There is a new single purpose fund on the block, 137 Ventures, which has been setup specifically to purchase stock options directly from Facebook employees. The fund is headed by Justin Fishner-Wolfson, a former principal at Founders Fund, which is an early Facebook investor. 137 Ventures is reportedly raising as much as $100 million to purchase stock options from the Facebook employees.
“For borrowers, 137 Ventures is proposing to charge about 12% interest on the loans, as well as a 10% upfront fee. The upfront fee will be paid in stock of the company for which the options are exercised, while the principal and interest apparently will be paid in cash.”
Facebook employees stock options expire 90 days after an employees leaves the company, and considering most employees can’t afford to exercise their options, this fund may provide the fully vested employees the option to cash out their stock at Facebook and move on to a new startup to begin vesting new stock options. Essentially, once an employee is fully vested at Facebook, there’s little upside in staying on board. The loans are needed by employees not only due to the cost of exercising the stock options, but in many cases there are heavy tax burdens as well. Essentially, the Facebook employees are subject to taxes on the difference between the current value of the stock and the price at which the employee exercised the option, which can be rather significant for Facebook stock options today.
As for the limited partners in the fund, 137 Ventures is proposing to charge a management fee of $1 million plus 1% annually. The fund also has a carry of 20% above the net IRR of 25%. The fund is setup for five years, with three possible one-year extensions. Borrowers must use the company stock as collateral on the three-year loan, and the stock must be worth at least two to three times the amount of the loan.
VentureWire interviewed Cyan Banister, an angel investor and the chief executive of model and photography startup Zivity LLC, who said “I’ve personally loaned large sums of money to employees so they can leave Facebook. I’m not in the business of doing this. Clearly if my friends have a need and are stuck there, there’s clearly an opportunity here and (the loans) need to exist.”
A fund like this wouldn’t work for smaller startups, but with companies like Facebook, Zynga, Twitter, Groupon and others, it may just work due to the number of employees and their growing valuations and likely eventual IPO’s towards liquidity. With more than 1,000 Facebook employees and recent secondary transactions for its stock above $40 billion and growing, the market for just Facebook employee stock options is becoming an enormous market in itself. Typical investors like to see a 2 to 3 year horizon for liquidity, but with these high profile startups, the secondary market is already providing their required liquidity. Additionally, Stock Options Funds like this may not work with smaller startups that have fewer employees and lower valuations due to the risk that they may be acquired for a lower valuation that the purchase price of the options. The risk is that the preferred stock in these companies will monetize before the common stock, which is what the employee’s stock options are. However, in growth stage companies like Facebook, Twitter, Zynga and others, this risk is much lower.