Stock-Option Financing in Pre-IPO Companies

9 Pages Posted: 18 Aug 2021 Last revised: 31 Aug 2021

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Brian Tayan

Stanford University - Graduate School of Business

Edward M. Watts

Yale School of Management

Date Written: August 16, 2021

Abstract

In this Closer Look, we examine a new industry that has arisen in recent years to facilitate the financing of stock-option exercises for employees and executives of pre-IPO companies. These capital providers allow individuals to exercise and retain their stock option awards, meaning the employee can continue to participate in any future appreciation of the shares while still receiving the money needed to exercise the award, pay taxes, and in some cases extract additional capital to finance personal expenditures. We consider the economic implications of this market from the perspectives of employees and employers, as well as the financial model of the capital providers that participate in this space.

We ask:
• For which employees does stock-option financing make sense?
• Is the growth of this industry driven by large increases in private company valuations, or would it continue in the absence of these forces?
• Why haven’t more traditional lenders entered the market? Would more competition drive down lending rates and the returns these vendors enjoy?
• What impact does early exercise of stock options have on incentive programs?

Keywords: Corporate governance, stock options, ISOs, NSOs, stock option financing, nonrecourse lending, pre-IPO companies, private companies, startups, secondary markets, taxes, equity compensation, employees, executives, incentives, corporate governance research

Suggested Citation

Larcker, David F. and Tayan, Brian and Watts, Edward, Stock-Option Financing in Pre-IPO Companies (August 16, 2021). Rock Center for Corporate Governance at Stanford University Working Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3906175

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
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650-725-6159 (Phone)

European Corporate Governance Institute (ECGI) ( email )

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Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

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Stanford, CA 94305-8610
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Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Edward Watts

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

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