(We originally posted this in 2021. You can read more of our original ideas in our archive. You can order a business plan of this idea here.)
Problem: On March 1, the Financial Times wrote about the startup and stock option “pre-wealth effect.” In short, this is the idea that “more than half of employee stock options are not taken up because workers lack the necessary funds. This is particularly the case with highly valued, long-term private companies whose stock options come with a high exercise price.” How could a business provide both liquidity services and turn a reliable profit?
Solution: This business would serve as a cash-up-front loan service to give employees the capital needed to exercise their options at the high prices that they may be granted to employees at. For instance if I am a tech worker with options to purchase 100,000 shares at $100 each I would use this service to “borrow” $10 million and complete the purchase (as opposed to only being able to complete a small portion of the purchase because I don’t have the capital). Through formulations like flash loans (written about previously on this blog), the business would avoid taking on any risk while also providing large bouts of liquidity for IPO-ing companies.
As described by the Financial Times in their piece when analyzing the market all-up and competitors that already offer these services they wrote (emphasis mine),
Last year, US-listed initial public offerings raised a record $167.7bn, according to data provider Dealogic. This should be a bonanza for employees… [However,] Airbnb spent more than a decade as a private company before listing in December. Palantir remained private for 17 years.
The number of IPOs is rising, but so is private funding.
VC funding reaching a record $39.9bn in January, according to Crunchbase. This should support the employee stock option service sector. Companies such as Secfi, Quid and EquityBee offer forward purchase deals to buy options and cover tax payments. These are not repaid until there is a liquidity event — such as an IPO — at which point the company takes a portion of the upside. EquityZen, meanwhile, is a marketplace that allows employees to sell shares on a secondary market before their employer goes public.
What would make this business different is the introduction of innovative technologies like flash loans. Perhaps it could also serve as a flash loan marketplace where individuals with capital could loan money to those who want to exercise their options. Additionally, it would more explicit marketing to technology startup employees in order to hyperscale through their networks and opportunities. The business could also innovate by providing this service for free in exchange for a certain amount of stock from the companies that they are leveraging towards.
Monetization: Percentage of profits from the leverage that this business generates for startup employees.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)