The phrase “private share liquidity transaction” doesn’t exactly elicit excitement, but it can be a great tool for private shareholders looking to accomplish certain goals. While a private share liquidity transaction does share similarities to a secondary sale of shares, there are also differences to consider.
A private share liquidity transaction allows a shareholder to access liquidity ahead of an exit event using only the value of their shares as collateral (i.e. non-recourse1). Unlike a secondary sale, it does not allow you to gain access to the full value of all your shares in cash, but a portion, while the shares involved in the transaction serve as collateral. Like many financial transactions, there are costs, so please reach out to us for more information.
The potential benefits of a private share liquidity transaction are multifold. The proceeds that you receive are usually not taxable upon receipt, whereas a secondary sale would typically incur taxes immediately. To raise $1M of proceeds via a secondary sale may require selling shares valued up to 1/3 more than $1M to account for taxes (assuming long-term capital gains treatment and depending on your state of residence)2. With a private share liquidity transaction, you could receive the entire $1M free of taxes, dependent on how the transaction is structured.
Private share liquidity transactions generally provide the most economic benefits when you believe the value of your company will continue to increase substantially. In a secondary sale you are giving up any future gains on the shares that you sell, but a private share liquidity transaction may allow you to hold on to more shares, which may increase in value and provide more gains than a secondary sale.
Lastly, many times a secondary sale is not possible due to an illiquid market for the shares or other company specific restrictions. A private share liquidity transaction does not require a sale or transfer of your shares, which may work better for your personal situation and allow you to unlock value from your private shares.
Recently, Liquid Stock provided liquidity to a counterparty who is the VP of Engineering at a prominent startup. After years of taking a lower salary in hopes of creating value through equity, our counterparty decided it was time for their family to purchase a house (a very popular reason to be looking for liquidity, and something that I wrote about at length in another recent blog). But how would they accomplish this with little liquid net worth and in a real estate market where an all-cash bid may be necessary to get the house of their dreams? Using the value of shares from previously exercised options, Liquid Stock was able to provide several million dollars of liquidity. In exchange, when our counterparty’s startup goes public or is acquired Liquid Stock will have a right to a percentage of the value of their shares and an accrued return. Other than in certain events of default, our counterparty will not owe Liquid Stock more than the value of their shares, even if that value is less than the amount provided. 1 If the shares increase in value, the settlement amount owed to Liquid Stock can be paid in cash or shares after the company exits.
If you want to find out whether a private shareholder liquidity transaction could be right for you, please contact Liquid Stock to learn more.About the Author:
Shane Larkin, Founding Team Member at Liquid Stock, is an investment professional with an engineering background and MBA.
1Liquid Stock private share liquidity transactions are non-recourse, other than in certain enumerated events of default. As used herein, “non-recourse” means that a transaction counterparty is not personally liable for the difference between the value of the advance made to the counterparty and the value of the collateral shares upon a liquidity event or upon such other time(s) as defined in the transaction agreement.
2 The tax impacts of a private share liquidity transaction or secondary sale are complex and differ based on individual circumstances. Individuals considering a private share liquidity transaction or secondary sale should consult with a tax advisor.
This blog post is intended for general informational and education purposes only. Liquid Capital Management, LLC (together with its affiliates, “Liquid Stock”) makes no representations as to the accuracy of information in this post, and no representations or guarantees as to specific outcomes from relying on this post. No content in this post is intended or should be construed as tax, investment, legal or accounting advice by Liquid Stock, or as an offer to sell or solicitation of interest to purchase any securities offered by Liquid Stock. Liquid Stock does not provide tax or other financial, legal or regulatory advice to its transaction counterparties. While reasonable steps have been taken to ensure that the information herein is accurate and up to date, no liability can be accepted for any errors or omissions. All views and information contained herein are as of the date hereof and subject to change. Information contained in third-party links has not been independently verified by Liquid Stock and inclusion of such links should not be interpreted as an endorsement or confirmation of the content therein. Prospective investors considering an investment in a Liquid Stock fund should not consider this content as fund marketing material.