At Liquid Stock, we offer a unique transaction solution, structured as “non-recourse,” other than under specific events of default1. You might be wondering, what exactly does this mean, why is it important, and how can it be helpful to someone considering different liquidity offerings? The main point to consider is what you may be putting at stake. With the Liquid Stock solution, what we mean by non-recourse is that our transactions are collateralized by only your company equity. This is typically the shares that you receive from exercising stock options using the Liquid Stock solution, or it may be the shares you already held and chose to use as collateral for a private share liquidity transaction with Liquid Stock.
Non-recourse means that we only look to the value of those collateral shares to settle our transaction. For example, in an “upside exit” scenario – if your company exits at a high valuation – the value of the collateral shares will likely exceed the amount needed to settle the transaction, allowing you to use a portion of your exit proceeds for settlement. In a “downside scenario,” the amount you owe would be capped at the value of the shares at the time of your company’s exit or other specified date.
On the flip side, in a recourse transaction, you may be personally liable if the value of the collateral is not sufficient to settle the transaction. That means your other assets (cash, real estate, investments, etc.) could be at stake. For instance, in a non-recourse transaction, if Liquid Stock provides you with $1M of liquidity but your collateral shares are only worth $500k at the time of exit, the settlement amount owed to Liquid Stock would not exceed the $500k value of the shares. With a recourse transaction, the capital provider could look to your other assets to collect an amount owed above the value of the shares, and you might have to make up the difference by selling or surrendering your other assets. An extreme measure could potentially be bankruptcy.
A recourse transaction will often offer lower-cost terms than a non-recourse transaction because it is viewed as a lower risk transaction for the capital provider. With a recourse transaction, if the value of the collateral shares decreases, the capital provider can pursue your other assets to fill in what is missing and “make themselves whole.” With the Liquid Stock solution, we only look to the value of your shares, and if the value ends up being less than would otherwise be due on settlement, we lose money. This is a risk that must be priced into our transactions and part of the reason we receive a percentage of the value of your shares at settlement. This solution acts to align our interests. Both parties have potential risk and when you make money, we make money.
Lastly, the application process for a recourse transaction typically involves an established relationship with a lender or wealth advisor and it can take months for the capital provider to construct your personal balance sheet (i.e., value your assets). At Liquid Stock we pride ourselves on efficiency and generally can complete your transaction in weeks, not months. This can be crucial if you’re looking to purchase a home, make an investment, or simply start building funds for your retirement.
We have found that startup founders and employees often have the vast majority of their net worth tied up in their company ownership. They bet on themselves and use every resource possible to generate a positive outcome. Why not use that equity to get the liquidity that you need now while building your company’s future?About the Author:
Shane Larkin, Founding Team Member at Liquid Stock, is an investment professional with an engineering background and MBA.
1As 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, if the value of the collateral shares is less than the advance or other amount owed. In Liquid Stock transactions, the Counterparty will be personally liable in certain enumerated “Events of Default” defined in the applicable transaction agreement. These events include but are not limited to, failure to pay amounts owed under the agreement when due, breach of representations and covenants, and transfer of collateral shares in violation of the transaction agreement. Follow such an “Event of Default” a transaction counterparty may be personally liable for the entire amount due under the agreement, even if it exceeds the value of the collateral shares.
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.