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.
If it's to exercise at the close of a deal, the acquirer could also setup a loan too. I had options which were subject to revesting (lame, but worked out ok), and the acquirer fronted the money to exercise everything that wasn't already exercised and then took payments automatically when the chunks vested. Because of the strike prices we had, it didn't feel very risky.
It's a loan with conditions. Not all that unusual. Each company can decide if they accept the conditions or want to reject the loan offer and get their finance elsewhere.
I’m fairly certain this loan is either a private individual or a HELOC or something. No way is a bank just going to loan out a bunch of money to some startup like this.
It's a convertible note, so it is a loan. I'm 100% positive that there are no personal guarantees and it is essentially entirely unsecured. Convertible notes are very common early investment tools when it is very hard to place an accurate valuation on the company. It significantly reduces the amount of paperwork involved and it allows the person providing the note a guaranteed seat at the A round table. Like most loans, it typically carries interest which accrues as part of the principal and adds to the conversion.
It's a loan with no interest (meaning you actually keep the interest). It's a better deal than buying one cash since you can invest the money you are not using.
"The loan is a convertible note made to the entrepreneur's company. It is unsecured debt. If the company goes out of business, the entrepreneur is not personally liable in any way."
This seems to indicate that it's a NOT a personal loan, FWIW.
There are ways to get loans where the only source of collateral are the underlying shares. For example, this is common when employees take loans out to cover the strike price of their options from their company.
Makes sense. I wonder if they also offered no fees (6,12,24 months) as a form of loan as well if that would be appealing to their customers. At the end of the term, you'd be responsible for paying back all the fees during the term plus interest.
I like the idea of having enough cash to pay off the loan immediately but having the loan (and interest arbitrage, however small) to keep myself liquid + make the monthly cashflow of My Personal Self, LLC, work for me in more optimized ways.
The credit score boosting as a result is also attractive.
But I recognize this requires me to have that much liquid cash anyways. Which a lot of people don’t so they get unfortunately put on the losing side.
They offer equity and it will be interpreted as equity so this can be only available (if you publicly announce that, depending on jurisdictions there is a maximum of people this can be offered to etc) to professional investors (minimal capital etc) in most jurisdictions. You can't just offer this to general public legally even if you call it a loan. It's like running a bank without license and saying that people are not depositing any money, they are only borrowing them to us.
Why don't you just book any capital injection as a loan to the company which needs to be paid back at nominal interest at some point in the future? Nothing shady about that.
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.
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