companies can’t afford to lay out that much capital. Banks, too, shy away from option loans, because regulations prevent them from counting shares as collateral.
“We’re not a bank,” Brogger notes. To fund the initial loans, SharesPost is working with a new firm called The ESO Fund, which is made up of a group of venture industry veterans and has allocated between $15 million and $20 million for the program.
At the time of my interview with Brogger in late October, two option loans had been completed and another 15 were in the pipeline. That’s not exactly what you’d call a rush, but Brogger says the program is still in its beta phase. “There is not the same intensity to it that there was around Facebook. We are going to perfect it and build a marketplace gradually,” he says.
Without programs like this to unlock the value trapped in employee stock options, it will ultimately become much more expensive for Silicon Valley companies to recruit and retain employees, Brogger predicts.
“Private companies are staying private longer,” he observes. While a few big tech companies like LinkedIn, Facebook, Zynga, and Groupon have managed to go public in the last year, there isn’t a clamor to follow them through the door. In fact, the market has brutally punished some of these companies over unstable earnings and other problems. “There are lots of advantages to staying private, and in fact the JOBS Act makes it easier to stay private even longer,” Brogger says.
And that’s putting a big strain on traditional incentive stock option programs, which are intended not merely as a form of deferred compensation, but as a way to build loyalty.
“It’s a treasured part of the Silicon Valley model—you align incentives, you generate a sense of ownership, and you create the carrot of a wealth-creating event,” Brogger says. “But now you have people who have been in the company for five, six, or seven years, who have vested options, and they want to go start their own businesses, they want to buy a house, they want to diversify.”
“Engineers who sign on when they are 25, they can wait until they are 29,” Brogger continues. “What they can’t do is wait until they are 37. Only the largest endowments and institutions have that kind of investment horizon.” If there isn’t a realistic prospect that their options will pay off within four or five years, Brogger says, employees would be better off working only until they’re vested, then moving on. “If your sweat equity is your capital, that is the only way to diversify.”
Brogger sees SharesPost’s option loan program as a natural extension of the secondary markets, which emerged a few years ago as a response to shareholders’ unmet need for pre-IPO liquidity. He thinks other options will eventually come along as well, including programs serving employees at smaller startups. “People with these valuable assets in these illiquid shares and options need a way to turn them into a usable part of their financial lives,” he says. “If it doesn’t emerge, the system will stay broken, and people will start saying ‘Thanks for the options, but I’ll take cash.’”
