offer and each offer is different. Investors compete for your business, so the terms may be attractive to you, especially if you work for a company with a high level of investor interest.
There are two costs to the deal. You will agree to pay interest, and you will agree to pay a portion of the stock profits.
Interest can be as low as 1%, but it can range higher depending on the offer.
You should expect to give up anywhere from 25% to 50% of the eventual profits. Again, this varies with the offer.
You will only pay if there is a successful “exit event.” An exit event can be an acquisition, merger, or initial public offering (IPO). These allow you to sell your shares. You can also sell your shares when you leave the company.
💡 Tip: You have a limited time to exercise your options after you leave a company. If you think you may be using Equitybee, it is important to contact the company well before your options expire.
Investors pay 5% of the investment value when the transaction begins. When the shares are sold, and the employee pays the interest due, Equitybee charges 5% of that amount as well.
Equitybee Pros & Cons
Benefits for Employees
Here are some of the reasons why employees choose to use Equitybee.
- Getting Stock When You Can’t Afford It – The primary benefit is that you can exercise your options to buy the stock even if you don’t have the money. This is much better than allowing your options to expire and losing the opportunity.
You will pay a portion of your gains to the investor, but if you don’t exercise the options, there will be no gains at all.
- Minimize Risk – Exercising a private-company stock option entails risk. The company might never go public or be acquired, so there might never be a market for the shares. The company could even go out of business, leaving the shares worthless.
If you use your own money to exercise your options, your losses could be substantial.
Options funding with Equitybee is a “non-recourse” deal. That means if your company fails or the stock price goes lower than the price you are offered in your options package, or an exit event never occurs, you don’t owe the investor money back.
You lose some potential profit, but you almost completely eliminate risk.
Risks for Employees
You may have to give up a significant portion of your profits when you sell your shares. This can be as much as half of what your make.
You must sell enough shares to pay the investor as soon as an exit event occurs. If you do not, Equitybee may initiate legal action to force compliance.
Benefits for Investors
Accredited investors have their own reasons for working with Equitybee.
- Access to Privately Held Companies – It’s not easy to buy shares in privately held companies. There are private equity marketplaces, but there’s never any assurance that shares in any given company will be available.
Employee stock options are one of the few reliable sources of private company shares, and because investors don’t technically own the shares, no company approval is needed.
- Reduced Prices – Stock options typically offer shares at prices below the Company’s formal valuation. That gives investors an opportunity to acquire shares at an attractive price.
Risks for Investors
Investing through Equitybee has risks, many of which are common to any private equity investment.
- High Minimum Investment Amount – The minimum investment amount for EquityBee is $10,000 or more.
- No Ownership – When you invest through Equitybee, you don’t own the shares, even after a liquidation event. That’s an advantage in some ways: the company doesn’t need to approve the transaction. It also limits your rights.
- High-Risk Investment – Investing in privately held companies is a high-risk endeavor by any standard. There is no assurance that the company will succeed or that there will ever be a market for the shares.
- Potential for Complete Loss – If the startup never has a liquidity event, you will not be able to withdraw or liquidate your investment. If the company fails or goes bankrupt, you lose your investment, and the employee you helped does not have to reimburse you.
Getting Started with Equitybee
Here’s what you’ll need to do to us Equitybee.
- Review the requirements for employees.
- Click on “Signup” in the top right corner of the home page and get started by registering as an employee.
- Provide Equitybee with basic information about yourself and your stock options.
- Receive an assigned Equity Success Manager that will explain the funding process and answer your questions.
- Provide a stock option grant notice.
- Provide a copy of your option plan.
- Provide proof you have the right to exercise the options.
- Submit your application.
- If a successful match is found, you and the participating investors sign an agreement laying out the terms of the funding.
- Provide your share option assignment notice, option plan, and evidence of your acquired options.
- Once you have received funding, provide proof that you have exercised your options.
You will be the owner of the shares. They remain in your name. Once you sell them, you will give some of the value (in cash) to the investors.
- You must work for a private corporation that issues stock.
- You need to have stock options that are worth at least $10,000.
- You must be able to pass a background and credit check.
Remember that Equitybee needs to ensure it offers quality opportunities to investors, so provide all information that will give them confidence in your deal. Not all companies will be approved.
Equitybee requires that investors meet the SEC’s accredited investor standards. If you meet these standards, contact Equitybee directly to register as an investor and review available investments.
You must be a qualified investor to invest in Equitybee. This means that you must meet one or more of the qualifications set out by the U.S. Securities and Exchange Commission (SEC):
● Have earned more than $200,000 annually in each of the last two years and expect to earn the same amount in the current year.
● Have a net worth of more than $1 million (excluding your home)
● Have adequate evidence of training or specific professional certifications, such as FINRA Series 7, 65, or 82.
You must also invest at least $10,000 to participate in the financing of stock options. This is the Equitybee minimum investment.
Equitybee is not the only private equity marketplace. Consider these alternatives.
EquityZen and Forge Global are more oriented toward stock buyers, while SecFi and Liquidstock serve employees seeking funding to exercise their options.
EquityZen is an online market for the shares of pre-IPO employees of private companies.
The platform connects employees of private companies to investors who would otherwise be unable to invest in the company before the IPO. You must own the shares you sell, so you must exercise your options before making a deal.
Forge Global is the world’s largest private equity marketplace. It allows accredited investors to buy and sell shares in private companies. Forge Global handles actual purchases of stock. They do not fund options.
This means that employees must exercise their options and own the stock before they can sell it through Forge Global. Transactions must be approved by the company issuing the shares.
SecFi provides a wide range of services to investors, companies, and employees. One of these services is stock options funding. The deal is much like what Equitybee offers: you will own the shares, and any return to SecFi occurs after a liquidation event.
SecFi’s website does not discuss sales of private equity shares to investors.
LiquidStock works very much like Equitybee, except that they don’t match you with an investor. Instead, Liquidstock funds your stock options directly. They also provide education about stock options to help you understand your choices more thoroughly.
LiquidStock manages its own capital pool and does not sell private company shares to investors.
Is It Worth It?
For employees who can’t afford to exercise options, this is a situation where something is better than nothing. If you are going to lose your options because you can’t afford to exercise them, Equitybee gives you at least a percentage of the profits while minimizing risks.
That’s clearly worth it, though it might be worth exploring competing services as well to see who offers the best deal. Funding stock options is complicated, so be sure you understand the process before pursuing a deal.
For investors, it’s a more complicated question. You’ll need to fairly evaluate the risks, your risk tolerance, and the potential for profit and loss to decide whether such a deal is appropriate for you.
We evaluated Equitybee based on these criteria:
- Reliability – The company has a track record and brokers deals effectively. We particularly like the fact that investors must be qualified.
- Profitability – We looked at whether an option holder could reasonably profit and found the company’s terms attractive. We also evaluated the potential for investors and determined that, though this is a high-risk opportunity, it can make significant money.
- Ease of Use – The platform is pretty straightforward. Because each employee is assigned an Equity Success Manager, the process is transparent.
We did not find significant numbers of customer reviews on any reliable review site, so customer reviews are not included in our evaluation.
Equitybee is a legitimate fintech company that has helped more than 1,700 startups to exercise their stock options. The platform has handled shares in companies including Airbnb, Affirm, Coursera, Payoneer, 23andMe, and Compass.
Equitybee brokers deal between investors and private company employees who seek financing to exercise their options. The terms of each offer are different, but you can expect to pay an interest rate of 1% or more and pay 25% to 50% of the eventual proceeds to the investor.
Your options grant will provide you with expiration dates. You must exercise the option before the expiration date.
Equitybee’s minimum investment is $10.000.