Secfi – A New Social Leverage Investment

Last year our fund – Social Leverage – led an investment in Secfi, whose vision is to help startup employees make sense of their stock options and equity.

Today, the website and product are live to the public (transactions have been happening the last six months while in stealth mode).

The company was founded by Wouter Witvoet . He was motivated to start the company from his own experiences at a fast growing startup. Here is his announcement.

Option exercise is broken

A computer science graduate, I’ve never really enjoyed working for a big corporation so since graduating Cambridge I’ve always worked in start-ups.

A few years ago I was working for a start-up which I so fortunately joined as fourth employee. The job came with an option package and together with a few bonuses here and there I had about a million options at the time. I still recall the share prices of the funding rounds quite vividly: $0.34 per share, $0.66 per share, $1.75 per share and later even $4.50 per share. A great start of my career, I thought, being 23 years old at the time.

How things changed when I wanted to leave…

I decided to leave the company because I was ready for something new. I figured I had my options and I would exercise them at some point, but never precisely understood how that works (who has the time to read all that legal anyway). As it turned out, I had about 90 days to exercise my options after leaving the company or would otherwise lose them. Not only that, I would also have to pay about $2.8M of income taxes.

Wait, what? Yes — I would have to pay $2.8M of income taxes on a security that I couldn’t sell and on income that I’ve definitely never seen in my bank account. I explored various avenues for getting this funded, but couldn’t find anyone who could help me and none of the banks would lend against private stock. I still left the company (life is too short to work somewhere you don’t love anymore) and lost the equity.

When I dug further, I found out that this is a much bigger problem in Silicon Valley.

So what does SecFi do?

Whereas traditional financial institutions only care about the currently wealthy, SecFi is building products for employees pre-wealth so they can take advantage of their financial opportunities. They do this by providing financing to employees of growth and late-stage private companies so they can exercise their stock options and to the shareholders who already own their stock. The key to their offering is that all financing comes without risk to the borrower – if the company goes under, there is no legal obligation on the borrower to pay anything back. In return, borrowers pay a compounding interest rate and share a portion of their equity when the company has a liquidity event. Using SecFi for financing has the following benefits:

Unlike selling, a Secfi financing defers capital gains taxes until exit and lets companies and employees keep their Qualified Small Business Stock (QSBS) tax treatment.

Financing against your shares lets you keep the upside compared to selling on the secondary market.
Avoid having all your wealth locked up in one company and keep your savings for what matters to you.

How does it work?

Employees and shareholders apply for financing on SecFi’s platform, which based on each individual’s personal and tax situation determines how much financing you are eligible for. Once an agreement is reached, SecFi pays the determined amount. SecFi’s structure works for all companies, too. They have ensured that their platform doesn’t violate any company’s restrictions so employees everywhere will have an opportunity to exercise their options when they want to. In instances where the employee doesn’t need financing, they can still use SecFi’s products to better understand the value of their equity/options, better plan for upcoming taxes and best prepare for a potential IPO or company tradesale.

SecFi’s Vision

SecFi’s ultimate goal is to be the financial advisor that helps employees and shareholders before they are wealthy and are bombarded by a plethora of “old school” financial advisors. We simply couldn’t find a technology solution that helps people in this process.

The vision and the solution line up very well with how we (Social Leverage) see financial services and the industry evolving.