In a blog post series published on our WilmerHale Launch site, Partners Ciara Baker and Kim Wethly take a close look at startup stock options. In the final part of the four-part series, the authors do a deep dive into the practice of making loans to employees to purchase company stock.
Excerpt: “...it doesn’t take long for a company to propose (or for an employee to ask for) a loan from the company to pay for the option’s aggregate exercise price (and potentially applicable withholding taxes too). After all, even if the company itself is cash-strapped, it doesn’t actually have to come out of pocket for the amount of the loan to pay an exercise price (because the employee would only turn around and pay it right back to the company to exercise the option) and, the thinking goes, the loan itself can be paid off at the time of a liquidity event. Easy-peasy, right?
In this fourth and final part of our four-part series on commonly-considered option program enhancements we do a deeper dive into making loans to employees to purchase company stock. As with the other practices and programs we have looked at, including the use of extended post-termination exercise periods, while employee loans are technically possible and not infrequently used, companies should proceed very carefully, consider the pros and cons, and seek advice of tax counsel before implementing them....”
