Equitybee gives you the opportunity to access high-growth startups at past valuations by funding employee stock options.
In exchange for helping these startup employees exercise their options, should there be a successful liquidity event, you receive the return of your original investment capital, any accrued interest on the initial investment and the value of a percentage of shares.
To facilitate this type of investment, all employees seeking funding through Equitybee sign our private financing agreement, the PFC. In this blog, we’re going to explain what is included in this contract and how it helps protect your investment and mitigate risks.
Before any investment offer is added to our platform, the employee is required to sign the Private Financing Contract, known as the PFC. By signing this contract, they agree to receive funding from our investor network with the purpose of exercising their employee stock options and paying the associated taxes.
In exchange for receiving this funding, upon a successful liquidity event, the employee must deliver the predetermined settlement amount to the investor – as stipulated in the PFC. As the investor, you have the rights to a predetermined percentage of the stock value, return of principal, and annual compounded interest on the initial investment.
To facilitate this investment struction, Equitybee opens a special purpose vehicle, each known as a Fund, which effectively holds the PFC as the underlying security. Investors purchase a membership interest in the Fund.
In order to protect your investment from counterparty risk, here are some protective clauses we included in the PFC:
Once an employee has signed the PFC, we review an employee’s background and credit check. We conduct this to review an employee’s financial history and discern if they are subject to statutory disqualifications.
Sale of Assets
If the employee would like to sell the shares, they must communicate this with Equitybee and gain approval first. For the first four years following the effective date of the PFC, if the employee has the opportunity to sell their shares the employee must be interested in selling and receive consent to participate. After the first four years of the PFC, the employee must follow instructions whether to participate.
The employee consents that the shares cannot be included in any separation or divorce agreement. The employee’s spouse, if applicable, is obligated to sign a spousal consent form confirming that these shares will not be included in any potential separation settlement.
In any liquidity scenario, the investor has first priority to any receivables from a liquidity event. This means the employee will not receive any proceeds until your principal, interest, and value of the shares is returned; your investment will be paid back in full before the employee receives any proceeds.
Breach + Power of Attorney
If the employee refuses to distribute the investor proceeds, the Fund can exercise its power of attorney to inform the issuer of the stock to transfer remaining covered securities into the name of the Investor. The Fund may also compel the employee to arbitration and request specific performance.
Of course, there are additional clauses included in the PFC intended to mitigate counterparty risk – we just highlighted some of the important ones. You can read more about it on our website here or our team would be happy to review the contract in more detail, just let us know!
Once the PFC is signed, our team conducts due diligence on the offer and the employee. This includes the team verifying the options and reviewing the last known 409A, in addition to the aforementioned background and credit check. Only after these items are reviewed closely by our team is the offer added to our platform.
These investment opportunities are anonymous in nature, which means that you won’t know the identity of the employee and the employee won’t know your identity.
If you’ve chosen to invest in an offer on our platform, Equitybee Securities, as the placement agent, reviews and approves the transactions. Once your funds are received by the Fund’s manager, they will be wired to the employee to exercise their options.
The employee has two business days to use the investment capital to exercise their stock options. We require that they send us a copy of their share certificate verifying proof of the exercise.
Please note that the ownership of shares will not transfer to the investor at this time. Once these shares can be accessed by the employee, triggered by a liquidity event, the settlement can take place. The employee can elect to settle in either cash or shares.
The PFC is the underlying contract in the Equitybee investment process and was put in place to protect your investment. Armed with a more comprehensive understanding of this agreement, we hope you feel confident to start investing in startups with Equitybee!
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Securities offered through EquityBee Securities, LLC (“EBS”), an affiliate of Equitybee, Member FINRA. EBS does not make investment recommendations and no communication, through this website or in any other medium should be construed as a recommendation for any security offered on or off this investment platform. You can learn about Equitybee Securities on BrokerCheck
This website is intended solely for accredited investors. Investments in private offerings, and startup investments in particular, are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest in such offerings. Companies seeking startup investments tend to be in earlier stages of development and their business model, products and services may not yet be fully developed, operational or tested in the public marketplace. There is no guarantee that the stated valuation and other terms are accurate or in agreement with the market or industry valuations. Additionally, startup employees’ options and equity (once options are exercised) may be subject to blackout periods or other restrictions including holding period requirements. Investments in early-stage private companies should only be part of your overall investment portfolio. Furthermore, the allocation to this asset sub-class may be best fulfilled through a balanced portfolio of different start-ups. Investments in startups are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.