A startup employee shared a horror story about using loans to buy stock

  • Startups like Bolt and Carta are offering loans to employees so they can exercise stock options.
  • Loans can help when a startup’s valuation is rising, but it can be tricky in a recession.
  • A tech exec has shared a horror story of how he ended up owing $1 million in the dot-com era.

As the 1990s trends of high-waisted jeans and Dr. Martens, startup employees who take out loans to exercise their stock options are suddenly back in vogue.

Loans can help employees buy stock in their companies before their options expire if they don’t have cash on hand. Loans can also help employees buy options sooner than they could afford, starting a countdown that can save money on potential tax bills: the tax rate on

capital gains

decreases if assets such as stocks are held for more than one year before being sold.

The advantage for companies is that equity compensation helps them retain talent, which is no small feat in this heated job market.

A plethora of third-party providers – such as EquityBee, Secfi, Liquid Stock, Quid and ESO Fund – have emerged to offer stock option financing, all promising to limit the risks of borrowing money.

But lately, some startups, like Carta, also offer loans directly to employees. In a blog post in September, CEO Henry Ward said the company would offer three options: a non-recourse loan, which means that employees do not owe money if the stock falls below the price paid, but that employees give up a part of its profits in fees; a recourse loan with a lower effective interest rate than a non recourse loan, but employees have to repay the loan no matter what the deed does; and a program where employees can borrow against their stock to mortgage a home.

Earlier this year, Ryan Breslow, the controversial founder of Bolt, loudly announced that his online checkout startup would offer cashless loans to employees and said that half of those eligible had taken advantage of the program.

Representatives for Carta and Bolt declined interview requests.

Breslow was widely criticized on VC Twitter for claiming something that had been around for decades was new, and for promoting a practice that, if not carefully considered, could end very badly for startup employees.

Rikk Carey shared a horror story with Insider. Carey has been senior vice president of engineering since the late 1990s at eGroups, one of the first email communications startups, just before the dot-com bubble burst in 2000.

In early 2000, eGroups’ valuation was soaring when, at the urging of her bosses, Carey said she borrowed on her hundreds of thousands of dollars in stock options, which Insider verified when reviewing a separation agreement.

“I pretty much just signed the paper and didn’t know I had basically borrowed from the company for the stock,” Carey said.

Six months later, his company was acquired by Yahoo for $400 million, so his eGroups shares became Yahoo shares. That looked great at first, but then Yahoo stock plummeted in the dot-com crash.

Carey’s stock was under water, worth far less than what he’d agreed to pay for them just a few months earlier. He decided to leave Yahoo, but when he visited the human resources department, he received unwanted news about the loan.

“They went through a list of things, including my vacation pay and all that, and the last item was, ‘Oh, by the way, you owe $1 million and we need to pay it off in 30 days,'” Carey said. “They basically recommended that I get a second mortgage on my house to pay off my debt.”

After a year-long legal struggle and tens of thousands of dollars in attorney fees, Carey’s lawyers managed to get Yahoo to drop out and settle for $25,000. It’s worth noting that many of today’s third-party programs, especially non-recourse loans, are designed to avoid this type of situation.

But the experience still haunts him two decades later, and he is dismayed to see CEOs like Breslow promoting startup option loans.

“My reaction is it’s just terrible,” Carey said. “Do not do it.”

Carey said working at a startup made it easy to get caught up in the hype and assume that the company’s stock price and fortune β€” and those of its employees β€” would continue to improve.

“You just can’t imagine your stash being underwater,” Carey said.

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