Brief - The Hustle

Q: What the heck is ‘pre-wealth management?’

Written by Conor Grant | Jun 30, 2020 10:54:59 AM

A: It’s an emerging industry that solves one of Silicon Valley’s foremost first-world problems — helping startup employees take out loans to cash out their equity stakes.

Yes, this a real problem for startup employees 

Many employees at startups are compensated with stock options. 

But when employees leave those startups before an IPO or an acquisition, the price of exercising those stock options is often prohibitively high (sometimes in the millions, thanks to taxes).

Enter: Pre-wealth managers

Pre-wealth startups — like Secfi, for example — offer “option exercise financing” plans that give startup employees the cash to exercise their options… with more advantageous terms than plain old loans.

Employees sign forward-purchase agreements that are backed by their stock options, which let them take out loans without making payments until an IPO or an exit. 

  • It’s a good deal for pre-wealth startups because their customers fork over some equity, providing a sneaky way to secure equity in private startups  
  • It’s a good deal for customers because they’re on the hook only for the value of their shares, so they won’t end up underwater if a SoftBank-style situation hits the fan