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Comment by JumpCrisscross | Hacker News Reader

> can't see why it should be illegal

Borrowing against one's shares shouldn't be illegal. Companies lining up recourse financing for their employees should.

How were the terms of the loans chosen? Who knew who was and wasn't participating? How was it ensured this wouldn't factor into personnel decisions? How were/are the people setting the strike prices of options segregated from the people setting the terms of the loans? There is too much already loaded onto the employer-employee relationship, we don't need to add lender-borrower to the damn mix.

(Side note: the $300 stipend for financial advice is laughable. You couldn't even get a lawyer to review a fraction of such an instrument for that amount, and yes, I'd put recourse loans against private shares in the risky as hell bucket which should absolutely be legally reviewed.)

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The strike prices of options are set based on a 409A valuation.

These are "cashless" loans, which are recourse for tax purposes (so that the IRS respects this as a true purchase of shares, in order to start people's LTCG and QSBS clocks). The terms were likely very favorable, i.e. set with an interest rate equivalent to the AFR. This is not a situation in which the company is trying to make money as a lender.

This is no riskier than deciding whether or not to exercise your options, which typically employees have to decide within 3 months of leaving a startup.

The risk is not in the terms of the loan, but in whether the employee wants to exercise and lay out the cash (or the promise to pay the cash); in each case, it's an investment decision to decide whether it's worth it given that the stock is risky and could eventually be worth zero.

Note that all these issues are driven by tax rules, and generally not the startups. Startups are damned if they do, damned if they don't.

Every type of equity has pros/cons. If it's an immaterial amount of money, the employee should be a big boy and just decide whether or not to risk the cash. If it's a material amount of money, the employee should really be speaking to their own advisors, which if they have a material amount of equity, they should be able to afford to do.

If you can’t afford to buy your options, but take out a personal loan to buy them, that must have been a riskier approach than just buying them if you had the cash, no? The leverage increases the personal risk at least as I understand how that works.

Unless there was an agreement to forgive the loans if the options go underwater, which I haven’t seen reported here.

It depends on what your future income stream looks like. If you're a 22-24 year old software developer, getting to take on low-interest debt in an inflationary environment is a great deal. It's losing money on the stock that is the problem here.

If it requires predicting the future isn’t that by definition riskier?

The potential outcomes if you spend money you have are that you recover your money (break even), lose the money, or make a profit.

The outcomes if you take a loan are that you break even, make a profit, or acquire a debt that you by definition weren’t really able to afford in the first place (or you would have just used the resources you have to fund the exercise).

I feel sorry for anyone who was hoping they were young and had tons of upside potential, who now needs to service a loan that they will never see a corresponding asset for, who is about to face a quite difficult job market for juniors.

>Companies lining up recourse financing for their employees should.

Wait the companies set these loans up? I thought they were just going to a bank and getting something akin to a personal loan or some other 3rd party collateralized loan.

Might as well work for free at that point.

It's a cashless loan. If you have options that cost $10,000 to exercise, the company lets you pay with a promissory note (promising to pay the $10,000, plus minimal interest set at the IRS's AFR). This is effectively the same as the company loaning you $10k, and then you hand it back over to exercise, but the cash does not change hands.

If you were to get a private loan, the interest would be much higher.

The company does not want to be in the business of making loans, but this is a way to allow the employee to exercise upfront (and thus potentially get certain benefits, like in a good exit scenario, of having gains be subject to LTCG and not ordinary income), in the best way possible. But in a downside scenario, like the company folding, the person is on the hook for the loan just like if they had decided to exercise with their own money.

Re: last paragraph

Is it realistic for a bankruptcy trustee to come after employees that signed uo for a personal loan for shares in a company now worth zero.

Is there a documented case of this happening and suceeding?

In that Twitter thread where the CEO originally announced the idea many people reported this happened in the dot-com bust. Private equity firms would buy the company and go after past employees for the loaned money.

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