Have you ever received stock options as an employee of a privately held company or a high-growth, venture capital (VC)-backed startup? Then, you’ll appreciate our Equitybee Review review. Holding shares that could end up worth thousands or millions of dollars can be exciting.
However, how long will that take? What if you leave the company or want to cash out these shares? It can be a frustrating process. On the other hand, what if you are an accredited investor seeking shares of these companies? Thanks to Equitybee, employees and accredited investors are reunited and can transact these shares.
Remember that investing in privately-held companies and VC-backed startups is very risky. These companies may never go public, and there is a chance they will go bankrupt. You may never recover your invested capital. Here is everything you need to know about stock options and Equitybee.
Stock options are a common form of equity compensation offered by private companies and VC-backed startups to employees. And what this Equitybee review delves into.
Private companies
In private companies, stock options give employees the right to purchase shares of the company’s stock at a predetermined price (strike price). Options are subject to a vesting schedule (a predetermined timeline that governs when an employee becomes entitled to claim their stock options), where a portion vests over time to incentivize long-term employment. They are usually low since the company initially has little value. These shares are illiquid and difficult to sell unless a liquidity event occurs. More on that later.
VC-backed startup
In VC-backed startups, stock options work similarly but with some key differences. Options comprise a significant portion of employee compensation due to company cash constraints. If the startup successfully exits, early employees can exercise their options and potentially earn significant returns on the increased stock value. However, if the startup fails or the employee leaves before an exit event, the options may expire worthless or need to be exercised within a short window. Depending on the company’s success, that can result in a significant tax bill and a high exercise cost.
What Is an Exit or a Liquidity Event?
A liquidity event or exit refers to a transaction that allows the company’s shareholders (founders, employees, investors) to convert their equity or ownership stakes into cash. That can happen in many ways in this Equitybee review:
- IPO – The company goes public by offering shares to the public markets for the first time. Existing shareholders can sell some or all of their shares during the IPO, converting their equity into cash.
- Merger or acquisition – Another company acquires or merges with the private company, paying cash or stock to the existing shareholders in exchange for their equity. As a result, this allows the founders, employees, and investors to cash out their ownership stakes.
- Management or leverage buyout – The company’s management team or a private equity firm acquires the company, buying out the existing shareholders’ equity.
- Secondary share sale – Existing shareholders (VCs or others) sell some or all of their shares to new investors, providing them with liquidity while the company remains private.
- Tender offer – The company offers to repurchase outstanding shares from existing shareholders at a set price, using available cash or raising funds.
What Is an Accredited Investor?
You must be an accredited investor to buy employee stock options on Equitybee. How do you become one? You must meet at least one of the following criteria the SEC sets.
- Income: At least $200,000 (or $300,000 in joint spousal income) for the last two years, and expect to maintain the same income level in the current year.
- Net worth: Have a net worth exceeding $1M, individually or jointly. As a result, this excludes the value of a primary residence.
- Professional certifications/licenses: Hold certain professional certifications or licenses, such as a Series 7, Series 65, or Series 82 license issued by FINRA.
- Certain entities are also considered accredited investors, such as banks, insurance companies, registered investment advisers, employee benefit plans, and trusts with assets exceeding $5M.
It’s important to note that no formal accreditation process or certification exam exists. Equitybee will verify an individual’s accredited investor status.
They will typically require potential investors to provide documentation such as tax returns, brokerage statements, and other financial records to prove they meet the income or net worth thresholds. Let’s continue with our Equitybee review.
Equitybee Review of the Platform
And now, our main topic is our Equitybee review. The platform was co-founded in 2017 by Oren Barzilai (CEO), Oded Golan, and Mody Radashkovich. It is based in Palo Alto, California, but was initially headquartered in Tel Aviv, Israel. The co-founders are all entrepreneurs with backgrounds in tech and startups.
Equitybee raised over $80M through various funding rounds to become successful. Today, Equitybee provides a marketplace that connects startup employees with a network of over 12,000 investors in the US and Israel only.
The platform helps employees exercise their stock options by providing the necessary funding, which covers the cost of purchasing the options and any associated taxes.
The process for a transaction between an employee and an accredited investor on Equitybee involves several steps, ensuring both parties are well-informed and protected throughout the transaction. Here is a detailed breakdown of the process for both parties.
Employees
- Funding request – Employees who need funds to exercise their stock options submit a funding request on the Equitybee platform. It includes details about their stock options (number of options, strike price, and vesting schedule).
- Verification – Equitybee review finds they perform background and credit checks on the employees (credit scores, past due payments, liens, criminal charges or convictions and verifies the employee’s option grants).
- Offer presentation – Once verified, the funding request is presented to Equitybee’s network of accredited investors. The platform provides detailed information about the investment opportunity, including the company’s background and the terms of the stock options.
- Matching with investors – Interested investors review the available opportunities and decide which ones to fund. They select the investment amount and proceed with the transaction.
- Funding agreement – The employee and the investor sign a funding agreement, which outlines the terms of the funding (amount provided, percentage of future proceeds the investor will receive, and both parties’ obligations).
- Exercise options – The funds the investor provides are used by the employee to exercise their stock options. The employee must provide updates on any relevant information regarding the shares (liquidity events).
Accredited Investors
- Registration & accreditation – Investors must register and complete their profile (basic information about themselves, accreditation status, and investment interests).
- Investment opportunities – Once registered, investors can browse through various investment opportunities. They can filter offers by company, industry, total funding raised, and other criteria.
- Selection & funding – Investors select the opportunities they are interested in and choose their investment amount (minimum $10,000).
- Brokerage fee – After funding an employee’s stock options, investors pay a brokerage fee of 5%.
- Monitoring & updates – Investors receive updates on the status of their investments, including any liquidity events such as IPOs or acquisitions. Equitybee ensures that employees provide relevant information and comply with the terms of the funding agreement.
- Liquidity events & returns – If and when a liquidity event occurs, Equitybee review finds they work closely with the employee to process the settlement and deliver the proceeds to the investor. As the funding agreement outlines, investors receive their initial investment and a share of the profits.
Post-Funding
What happens after the funding? The company will either go through a liquidity event (exit) or it won’t (bankruptcy). What happens to the agreement in both cases?
Exit
When an exit occurs (IPO, merger/acquisition, etc.), the following happens:
- Settlement amount – The employee must provide the designated settlement amount to the investor (return original capital invested, predetermined share percentage, and accrued interest on the original capital).
- Distribution – The settlement proceeds can be cash or shares, depending on the employee’s choice. The settlement will only occur when the employee can access the shares, such as post-IPO or after any lock-up period.
No exit
If the company goes bankrupt or there is no exit event, the following happens,
- No repayment obligation – The employee has no further monetary or other obligations to the investor. The entire risk lies with the investor, meaning if the company fails, the investor loses their investment. The employee does not owe anything to the investors.
Unfortunately, Equitybee review finds they don’t provide a specific percentage of companies with an exit versus those without. However, as of January 2024, there have been over 155 liquidity events for 122 companies.
The average internal rate of return net of fees was 55.5%. You can find more information about Equitybee’s numbers here.
Equitybee Review of Fees
Equitybee charges different fees for investors and employees. Since it isn’t a fixed fee model but a percentage, they can add up very quickly. Here is the breakdown for both parties.
Investors
- Upfront platform fee – Investors get charged a 5% upfront platform fee on all investments. This fee gets deducted from the amount of money that the investor invests. For example, investors who invest $100,000 will pay a $5,000 platform fee.
- Carry fee – Investors also pay a 5% carry fee for successful liquidity events. If the startup is acquired or goes public, the investor will owe Equitybee 5% of the profits from the sale. For example, if a $10,000 investment turns into $50,000, the investor will owe 5% of the $40,000 profit, which is $2,000.
Employees
- Placement fee – Employees who receive funding to exercise their stock options will pay Equitybee a placement fee of up to 5% of the funding amount. This fee gets deducted from the amount provided by the investor.
- Profit sharing – Employees must share a portion of the eventual proceeds from selling their shares with the investor. This includes repaying the initial funding amount plus interest and a portion of the total share value covered by the funding agreement. The specific interest rate and share percentage are stated in the funding agreement.
Final Thoughts: Equitybee Review
To conclude our Equitybee review, they connect employees of privately held companies who need funding to exercise their stock options and accredited investors. It has facilitated funding for employees from notable companies like Airbnb, Palantir Technologies, QuantumScape, DoorDash, and more.
The platform offers an innovative solution, and it is working successfully. However, one big downside remains. Equitybee’s fee structure can become very expensive for both parties involved. Additionally, keep in mind that there is always a risk of the company being unsuccessful. In that case, the employees make some money, and investors lose their entire investment.
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Frequently Asked Questions
Equitybee is a legitimate company. Many employees have successfully sold their shares.
Equitybee charges both parties a 5% placement fee. Successful investors will also have to pay a 5% carry fee. As a result, this can become very expensive.
Equitybee was co-founded in 2017 by Oren Barzilai (CEO), Oded Golan, and Mody Radashkovich.
