Weekly Update #216: What the 90-day option exercise rule means for pre-IPO secondaries

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Hello Investors,

What the 90-day option exercise rule means for pre-IPO secondaries

Employees that receive Incentive Stock Options (ISOs) typically have 90 days to exercise upon termination (or if they leave the company voluntarily, too). This can create cash constraints, as the option-holder may need to come up with cash, quickly, to cover the cost of exercise (and the ensuing tax bill the following year). Consider the following hypothetical scenario:

UnicornCo has a valuation of $1 billion
15% of the company is owned by employees.
UnicornCo has 500 employees.
Half of the equity owned by employees has vested, and all the equity issued to employees was in the form of ISOs
UnicornCo decides to layoff 10% of its staff (50 employees), to lower costs

In this scenario, we can calculate the value of stock at stake:

$1 billion * 15% owned by employees * 50% vested * 10% of staff laid off = $7.5 million in stock value

That means that in our hypothetical scenario, there are 50 employees that have 90 days to come up with a way to cover their exercise cost, otherwise they may forfeit stock that's worth $7.5 million!

If you think this scenario is uncommon, think again. Here are some recent headlines:

As a result, EquityZen often connects with ex-employees that are in this 90 day window. Selling a portion of their shares provides them with cash to exercise their soon-to-expire ISOs.

Fortunately, for tech workers, forward-thinking companies have found a solution for ex-employees, by offering to convert the ISOs into Non-qualified Stock Options (known as NSOs) upon termination. This removes the requirement of the 90-day exercise window, allowing the option-holder to exercise much later in the future. While Pinterest (Exclusive: Pinterest unpins employee tax bills) and Quora (as of 2014) were pioneers of this structure, many companies are beginning to follow suit. There is even an open-sourced list on Github of companies that extend the option exercise window.

Thanks,
Phil Haslett
Founder + Head of Investments, EquityZen

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EquityZen.com is a website operated by EquityZen Inc. ("EquityZen"). Equity securities are offered through EquityZen Securities LLC ("EquityZen Securities"). EquityZen Securities is a registered broker/dealer and member of FINRA/SIPC. By accessing this site and any pages thereof, you agree to be bound by our Terms of Use and Privacy Policy. EquityZen.com is intended only for accredited investors (for persons residing in the U.S.), and for persons residing abroad in jurisdictions where securities registration exemptions apply. EquityZen does not make investment recommendations. No communication through this website or in any other medium should be construed as an investment recommendation, unless otherwise indicated by EquityZen Advisors LLC ("EquityZen Advisors"). Investment opportunities posted on this website are “private placements” of securities that are not publicly traded, are subject to holding period requirements, and are intended for investors who do not need a liquid investment. Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by EquityZen Securities, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment. Any financial projections or returns shown on the website are illustrative examples only, and there can be no assurance that any valuations provided are accurate or in agreement with market or industry valuations. Any investment information contained herein has been secured from sources EquityZen Advisors believes are reliable, but neither EquityZen nor EquityZen Advisors make any representations or warranties as to the accuracy of such information and accept no liability therefore. Offers to sell, or the solicitations of offers to buy, any security can only be made through official offering documents that contain important information about risks, fees and expenses. Investing in private companies may be considered highly speculative and involves a high degree of risk, including the risk of substantial loss of investment. Please click here for a more detailed explanation of the risks involved by investing through EquityZen's platform. For additional details regarding the allocation policies of EquityZen and affiliated entities, please click here. For additional information regarding a Trusted Contact Person, please click here. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed on this website, and are encouraged to consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. For a summary of our Business Continuity Plan, please click here.

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