Frequently Asked Questions about the Collective Exchange Fund and Loans
All you wanted to know about The Collective Exchange Fund and Loans
1. What is Collective Liquidity?
Collective Liquidity is an online platform enabling many unicorn (valuation $1bn+) shareholders to easily obtain liquidity and reduce their risk from being over concentrated in a single stock in a tax efficient manner.
2. What is the Collective Exchange Fund? What’s a Collective Exchange?
The Collective Exchange Fund is a portfolio of the world’s leading unicorns diversified across technology sectors. Employees and shareholders in these companies can exchange their shares tax free for a partnership interest in the Exchange Fund of equal value. The resulting diversification (i.e., holding an interest in many unicorns rather than just one) can reduce the exchanger’s financial risk. After the first year, exchangers can redeem their interest in the Exchange Fund for cash at the end of any quarter. Learn more about the Exchange Fund here.
3. Can I get immediate cash from Collective Liquidity?
Yes. Once you hold an interest in the Collective Exchange Fund, you can apply for a non-recourse loan equal to 60% of the value of your interest. So, for example, if you exchange $100 worth of shares into the Fund, you receive $100 partnership interest in the Fund and can then immediately borrow $60 on a non-recourse basis against that interest. In addition, Exchanges and Exchange Loans are tax free which means you may receive more liquidity on an after-tax basis than you might get from selling your stock.
Please note, that if the shares being exchanged originated from the exercise of Incentive Stock Options (ISOs), you may owe some tax on the disqualifying disposition of your ISO shares if you have not met the ISO holding period requirements. The tax from the disqualifying disposition is often significantly less tax compared to the tax from a sale of your ISO shares. Consult with your tax professional to review your tax circumstances.
4. What is a non-recourse loan?
Exchange Loans are secured only by your interest in the Collective Exchange Fund and are non-recourse to you. In the unlikely event that the value of your interest in the Collective Exchange Fund drops below your outstanding loan amount, you can choose to relinquish your partnership interest to the lender to satisfy your obligation. Put another way, no matter what happens to the value of the Fund, you never have to come out of pocket to repay an Exchange Loan.
5. How do I know if I should do an Exchange Loan vs just selling?
We recommend that unicorn employees compare their different liquidity alternatives based on their long-term, after-tax proceeds. The amount you pay in taxes will depend on many details (e.g., are your options NSO or ISOs, your state’s income tax rates, how long you have held your shares, etc.). Consult with your tax professional to review your tax circumstances. For many unicorn employees though, an Exchange Loan offers more immediate after-tax cash than a stock sale plus they retain long term upside from their partnership interest in the Exchange Fund. Our Liquidity Estimator can give you an immediate estimate of your potential after tax proceeds from an Exchange Loan vs a stock sale or you can schedule a call with us and we will review your situation in detail.
6. What is the timeline for processing a transaction with Collective Liquidity?
Exchanges into the Collective Exchange Fund can be initiated anytime instantly from the Collective Liquidity website or by speaking with a Collective Liquidity representative. Once initiated, we typically take a couple of days to confirm some details (e.g., you own the options or shares, you are an accredited investor, etc.) before submitting the transaction to your company. Companies then usually take 30 days to process the transaction. Once the exchange is complete, you can immediately borrow against your partnership interest. Exchange Loans are typically funded within 3 business days of completing the online forms.
7. Do I need to exercise my vested options before I can participate in an exchange with Collective Liquidity?
Yes – only shares (not stock options) can be exchanged into the Exchange Fund. If you need help exercising your options, contact us at [email protected].
8. When do I have to repay the loan?
Exchange Loans have 12-14 month terms depending on the date the loan funds. The principal is due at maturity (when the final loan payment is due). It can be paid three ways: 1.) Refinance your existing loan with a new loan (Note that this option is available as long as the refinancing loan doesn’t exceed 65% of your collateral (equity in the fund); 2.) Liquidation of your collateral; or 3.) In a lump sum directly from your bank account via wire transfer. The full amount of interest payable over the life of the loan is paid in lump sum at origination and netted out of your loan proceeds. The net proceeds you receive is the loan amount less origination fee and total interest.
9. What are the Collective Exchange Fund fees and when they are due?
The Collective Exchange Fund charges U.S. exchangers a 1.75% annual management fee and a 15% performance fee. See details about the Fund here and/or view the Fund’s Private Placement Memorandum.
10. My company was not on the list of companies eligible for exchanges. How can I be notified if/when it becomes eligible in the future?
We are constantly evaluating companies for eligibility for exchange. If you think your company might be a good fit for our portfolio of leading unicorns, let us know here. If our Investment Committee reviews and accepts your company, we will contact you to discuss an exchange into the Collective Exchange Fund.
11. Who is behind the company?
The Collective Liquidity team is comprised of the founders, executives, and board members of pioneering private market platforms SharesPost, Forge and Nasdaq Private Market. We leverage that experience to create dramatically better liquidity and risk management solutions for unicorns and their employees.
12. How do partners in the Collective Exchange Fund track its performance?
Each Collective Exchange Fund’s limited partner has access to a personalized dashboard that shows the value of the limited partner’s capital account and changes in the Fund’s net asset value in real time. The Fund also regularly sends limited partners performance updates and news about its portfolio companies.
13. When and how can I cash out of the fund?
After the first year, subject to some limitations, Collective Exchange Fund limited partners can redeem their capital account for cash at the end of any quarter. If the limited partner has an outstanding Exchange Loan, the loan is repaid from the redemption proceeds and the remainder is paid to the limited partner.
14. Why do I need to be an accredited investor to exchange into the Collective Exchange Fund? What are the requirements to be accredited?
An exchange into the Fund involves the issuance to you of a limited partnership interest in the Fund. This partnership interest is a restricted security and one of the requirements under U.S. securities laws is that holders of restricted securities are “accredited investors.” You can qualify as an accredited investor either by meeting certain income or net worth criteria.