4 basic ways you might get cash for your stock
Every day at Collective Liquidity, we speak to unicorn employees about their liquidity and risk management alternatives. Frequently, they are unfamiliar with brokered stock sales, private stock loans, company tender programs and Collective’s solutions. So, it’s not surprising that they often have a hard time determining which is the best for them. This article provides a high-level summary of the primary private market liquidity alternatives and a discussion of the pros and cons of each.
To get started, let's identify the four basic ways you might get cash for your stock and/or reduce your risk from being overconcentrated in a single stock. Though there are now a bunch of hybrids and variants, the four basic transaction types are:
Tender Offer
In a tender offer, the company or its designee purchases your shares as part of a company run liquidity program. Typically held only once a year, these programs let you sell a portion of your shares (e.g., 15-20%) for a set price. Companies frequently use Nasdaq Private Market to facilitate these programs
Brokered Sale
In a brokered sale, an individual broker or an online marketplace like Forge charges you a commission to find you a buyer and help you negotiate price and draft transaction documents.
Stock Loan
Lenders like SecFi will make loans secured by your unicorn shares for about 15-25% of their value. The loans generally mature when your company goes public or is sold. Because these loans are typically made on a non-recourse basis, you don’t have to repay the loan even if the shares securing the loan become worthless.
Collective Liquidity
Collective Liquidity enables you to reduce your risk by letting you trade shares tax-free for an LP interest in a diversified fund of leading unicorns. Whenever you need liquidity, Collective will buy back a part of your fund interest for cash. Learn more here.
Consider your tax situation and options
Which of these options is best for you depends primarily on what your objectives are – e.g., do you need to maximize immediate cash, or can you wait to maximize your return over the long term? Do you want to de-risk your net worth by exchanging some of your stock into a diversified fund or are you OK to keep all of your “eggs in one basket”? Do you have weeks to spend talking with brokers or would you prefer to just transact online immediately?
Your tax situation is another major factor in making a smart financial decision. For example, taxes can have a huge impact on how much money you keep from a stock sale. If you have yet to exercise your options and hold them for a year, you will pay the ordinary income tax rate (i.e., as much as 46% for state and federal) on any sale proceeds. There are a number of other tax related details that may also materially affect your financial outcome. What is the exercise price for your options and how does it compare to your company’s current 409a price? Were your options issued as ISOs or NSOs? Are there tax implications from financial transactions or tax related events unrelated to your shares or options that you need to take into account? Though the team at Collective can help you evaluate your liquidity options, we always recommend you consult with a tax professional as part of your process. You might also review our article on how to minimize taxes in connection with your stock options.
Consider your cash alternatives
Once you know your objectives and are mindful of your tax circumstances, you can start to consider your alternatives. The following breakout compares each of the main transaction types against the financial objectives we hear about most from our customers.
| Factor | Tender Offer | Brokered Sale | Stock Loan | Collective |
|---|---|---|---|---|
| How it works | Company (or its designee) buys your shares through a company-run program, usually once a year, at a set price. Often run on Nasdaq Private Market. | A broker or marketplace (e.g., Forge) finds a buyer and helps you negotiate price and paperwork, for a commission. | A lender (e.g., SecFi) lends against your shares on a non-recourse basis; the loan matures when the company IPOs or is sold. | Trade shares tax-free for an LP interest in a diversified fund of leading pre-IPO companies; Collective buys back part of that interest for cash when you need liquidity. |
| Cash you can access now | A limited slice, typically ~15-20% of your holdings. | Whatever price a buyer will pay for the shares you sell. | About 15-25% of your shares' value. | Up to 50% of your exchanged interest upfront ($50 per $100 of shares). |
| Fees / costs | Usually minimal; companies sometimes pass along small Nasdaq/admin fees. | 4-6% commission; after tax and commission you may net under $0.50 on the dollar. | ~15-18% interest, plus a "stock fee" of ~25-33% of your shares at maturity. | No brokerage commission, no stock fee, no costly legal complexity. |
| Tax treatment | If options are unexercised or shares held under a year, proceeds are taxed at ordinary income rates (up to ~46% combined). | Same - ordinary income rates if unexercised / held under a year. | Generally no income tax on the loan itself (exercising options alongside it can trigger tax). | Generally a tax-free exchange (you may owe tax on the 409A-vs-exercise-price spread if you recently exercised). |
| Long-term upside | None on shares sold. | None on shares sold. | You keep the upside, less the ~25-33% of shares paid as the stock fee. | Keep your remaining LP interest in the fund; redeem for cash any time after a 3-year holding period. |
| Risk reduction | De-risks only the ~15-20% you can sell; the rest (~80%) stays concentrated. | De-risks only the shares you sell; the rest stays concentrated. | Minor - you keep ~80-85% of the risk, since you can only borrow a small percentage. | Diversifies your single-stock position into a fund of many companies while keeping long-term upside. |
| Time to transact | Usually painless, but runs only once a year - miss it and you wait, with no guarantee of a next round. | Weeks of back-and-forth with a broker to find a buyer and negotiate documents. | Lender must value the company, then negotiate amount, rate, stock fee, and legal terms. | About 5 minutes to initiate online; no broker required. |
As you can see, there’s a lot to think about and, since everyone has different priorities, there is no one, best solution for everyone. After acknowledging that we are naturally biased in favor of our own solution, we believe we can, however, make a couple of general observations.
First, if your sole objective is to maximize short term cash, you will likely be choosing between a brokered stock sale and Collective. Tender offer programs let you sell too few of your shares and most lenders will loan you too small a percentage of the value of your shares to generate significant liquidity. Whether a stock sale or Collective nets you the most immediate, after-tax cash will depend on your tax circumstances. Our free Liquidity Estimator compares the two based on your tax situation.
Second, if you can be patient and want to maximize your long-term total cash, then we believe Collective is probably your best option. This is because Collective enables you to both generate immediate cash with an LP BuyBack and retain upside in the Exchange Fund which can be expected to appreciate over time. Whenever you choose to cash out of the fund, you redeem your remaining LP interest, keeping whatever is left over.
Third, if your primary goal is just to get some liquidity quickly and easily, then again, we think Collective might be the best fit for you. Unlike other platforms where you spend weeks negotiating with a broker or lender, at Collective you can initiate a transaction in about 5 minutes entirely online or via a Customer Representative.
We hope you found this article helpful. Feel free to contact us anytime at Collective Liquidity if you still have questions about how to optimize your stock options. We will be happy to help you chart a path to liquidity regardless of whether or not that includes one of our solutions. At Collective, we are all about Freeing Your Wealth!
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