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Liquid Stock’s Heavily Backed Fund Approach, Explained

Leading liquidity source Liquid Stock raised $150 million of capital from Goldman Sachs, Coller Capital and Morgan Stanley for its Private Company Liquidity Fund in early February.

The idea behind San Francisco-based Liquid Stock’s ‘Liquidity Fund’ is helping shareholders and employees of private companies monetize any equity they hold without having to sell their stakes. How? By extending part-debt/part-equity financing to shareholders, collateralized against their holdings.

This approach can help early-stage employees vest their options in a more tax-efficient way. It also gives those who already hold shares access to liquidity while remaining invested in the company.

Founding partner of Liquid Stock Robert Pitti describes the strategy as having deep benefits not only for those early-stage employees and options holders, but investors as well.

  • For an early-stage employee, having the power to exercise your option at a lower valuation while the company is still private allows you to become a shareholder with a tax basis in the stock. You then maximize the value of the equity position, because all future gains are taxed at half that rate.
  • In the case of those who own their stock already and want liquidity, traditionally they would have had to leave any future upside behind. Liquid’s solution gets them liquidity while holding onto more of their equity.
  • And for investors, the return functions like an interest rate that accrues over the period of the financing, and is received upon financing settlement.

Pitti explains that Liquid Stock is one of the first true institutionally backed funds focused on this new asset class. He and his team have been proving the merits and success of their strategy since 2000, when he first worked with a group of partners to assemble two $20 million re-proof of concept funds.

Pitti believes the current atmosphere welcomes this fresh approach, and that the time is right to scale the business and market the strategy to a broader audience.

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