Compared to the Alternatives
What are the alternatives to a Collective exchange?
See why Collective is often a better way to reduce your risk, diversify your assets, and access liquidity than selling your shares or obtaining debt against them via margin or structured credit arrangements.
Compared to Stock Sale
In a stock sale, you sell shares on the open market immediately, triggering capital gains tax on the profits, and typically need to pay a 6% brokerage commission. But 10b5-1 plans and/or blackout periods might not permit you to sell when you want to do so.
Compared to Stock Loan
Many banks and brokerage companies offer loans to those with highly liquid, publicly-traded unicorn stocks. However, their rates have more recently exceeded 10%, and many borrowers have been subject to margin calls or collateral calls in recent downturns.
Exchange Benefits
With Collective, you aren't selling your stock, but rather exchanging it for diversification, which doesn't result in a taxable event. You're given the option to liquidate up to 20% of your position to access tax-free liquidity during the first year.
Collective Compared to a Stock Sale
Collective recommends that employees consider if a stock sale is the best way to diversify or monetize their pre-IPO shares. Depending on how frequently traded your company's shares are, online marketplaces like Forge Global, Hiive, Caplight, Nasdaq Private Market and Zanbato may assign a broker to try to find buyers for your stock.
In choosing between a stock sale or a Collective exchange, employees should prioritize their objectives for the transaction. If, for example, they need cash right away to make a major purchase, a stock sale might be the right solution. If they instead want to use their shares as the foundation for a long-term financial plan, we think Collective's tax savings and future investment returns likely make an exchange the right answer.
| Goal | Analysis | Advantage |
|---|---|---|
| Maximize Long-Term Value | Collective's fund targets long-term venture capital rates of return. Stock sale proceeds are substantially reduced by taxes and must be reinvested. | Collective |
| Minimize Taxes | Exchanges into Collective's fund, loans against Collective fund interests and LP buyback are all tax-deferred. Stock sales are immediately taxable. | Collective |
| Minimize Transaction Expense | There is no charge to exchange into Collective's fund. Online marketplaces and brokers typically charge a fee of 4% - 6% of the sale price. | Collective |
| Minimize Time and Headache | Collective gives you upfront pricing; transactions can be managed online. Stock sales typically require weeks of negotiations with brokers and buyers. | Collective |
| Maximize Cash Today | Depending on your tax circumstances, selling shares may generate slightly more immediate cash than a Collective LP BuyBack. | Maybe Stock Sale |
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Estimate Your Wealth Over the Long-Term
Compare results of diversifying with an exchange fund vs. stock sale
Collective Compared to Loans Against Your Shares
Employees may also consider taking out a loan secured by their pre-IPO shares as a way to diversify or create liquidity. The primary advantage of such loans is also their major drawback: they provide no diversification - they leave the employee 100% exposed to one stock. If you want to bet on the outcome of a single company, these loans can be a good fit. A Collective exchange, on the other hand, provides both diversification and liquidity. So, if reducing your risk is a goal, a Collective exchange is likely the better solution.
Other factors to keep in mind when evaluating a stock loan are the loan-to-value ratio and the transaction cost. Loans secured by a single stock are relatively risky to the lender. As a result, their interest rates and fees - including stock fees - can be very high and the amount they will lend can be quite low. Because loans from Collective's partnering banks are secured by a diversified, semi-liquid portfolio, they typically lend more at substantially lower rates and with no stock fee.
| Goal | Analysis | Advantage |
|---|---|---|
| Maximize Cash Today | Single stock lenders will typically lend you 15% - 20% of the value of your shares. A Collective LP BuyBack advances 50% and partnering banks will lend at 25% of the value of the exchanged shares. | Collective |
| Maximize Long-Term Value | Collective's fund targets long-term venture capital rates of return for its diversified portfolio. Single stock loans maintain 100% of your exposure in your shares. | Unclear but Collective is less risky |
| Minimize Taxes | Neither loans from Collective's partnering banks or single stock lenders trigger taxes. LP BuyBacks defer the great majority of taxes. | Unclear but Collective is less risky |
| Minimize Transaction Expense | There is no transaction fee to exchange into Collective's fund or for an LP BuyBack. Collective partnering banks and single stock lenders charge varying loan origination fees. | Varies by Lender |
| Minimize Time and Headache | Single stock lenders typically have a lengthy underwriting process and complex legal agreements. Collective gives you upfront pricing; transactions can be managed online. | Collective |