ESOP Financing: Access the capital you need to exercise your stock options

by Sandeep Kumar | June 1, 2021

Why ESOPs are given?

Employees are granted stock options for a variety of reasons. Stock options are more frequent in start-up companies that can’t afford to pay their employees significant wages but are willing to share in the company’s future success. In such cases, stock options are given to employees as part of their remuneration package. In some cases, the employee is also given stock options, which he can exercise at a later date/s, in order to ensure his long-term commitment. Employee stock ownership plans (ESOPs) assist to build a sense of belonging and connection among employees in addition to giving monetary benefits.

When a stock option is provided to an employee under an ESOP program, it is free. The ESOP scheme spells out the terms and conditions under which an employee can use his rights. After a specific lock-in time, which is usually more than a year, the employee’s option can be exercised.

How do they work – vesting portion

The right to exercise the option may vest in the employee at a later time. The “vesting date” is the date on which an employee becomes eligible to exercise his or her right to purchase shares. The rights may vest fully or partially over the vesting period.

For example, on 31 March 2018, an employee is granted 1000 options, which can be exercised in three phases: 20% at completion of the first year, 30% with completion of the second year, and 50% on completion of the third year from the date of the grant. So, in this situation, the vesting dates for 200 options are 1 April 1 2018, for 300 shares, 31 March 2020, and for the remaining 500 shares, 31 March 2021.

For such vesting, the plan may specify the same or a different grant price or exercise price. The grant price, or the price at which an employee can purchase a share from the company, is usually set and is significantly lower than the current market price of the shares.

It is not mandatory for the employee to exercise the option because it is only presented as an option with no obligation linked to it. In the event that the current price of the shares is lower than the exercise price, the employee can choose to execute the option or let it lapse. The employee is granted a certain amount of time to execute his option, after which his vested rights may lapse. The ‘exercise date’ is the day on which an employee exercises his option to purchase shares.

When options are granted, as well as when they are vested in the employee, there are no financial outflows or tax ramifications.

Exercising options: why, how much, and when?

If your current cash curve isn’t doing as well as you’d like, exercising stock options may be able to help.

Exercising, on the other hand, is an investment in terms of money. Is it therefore worthwhile to pay the price?

When executing options, you pay money to increase your cash curve. The more options you utilize, the more money you spend; nevertheless, the curve improves as you utilize more options.

The numbers will change depending on your situation. You boost your chances of making more money in the future by paying today. However, if your company fails, you will lose that money.

An employee’s option does not have to be exercised after it has vested in him. The employee has a certain amount of time to exercise his or her privilege. When an employee should exercise his or her options is a crucial subject from a financial and taxation standpoint.

The employee must pay the preset price for the shares when he exercises the option, resulting in a financial outflow. Because the shares cannot be sold unless they are listed on a stock exchange, the money is locked up until the shares are listed or the promoters offer you a way out. Furthermore, extending your exercise date has tax implications because the capital gain holding period begins on the exercise date. As a result, the decision must be taken carefully after considering the cash flow and tax implications.

You exercise your options and officially have shares

When it comes to exercising, you have complete control. As long as you work for the company, you can buy shares whenever you want, and you don’t have to buy them all at once. When you leave a company, you usually have 90 days to decide what you want to do next (a few companies extend this to 5, 7, or 10 years).

You can exercise closer to the exit and then pay for it with the money you earn, so there are no out-of-pocket expenses. However, there are a number of disadvantages to this method.

It’s a big decision to decide which tactic to use.

Your company exits – finally!

When a business closes, one of two things happens:

  1. It is acquired, which means that another firm buys it. Microsoft purchased GitHub, Amazon purchased Twitch, and Facebook purchased WhatsApp. It goes public, which means it sells its stock in an initial public offering on the open market (IPO). Slack, Uber, and Lyft have all done just that.

Employees usually have a 90- or 180-day ‘lock-up’ period after the IPO during which they are unable to sell their shares.

You can sell your shares for a profit if the company’s exit value is high enough.

Your alternatives would be pointless if you didn’t have a way out.

Determination of your shares’ exit value

Your cash curve determines how much money you’ll make if your firm goes bankrupt.

Your ISOs and NSOs are in place to make you money in the future. “Exit” was the moniker given to that particular day. This occurs when your firm goes public via an initial public offering (IPO) or is acquired by another company. The amount of money you receive if and when your company closes is dependent on how successful it has grown. Your company’s exit value is determined by its level of success.

Regrettably, the exit value is unpredictably variable. You’ll never know how much money you’ll make as a result of your efforts. The only certainty is that when the exit value rises, you will make more money.

When should you sell the shares?

Selling an ESOP stock is equivalent to selling any other type of investment. You must evaluate the capital gains implications as well as the need for liquidity when making a decision. The selection will also be based on the Company’s future prospects.

It’s also possible that the shares you purchased through an ESOP aren’t listed, in which case you won’t be able to sell them until they are, or until the promoters offer you an exit, which may or may not be under very favourable terms. It would be advisable to wait until the shares are listed on a stock exchange in this scenario.

Tax implications when exercising the option

The taxes of ESOPs have a common structure. It is subjected to two levels of taxation.

The employee’s option to purchase shares at the exercise price is exercised in the first stage. The shares are eventually sold in the second stage.

First stage, 

When an employee’s ESOP options are exercised, the difference between the exercise price and the security’s value is treated as a prerequisite in the employee’s hands. The employer must deduct tax from the employee who exercises the option at source, recognizing it as a prerequisite. If the shares are listed on any stock exchange in India, the value of the shares given to the employee will be the average of the market price (average of highest and lowest price) on the date the option is exercised. In that instance, the fair market value will be determined by the merchant banker’s valuation certificate. The certificate of share valuation must be no more than 180 days old from the date of option exercise. Even if the shares are listed outside of India, the Company must get a certificate from a Merchant Banker because such shares are considered unlisted for ESOP purposes.

Second stage,

When the employee sells his/her stock. Capital gains tax will be imposed if a sale occurs. Depending on how long the employee has owned the shares, the gains can be either long or short term. The holding time requirements for both listed and unlisted shares are different.

Starting from F.Y. 2016- 17, If the holding period is more than 12 months, the listed shares will become long-term. However, if the holding period is more than 24 months, unlisted shares will be considered long-term.

The period of holding begins from the start of exercise date and ends at the date of sale.

At present the long-term capital gains on listed equity shares (on a recognized stock exchange) is tax free, however, short-term capital gains are taxed at 15%. Let us explain!

When shares are traded through a broker the long-term capital gains are fully exempt under Section 10(38) of the Income Tax Act.  However, as per the newly inserted section 112A via Finance Act 2018, if the amount of long-term capital gain exceeds Rs 100,000 than the amount in excess of Rs 100,000 shall be chargeable to tax at 10% without indexation (plus heath and education cess and surcharge). However, the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1st April 2018. Moreover, such short-term capital gains shall be taxed at flat rate of 15% under Section 111A.

If the shares are not sold through the stock exchange’s platform, long-term capital gains are calculated by indexing the original purchase price. Indexed gains will be taxed at a 20% flat rate, plus any applicable surcharges and cess. Short-term capital gains are treated like any other form of income, and they are combined with other kinds of income and taxed at the appropriate slab rate.

For the purposes of computing capital gains, the cost of acquisition is treated as FMV (fair market value) on the date of exercise, which is taken into account for the purposes of perquisites of the options, rather than the amount actually paid by the employee.

Taxation of Foreign ESOPs

If a foreign company grants an ESOP to an Indian resident, the ESOP will be taxable in India. Furthermore, the tax regulations of the company’s home country, as well as the double taxation avoidance agreement, must be investigated in order to determine the actual tax implications. Furthermore, because these shares would not be offered on Indian stock exchanges and are unlikely to be listed in India, the long-term capital gains exemption under Section 10(38) or the concessional rate of 15% tax on short-term capital gains in respect of such shares would not be available. ‍ 

When you have incurred a loss

In case you have incurred a loss you are allowed to carry forward short term capital losses in your tax return and you are eligible to set them off against short term capital gains in the coming years. Long term loss on equity shares is a dead loss and has no treatment, simply because gains are not taxable as well.

Torre’s Offering: Non-recourse financing and how it benefits startup employees‍

Employees in private enterprises (like you) can execute stock options using non-recourse financing. Because the loan is non-recourse, your other personal assets are never in danger.

For example, if the loan is non-recourse, the lender accepts the risk and you are not required to put up personal assets as collateral, such as your automobile.

Before we get into the technicalities, let’s take a look at why financing is useful in the first place.

It’s usually better to execute your stock options as soon as possible rather than later. If your company grows, exercising sooner means paying less tax both during the exercise and after the IPO— which means more profit for you.

However, exercising options can be financially out of reach for many employees of high-growth businesses on the verge of an IPO or exit. Consider this: exercising options costs nearly twice as much as a household’s annual income.

Furthermore, as the value of start-ups rises, exercising options becomes more expensive and prohibitive. That’s because the higher your options’ 409a valuation, the more tax you could owe.

Non-recourse finance can aid in this situation. It works like a cash advance, allowing you to exercise your start-up stock options without having to pay for them out of pocket.

How it works?

The lender delivers you the funds you need to execute your stock options and pay your taxes. You wait for your company to go out of business. There are no monthly interest payments, unlike a traditional loan.

If your firm has a successful exit (such as an IPO), you repay the money you borrowed plus any fees. You owe nothing if your company does not exit or falls out of business entirely. The lender is responsible for the loss. Your other personal assets are never at risk because it’s non-recourse finance.

If you already own stock in your company, non-recourse financing might enable you to access cash for other financial goals, such as buying a house or diversifying your stock portfolio, without having to sell your stock.

Is non-recourse financing too good to be true?‍

So what’s the catch?

To summarise, non-recourse financing does not put your personal assets at risk, and the financing source bears all of the adverse risk. So, what’s in it for the financial service provider?

Case 1: The supplier benefits from your success: the more effective the exit, the better for everyone. In the end, the amount you owe is determined by the value of your equity.

For example, you have $100,000 worth of ESOPs and on a successful exit you gain $50,000 then a commission of 30% would be charged which is $15,000 plus the principal amount. Similarly, if your gain is higher let’s say $80,000 then you owe a charge of 30% of $80,000 that is $24,000 plus the principal amount, hence the amount you owe will be determined by your equity value at the exit event.

Case 2: The financing provider receives a share of your pay-out plus a return of the initial advance if you successfully depart (plus any interest).

Continuing the previous example along with the commission on profit x% of interest will be levied on the principal amount. Suppose you borrowed $80,000 for exercising the ESOP, x% of that amount will be charged as interest in addition to a $15,000 commission.

Case 3: The funding provider bears the brunt of the loss if the exit fails. There is no payoff for the lender to take a portion of, and you are not required to repay the original advance.

Carrying forward the previous example of $100,000 worth of ESOPs. Suppose, the exit the value of your position is $90,000 and you are in loss of $10,000. Hence, there will be no payoff to take commission and we will bear the loss without bothering the borrower. Plus, the borrower will not be required to repay the principal amount, nor his personal assets be liable.

We are ready to take such a risk because we are very selective about the companies we engage with —thus, the people we finance. As finance providers, we also diversify the risk by investing in multiple start-ups.

How Torre can help‍?

We’re on a mission to assist start-up employees and shareholders understand, maximize, and unlock their stock’s value. We offer non-recourse stock option exercise financing to help you reap the benefits of exercising your options early. We also offer financing alternatives that allow you to access the cash of your hard-earned equity prior to departure without selling your stock.

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“All that glitters is not gold” — Growing valuation bubble of Indian start-ups

by Sandeep Kumar

 The valuation game

The Venture Capital valuation is a simple game, but never an easy one. While there is little to learn, to play it perfectly takes years, if not decades of experience under the belt.

So how do the VCs arrive at that valuation figure? Market Opportunity? Product Market Fit? Strong Founder Team? Disruptive Product Offering? Extensive Network Economics?

Nah.

Capital invested divided by the stake diluted. That’s it!

The VC chooses the amount of capital he is ready to deploy and the stake he wants to have in the company. Of course, the wish is to part with the least capital for the most stake. Now coming up with these two numbers, the capital chunk to invest and the amount of stake to buy, this is where experience comes in.

The winning bet in your portfolio

Most VCs have personal favorite ranges which they are comfortable with. Some VCs may like to hold only a few concentrated bets while others may want to deploy small amounts into numerous startups. The premise is the same. Each VC wishes to hold at least one winner in its portfolio, the winning bet that ‘returns the fund’.

This gets us to staging. The valuations do nothing to the VC portfolio, except increase the unrealized returns section, which, as the name suggests, are ‘unrealized’ and don’t mean anything unless the company makes an exit from that valuation.

But what if the company is not yet ready for an IPO or a buyout?

The VCs of course know this. Hence when they get together to finance a startup at some stage, let’s say series A, they are offering just enough money to take the startup to the next funding stage. This continues until the IPO or buyout.

Nowhere do the VCs use the DCF or any other model to find a fair value of the shares of the startup. Startup valuation is not a valuation game, it’s a pricing game. It is not about finding a startup trading at a lower than its fair value price and hoping the market corrects itself, the game is about finding another buyer who will be ready to pay higher. All this has nothing to do with cash flows generated from the assets held by the startup, adjusted for the underlying risks of all sorts (DCF basically). All these valuations are nothing more than exhaust fumes as suggested by Fred Wilson, an NYC based VC:

“Early-stage valuations aren’t valuations. They are the exhaust fumes of negotiation about two things — the amount raised and the amount of dilution.”

The information asymmetry

Now let’s take a look at what we have: You are a VC that is trying to get a stake in some startup. What do you do to get an idea of how much you should pay? You don’t have DCF or any other model to help. So, you look at what similar companies have been valued at. With new business models operating in diverse geographies, you realize that it is hard to say how you can define a similar company. Let’s say you came up with food delivery as one category. Despite the difference in the business models, one can hardly cobble together a list of 4–5 startups in the Indian space.

So, the VC game is plagued with opaque, inconsistent deal information. While the figures the VC arrives at are most probably wrong and have nothing to do with reality, they have nothing to worry about as long as they are able to find someone who’s ready to buy at a higher price from them.

The Indian startups in numbers

The past few years have been a gala time for the Indian startups who have managed to secure funding unabated despite the pandemic and its blues.

Startups in India managed to raise $7.8 Bn until April itself. This is a significant number almost 70% of the total $12.1 Bn raised in 2020 and more than 50% of $14.2 billion raised in 2019.

The average funding size has increased to $25.21 Mn, up from $14.94 Mn in 2020. There have been 402 funding rounds until April itself, against 1,114 deals in 2020 and 1,036 in 2019.

Overvaluation and the global landscape

The push towards absurd overvaluations has been a result of the negative interest rate environment. Post the GFC, there was heavy lending and even more borrowing. So much so that people had to pay up money just so that they could lend money. Of course, this led people to look for alternative avenues to park their money and generate juicy returns. The baseless optimism and hollow belief in spotting the next Bezos, Zuck, or Musk have led to an audacious amount of money flowing in, creating completely senseless valuations, having no roots in reality.

Tesla, more than $13 Bn in debt at the end of last year, recently had a market capitalization of $160 Bn, greater than General Motors and Ford combined. At the IPO price, Square was valued at close to $3 Bn, which is 50% below the $6 Bn valuations for which it had raised money from private investors a year before. Uber which in accounting terms stands at around 5x times its revenues, is also grossly overvalued as it is nowhere close to being the leader in the driverless car’s space. WeWork tried to go for a $47 Bn listing but ended up getting corrected to $8 Bn.

The WeWork fiasco was dubbed as a wake-up call in a Morgan Stanley report stating that the days of ‘’ were over.

Unicorns were considered rare. Today, however, the United States has a herd of more than 100 of them, with 100 more outside the US. Each worth a billion dollars or more.

Will history repeat itself?

Let’s talk about the Indian scenario and the startups which we believe are overvalued and most likely to come back to their intrinsic value as and when the markets correct themselves.

1. Byju’s: World’s most valuable Ed-Tech Company

Byju’s operates an online learning platform. It also creates a mobile app for pupils that offers a variety of learning activities. Exam preparation classes are also available. Original material, watch-and-learn movies, rich animations, and interactive simulations are all available to users on the site. The firm is having an EV/Revenue multiple of 17x.

It is the only major player in the Ed-Tech space in India, which has led the company to raise multiple rounds of funding and leading to an enormous increase in valuation. Knowledge in today’s world is free, however, Byju’s creates unique content with animation and the product often seems to be overpriced. In recent times there were a number of instances on various social media platforms where people questioned the pressure on the sales team and how Byju’s is so concerned about their sales when they try to push their offering in the market.

In the long run, the expected return from Byju’s is questionable. Below is the chart of the revenue and valuation of Byju’s over the last five years.

2. Cred — The borrower’s messiah

Losses in billions of dollars are nothing new for hyper-funded companies, especially when they’re chasing size and consumers at any cost. CRED’s metrics tell a tale in and of itself. CRED has made a profit of $71,000 in its second year of operation. CRED hasn’t been able to monetize its user base in FY20, despite acquiring a large customer base with a high propensity to spend and consume.

While the two-year-old company’s sales remained low, its total expenditure increased by more than 5.9 times to $52 Mn in FY20, compared to $9 Mn in FY19. The greatest cost center for the financial firm was advertisement and marketing, which accounted for 47.6% of total expenditure. From $3 Mn in FY19, such costs increased by 9.3 times to$25 Mn. During the fiscal year that ended in March 2020, CRED spent Rs 726.7 to earn a single rupee of operating revenue. CRED’s yearly loss in FY20 was INR 360.3 Crore, up 5.9 times from the $8 Mn it lost in FY19. The current cash burn is difficult to sustain, with an appalling EBITDA margin of -1979.5% in FY20, and the company will have to focus on its collections.

Despite registering astronomical losses it has attained a unicorn status by raising its valuation to $2.2 Bn in 2021. It is worth noting that the company is founded and led by Kunal Shah who is a known name in the start-up world for founding and leading numerous companies which may be an explanation behind the astronomical valuation of Cred. The graph below shows the valuation and losses of Cred over the years.

3. CarDekho — India’s leading car search venture

CarDekho helps users buy cars along with expert reviews, detailed specs, and prices, comparisons as well as videos and pictures of all car brands and models available in India. It has recently acquired an auto marketplace, Carmudi (Philippines) in late 2019 to expand business in Southeast Asia. GirnarSoft, the parent company of Jaipur-based automobile-related services behemoth CarDekho, has seen its losses increase by 155% to $45 Mn in FY2020. This comes after the company’s losses had already increased by 39% in the previous year.

Despite that CarDekho has managed to raise its valuation. Last year, Cars24, a CarDekho competitor, increased its consolidated revenue to $418 Mn and achieved unicorn valuation, and has a much lower EV/Revenue multiple. Let us now see the EV/Revenue Multiple of the peers in this game through the table below.

As per the last reported revenue and valuation figures.

We can infer from the table that CarDekho has a huge EV/Revenue multiple which signifies that the valuation of the firm is increasing at a much faster rate with respect to the revenue that the company generates, leading to overvaluation of the company. The graph below shows the valuation and revenue of CarDekho.

4. Unacademy

Unacademy is a Bangalore-based educational technology startup in India. Unacademy lessons are available in the form of Live Classes, which are both free and available on a subscription basis. Unacademy earned $12 Mn in revenue but spent $53 Mn, resulting in a loss of INR 300 crore. Employee benefits accounted for 23.7% of the edtech start-up’s costs, while other expenses accounted for 75%.

While 2020 brought plenty of development, the corporation would need to significantly increase its expenditures to reverse the losses it had in the fiscal year 2020, which ends on March 31, 2020. Unacademy’s revenue in FY21 is estimated to be over $55 Mn. It’s worth $3 Bn or approximately 35 times the expected income. The graph shows the valuation and loss of BharatPe.

5. BharatPe

When we talk about e-commerce giants, PayTm, Amazon, and Flipkart all wanted payments to take place within their own closed networks. BharatPe’s goal was to achieve what all the large brands were afraid to do: simplify things for retailers by adopting a standardized interoperable QR code. It allowed shops, street food vendors, and tea vendors to accept payments using any UPI app (PhonePe, Google Pay, PayTM, and so on) without having to download the apps. It was a simple and cost-effective approach with an added layer of security. The payment system’s complexity was reduced by a factor of ten by combining multiple UPI apps into a single sticker.

BharatPe was able to achieve early success by keeping things simple. BharatPe’s product strategy is based on making things simple for merchants, and the company uses P2M transactions as a springboard for future services. Because BharatPe does not charge merchants a setup or transaction fee, its fundamental feature money collection using QR codes is essentially a loss-maker for the company. It must spend a large amount of money to manage the servers that process millions of transactions every day. However, this provides BharatPe access to merchants who are passionate about their products and eagerly accept their offers. Despite having no visible revenue stream and without even earning a penny, the valuation of the company is increasing, and currently, it stands at $900 Mn, very close to the unicorn status. The graph shows the valuation and revenue of BharatPe.

The apprehensive loop of growing valuations

The indications are all too familiar. With large markets, illustrious founders, rapid growth, and top early-stage VCs on your side, you have a good chance of raising the next big round, even if you don’t yet have unicorn status (the desired billion-dollar value). And when major acquisitions are made for unproven companies, and valuations double or triple in a matter of months, it begs the question: are we in a bubble? This is always a challenge because most people only realize they were in an economic bubble after it has burst in the past.

Rich valuation multiples have also spread from the typical suspects — consumer internet companies — to enterprise software providers. This is a first. SoftBank, for example, invested in Mindtickle last year, valuing it at $500 Mn based on estimated revenue of $20 Mn — $25 Mn. Even SaaS companies in the United States, including Slack, Zoom, Snowflake, and Cloudflare, have gone public in recent years with great success. Sentiment in India often comes straight from the United States, particularly in related industries and from funds that invest in both nations, including several of India’s leading venture capital firms. Startup valuations are also affected by how publicly traded firms trade if retail investors are ready to pay high prices for loss-making companies, whether banks financing a share issue can find enough at a given price, and so on. There isn’t a single bubble across the board. Because of the vast quantity of money available in the market, investors are willing to pay a premium for good business. But that should be done judiciously.

Investors beware

For the first time in years, it’s possible to claim that private markets are more logical than public markets. If stock markets are the yardstick, select pricey companies may not be overvalued. A closer examination of what constitutes a bubble, as well as what Indian entrepreneurs are doing, reveals a more complete picture. Growth investing has been positive in industries that have recovered quickly from the epidemic, and there has been a lot of interest in a few market leaders. At such levels, one would expect some amount of rationalization. Investors must evaluate the prospects and the future road map of a company before investing. As more investments flow into a company without a proper business model or less revenue, it results in overvaluation creating a bubble. Investors can lose a colossal sum by not choosing the right company.

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This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Startup investing 101: The HNI’s guide to investments beyond the conventional asset class

by Sandeep Kumar

Why invest in startups?

Investing in a startup is a high-risk, high reward game

Deciding the right opportunity and best practices for investing in a startup

Ways to invest in startups

Delaying the IPO comes with certain advantages for Startups

How startup investing really works

When can you expect a return or are you locked in forever?

Source: Pitchbook and CBInsights

Exits are what investors care about, but many founders dream of becoming a unicorn and avoid using the word “exit” until it’s too late. Despite this, M&As accounted for 97% of departures in 2020. And the majority of them occurred prior to Series B.

Exit or no exit: A fatal call

Investing in alternative assets and why you should care about them?

by Sandeep Kumar

What is the meaning of a secondary market?

The private secondary market is the one in which stakeholders of private, venture-backed companies (employees, ex-employees and early investors) wish to transfer their shares to an investor in exchange for liquidity. The investor on the other side exchanges cash in return of shares of that private company. The sales proceeds go to the selling shareholder, not to the company.

A primary issue of shares is the source of equity for a given company. Primary issue happens when a company issues a new class of shares and grants those to employees (in the form of stock options) or sells them to investors in an event of fund raise. The employees and investors who own primary shares may choose to sell them in the secondary market, through Torre Capital’s marketplace.

How can you diversify your portfolio and expect higher returns by investing in the secondaries market?

  • Given the expense of going public (which can be significant in terms of time and resources) and the public markets’ short-termism (which can cause public companies to focus on quarterly earnings and not on long term growth).
  • Tech-Based companies have fewer reasons to go public than they did a decade ago, because of which the venture-backed technology companies are increasingly reaching $1B and even $10B valuations before they go public, which leaves less potential for public market investors. In the year 1999, US technology companies went public typically after 4 years but today, the average technology company IPO comes after a minimum of 10 years.
  • As the companies are taking longer to go public, their early investors and employees have to wait substantially longer for liquidity than they would have in the past.

There are many reasons why early shareholders of now valuable private companies might want to tap into liquidity through Torre Capital. For example, an early stage venture capital investor might want to return capital to limited partners ahead of the launching of a new fund. An early employee of a now late-stage company might want to sell shares to finance transactions like buying a house.

Torre Capital acts as an intermediary between the shareholders who need liquidity, and the investors who want investment exposure to proven technology companies before they ultimately go public or get acquired. If the company goes public, investors receive shares post the lock-in period (which restricts private company shareholders from selling their publicly traded shares, ranging between 6 months to a year). If the company is bought for cash, the investors are compensated for the same as well.

More than $50 Billion in value is estimated to be locked up in private, pre-IPO companies, and the secondary market is unlocking that value for investors who were previously unable to participate due to high minimums and restricted entry.

Who influences the pricing of the secondary market?

The investors who participate in the fund raise have an influence on primary market prices; secondary transactions are usually priced in relation to the most recent funding. The price is generally influenced by factors of supply and demand. If a private company has a high demand, its shares might trade at a premium in the secondary markets (in other words, the shares would be priced higher than the share price from the most recent funding). If the sellers of a particular security are more than its buyers, the shares might trade at a discount (lower than the share price from the most recent funding).

Apart from the influences of demand and supply, following are the other factors that can affect the price per share of private market securities:

a. Share Class: Two of the primary types of shares are preferred stock and common stock.

  • Preferred stock is a type of equity security that has certain rights over common stockholders. These rights may include, but are not limited to, liquidation preferences dividends, anti-dilution clauses, and managerial voting power.
  • Common stock is a type of equity security that is most frequently issued to founders, management, and employees. In the event of liquidation, preferred shares are generally given priority over common shares.

b. Discount for Lack of Marketability: A valuation discount exists between stock that is liquid and traded publicly, and stock that is illiquid and not publicly traded. Because Torre Capital’s offerings are relatively illiquid, it’s common for them to be priced at a discount to the most recent round of funding.

Why invest with Torre?

Torre Capital is a VC funded Singapore based Financial Technology company and a Registered Fund Manager in Singapore. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds. Our investment vehicles offer exposure to high quality global growth startups, private debt opportunities, and other thematic funds in the pre-IPO space. They are available to registered investors around the globe.

Our current customer set includes 500+ family offices and High net worth investors (CXOs, first and second-generation entrepreneurs). With the team composed of ex-Mckinsey consultants, Asset management veterans, and Digital experts.

Exclusive features offered by Torre:

  • Pre-vetted/ Curated funds
  • Low-minimums
  • Low and transparent cost
  • End-to-end digital

Who are the shareholders?

Shareholders include all angel investors, employees of the company, founders, or anyone who currently has equity in an eligible private company in the form of common shares, preference shares, stock options or restricted stock units. The following services are provided by Torre Capital to private company shareholders:

  • Opportunity to sell shares in the Torre Marketplace
  • Avail equity funding for your private company ESOPs

How does the Shareholder’s journey work?

a. For selling shareholders:

  • Register on the platform by providing a few basic details about your equity stake.
  • Explore the Torre Capital marketplace to submit your request. Our private market specialist connects with you to perform due diligence checks.
  • We offer the shares to our investor community and gather investment commitments. We also work with the company directly for a completely secure transaction.
  • Transfer documents executed and you receive the sale proceeds. Torre Capital charges a nominal transaction fee.

b. For shareholders who seek to avail equity funding:

  • Register your interest and submit your financing request. Find out how much funding you can avail.
  • Our credit experts get in touch with you to perform due diligence checks, understand your tax liability and underwrite the funding.
  • Depending on your company’s terms and agreement, the forward equity contract is signed and you receive your funds.
  • Share a portion of profits with us post liquidation event. In case of no liquidation event, you don’t have to pay us back.

Advantages of selling at Torre’s Marketplace:

  • Immediate Partial Liquidity.
  • Maximum benefit to shareholder: You only pay us in case of a liquidity event.
  • Get to keep your upside: If your company never meets a liquidation event, you still have received funding for part of your shareholding.
  • Minimized Risk: Upfront part funding and safety of investment till liquidation. 
  • Multiple asset class: If you own multiple classes of preferred stock, common stock, ESOPs, RSUs, you can sell them easily on the Torre Capital marketplace.

Who are the investors?

Currently only accredited investors as defined here are able to make investments through our platform (Investments are not open to US Citizens). With Torre’s platform, the opportunities are endless. You can choose to allocate capital across four different asset classes – equity, ESOPs, structured products, and funds.

How does the investor journey work?

  • Register your interest on our platform. We leverage our network to provide company specific offerings to all employees.
  • Reserve your interest. All IPAs issued post approval.
  • Shareholders agree to terms, sign a Forward share ownership contract.
  • Funds transferred to shareholders’ account. Company leadership informed of agreement with Torre Capital. Receive frequent updates.
  • Upon liquidation, receive principal and profits redemption requests raised to shareholders.

Advantages of investing at Torre’s Marketplace:

  • Exclusive access to high-growth startups: 20% – 30% discounted equity ownership in series D and above global pre-IPO unicorn/soonicorn shares leading to lower investments than secondaries.
  • No upfront cost: Zero transaction cost versus 10% charged by secondaries.
  • Attractive Returns: 3x – 5x better returns than direct secondary transactions.
  • Vigilant and protective measures: 3x collateral protection for initial investment till 80% downfall in stock value.
  • Faster cash-inflows: 3x – 4x faster return of capital than top VCs.

Torre’s Pre-IPO Fund

If you believe in the power of the Torre Capital platform for sourcing strong deal flow and you believe in the pre-IPO asset class, but you are not comfortable or otherwise do not want to select single names for investment, you should consider a managed fund investment. The Fund Series investment committee will select all investments, which are a curated subset of what comes across the Torre Capital platform.

If you would like your investment to give you diversified exposure to the pre-IPO asset class, but can’t commit to multiple $100,000 investments, a managed fund is a good option. You will get investment exposure to multiple pre-IPO companies that are carefully selected by the fund series investment committee.

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