My girlfriend is an early employee at a very successful UK tech company. She has stock options worth nearly £1m based on the price of the last private financing (completed in the last 6 months) and management believes this is the last round before the company goes public in the next 24-36 months (depending on market conditions). In my view the business is of a size and scale that they could go public and at a higher valuation than the most recent financing.
From a tax perspective, it would make sense for her to exercise her options prior to the IPO. She would need to pay the exercise price and pay a tax bill to crystalize the gain (but will not be able to sell the shares to fund the tax bill). If she waits until the company goes public she will have to pay tax on the public share price but while the company is private she is able to pay tax at a discount to the prices investors pay (similar to 409a valuation in the US). We would need to put up £200k to fund the tax bill and exercise price which is all of our savings (and then some) and feels risky to put all our money to work this way when we're not in control of the timeline.
Does anyone have any experience from private banking about providing margin loans for these kind of shares. We would need to borrow £200k against shares which have a face value of £1m but could also borrow a smaller amount and not exercise them all if the LTV is too high.
I assume a lot of private banks might not be interested in a loan / account of this size (too small) but most high street banks would view this as way too risky. For context, we have a combined income of £250k+ pre tax but do not own a home or other asset we can borrow against. Not looking for advice on the wisdom of borrowing the money (or on my relationship), which I can form our own view on but interested if anyone has any experience with this kind of margin lending! I know it's very common for CEOs of established private companies who might borrow $10m against stock valued at $50m or whatever but I worry this might be seen as small fry...
This premise of pre-ipo shares reminds me of a story about Peter Thiel and his Roth IRA strategy. There are/were ways to hold alternative assets with substantial tax structuring benefits.
Fun to wonder, is something similar possible in the UK?
As far as actual expenses and minimums; not advice, but for many private banks your margin is commonly a relationship rate qualified using total assets and then a premium based on a market rate could be applied.
Example: bank uses a prime rate plus a premium for any client with total assets under $3MM and SOFR plus a negotiated premium for anything over.
Check your margin agreement and you may see if there is a minimum required amount etc... Your £200k may be more feasible than you think.
Ah, the classic conundrum of exercising stock options pre-IPO! It's a high-stakes game of risk and reward, isn't it? Now, let's swing through the jungle of information based on the most helpful WSO content:
Private Banking for Margin Loans: Private banks do indeed offer margin loans against shares, but they typically cater to high-net-worth individuals. The loan-to-value (LTV) ratio they might offer can vary, often ranging from 50-70% of the shares' value, depending on the bank's assessment of the risk involved.
Loan Size Considerations: You're right that £200k might not be the sweet spot for some private banks, as they often deal with larger amounts. However, don't let that discourage you. There are boutique banks and specialized financial firms that might be more flexible with their terms and willing to work with what they consider "emerging wealth" clients.
Risk Assessment: High street banks might indeed see this as too risky, especially since the shares are illiquid and the company is yet to go public. The volatility and uncertainty of private company valuations add to the risk profile.
Alternative Options: Have you considered other financing options? Sometimes, companies offer internal programs to assist employees with option exercises, or there might be third-party firms that specialize in this kind of financing. It's worth exploring these avenues.
Due Diligence: Make sure to do your homework on the tax implications and the terms of any potential loan. The interest rates, the possibility of a margin call if the share value drops, and the terms of repayment are all critical factors to consider.
Negotiation: If you do find a willing lender, don't be shy to negotiate the terms. Given your combined income and the potential value of the shares, you might have more leverage than you think.
Remember, while borrowing against stock options can be a strategic move, it's also a complex one with significant financial implications. It's always wise to consult with a financial advisor who can provide personalized advice based on your specific situation. Swing carefully!
Sources: Private Equity Interview Questions - 13 Topics to Know, Enterprise software investing, Anyone know about Maranon Capital?, Does anyone have a list of companies with internal consulting groups?, Does anyone have any experience covering banks at a 2a-7 fund?
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