What to Consider When Using a Loan to Access Liquidity from Pre-IPO Shares

As pre-IPO shares become more recognized as valuable assets, there are several offerings now available in the market for individuals to get access to early liquidity. We don’t provide loans at Liquid Stock, but we’ve observed this solution potentially reemerging as an option for private company equity-holders in the marketplace as the void left by the collapses of Silicon Valley Bank and First Republic Bank gets filled. While loans can be straightforward on the surface, there are important details to consider for equity holders and companies exploring loan solutions.

• Maturity date: A loan has a fixed term (e.g., 2 or 5 years), at which time repayment will be required regardless of whether the recipient’s company has experienced a liquidity event. If your company hasn’t exited by the maturity date and you don’t have the means to pay back the loan, it may lead to a challenging discussion with the lender on whether or not your loan can be extended.
• Recourse: We have written on this subject before, and it is important to know whether your loan is recourse or non-recourse. Some loans require a personal guarantee, jeopardizing personal assets outside of your pre-IPO shares, and in the most draconian scenario, can lead to filing for bankruptcy as a remedy. Typically, loans provided by companies to their employee equity-holders must be at least 51% recourse.
• Forgiveness of indebtedness: While a loan can be non-recourse, it can still trigger a tax consequence related to forgiveness of indebtedness. This arises from a lender canceling some or all of the loan amount. The IRS may tax the forgiven amount, meaning that an equity-holder who borrows money collateralized by private shares could experience a substantial tax bill even if the shares decrease in value and the lender forgives all or a portion of the loan.
• Current pay interest: Many loans require borrowers to make cash payments on interest at regular intervals – sometimes as often as monthly. Depending on your situation, for example, if cash is tight or your transaction size is large, this can be financially prohibitive.
• Variable interest rate: Loan interest rates are often tied to an index that moves up and down with broader interest rates (e.g., Prime or SOFR). This can be beneficial in a low-interest rate environment but can work against you when rates are increasing.
• Potentially high collateral requirements: Lenders tend to be conservative, which means you might receive a smaller loan than you expect when utilizing private shares as collateral. For example, we’ve heard of collateral ratios as high as 1 to 10, meaning lending $100,000 for every $1,000,000 worth of private shares. In comparison, other types of transactions may require less collateral.
• Commitment fee: Many lenders impose a commitment fee related to loan issuance, covering underwriting and other costs. Often ranging from 3% to 6% of the borrowing amount¹, this fee is an additional cost to consider when contemplating a loan.

Utilizing loans is just one avenue for accessing liquidity through pre-IPO shares, alongside other alternatives such as private share liquidity transactions and secondary sales. At Liquid Stock, we encourage equity-holders, companies and advisors to explore and understand the advantages and disadvantages of each liquidity option available in the market in order to make the best choice for every unique financial situation.