The Employee Stock Option Fund announced today that it has pooled $25 million for its inaugural loan program that will lend departing employees money to exercise their stock options.
Employees who are leaving a company but do not have the cash to buy out their stock can purchase a high-interest loan from the ESO Fund. In the event that the company goes public or is acquired, the former employee repays the loan plus interest, and then keeps the rest of the financial gain. If the stock loses value, the fund, not the employee, bears the weight of the loss.
With this unique arrangement, the ESO fund reduces the risk of exercising stock options while also standing to capitalize on future earnings (and long liquidity cycles). The company estimates that each year, employees of venture-backed companies forfeit approximately $500 million in future earnings.
“I noticed that the stock option pool was a large, untapped area and that all this equity was essentially being wasted,” said co-founder Scott Chou in an interview. “When people leave a job, they are often pissed off and the last thing they want to do is write a large check, or they don’t know what to do. So they can come to us.”
Leaving a job can be traumatic, and the opportunity to receive a little cash paired with the prospect of future returns can certainly soften the shock of transition. Even if there is no bad blood, most people are wary of putting put tens of thousands of dollars in an investment that won’t necessarily pay out. Venture capital firms, on the other hand, can take much more significant risks because they have a diversified portfolio, but are often not interested in conducting such small transactions.
The ESO Fund strives to bridge this gap.
It was founded by veteran venture capitalists Chou, Stephen Roberts, and Jimmy Lackie. The idea was inspired by their experiences as board members for startups where significant numbers of departing employees did not exercise their options.
ESO Fund is based in Redwood Shores, California.