Recently I was talking to a successful entrepreneur that’s interested in some personal liquidity (e.g. selling startup equity for cash) but doesn’t want to send the wrong message to the board and investors by selling some of his founder stock. Generally, there aren’t many options in this case. I offered up that there’s likely a market — depending on the appetite for the private company stock — to get a high interest personal loan that’s collateralized against his equity that doesn’t require a personal guarantee.

Here’s how it might work:

  • Startup was valued at $200 million post-money after their last round
  • Founder owns 15% (so, $30 million of value on paper, but not liquid)
  • Founder borrows $1,000,000 with the following terms:
    • 10% annual interest rate
    • Sale proceeds of 10% of the loan amount in equity at last valuation (like a warrant that increases or decreases in value as equity value changes)
    • 3 year term
    • Collateralized against $3 million of equity based on the last valuation

Example exit scenarios:

  • If the startup exits 12 months later at a $300 million valuation, the founder would repay the loan as follows:
    • $1,000,000 in principal
    • $100,000 in interest
    • $150,000 in sale proceeds (the 10% of loan value was $100,000 and increased to $150,000 as the company value increased 50%)
  • If the startup exits 12 months later at a $100 million valuation, the founder would repay the loan as follows:
    • $1,000,000 in principal
    • $100,000 in interest
    • $50,000 in sale proceeds (the 10% of loan value was $100,000 and decreased to $50,000 as the company value decreased 50%)

Obviously, this would be a very expensive loan. But, as an entrepreneur that’s looking for options, and optimistic that the value of the equity will increase substantially, this is a better way to get some liquidity now without selling the equity immediately.

As more startups achieve scale and substantial valuations, look for new methods for entrepreneurs to get partial liquidity.

What else? What are some more thoughts on personal loans for founder stock?


Source: https://davidcummings.org/2017/07/11/personal-loans-for-founder-stock/

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