February 13, 2024

How Does Equitybee Work

Read more about Equitybee
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Equitybee makes it easy for employees and investors to use its platform. Learn more about how to fund or get funding for your stock options.

What Is Equitybee?

Equitybee is a platform that connects employees with investors who are willing to fund their stock options. It sets a minimum investment limit of $10,000 per offer.[1]

The platform makes it easy for investors to invest in early-stage startups. It also gives employees the money they need to exercise their options without paying upfront.

Read on to take a closer look at how Equitybee works for employees and investors. Then, learn about the other factors to consider when using the platform, such as fees and risks.

What are stock options?
When you're granted stock options, you're being given the right to buy shares of the company's stock at a certain price. This price is usually set when you're granted the options. And it's typically much lower than the current market price of the shares.

How Does Equitybee Work for Investors?

As an investor, Equitybee connects you with employees who want to fund their stock options. In return, the employees repay you with a predetermined percentage of the stock value plus interest after a successful liquidity event.

Before any investment is made on the platform, employees are required to sign a Private Financing Contract (PFC).[2] By signing this, they agree to receive funding from Equitybee's investor network, exercise their employee stock options, and pay the associated taxes.

Aside from being a contractual agreement between you and the employee, the PFC also includes:
  • Price of the stock options
  • Interest rate on the investment (typically 1%)
  • Percentage of investor share from any future profit (typically 25-50%)

To facilitate investments, Equitybee creates a special purpose vehicle called a Fund for each investment. It then holds the PFC as an underlying security. This means that, as the investor, you have the rights to:

  • A predetermined percentage of the stock value
  • Return of principal
  • Annual compounded interest on the initial investment

Example:
Let's say you want to invest $10,000 of an employee's stock option with an interest rate of 1%. The employee also agrees to repay you 20% of the stock value upon a successful liquidity event. If the stock value goes up to $100,000, here's how much you would earn:

  • Capital or price of employee stock option = $10,000
  • Interest rate ($10,000 x 1%) = $100
  • 20% of the stock value ($100,000 x 20%) = $20,000

Deducting the 5% carry fee from the interest and the 20% stock increase, you now go home with $29,095.

What is your primary goal when considering using a service like EquityBee?

Requirements for investors

To use Equitybee, you need to be an accredited investor. To find out if you qualify, sign up on Equitybee as an investor and follow the onboarding process.

According to the SEC, an accredited investor is someone who meets at least one of the following requirements:[3]

  1. You earned $200,000 or more (or $300,000 or more with your spouse) in each of the last two years and expect to earn the same this year.

  2. You have a net worth of $1 million or more (excluding the value of your primary residence), either by yourself or with your spouse.

  3. You have an active FINRA Series 7, 65, or 82 registration or an approved designation as deemed appropriate by the SEC.

In August 2020, the SEC modernized the definition of an accredited investor so that it now includes individuals with certain professional certifications, designations, and credentials. It also includes employees of private funds who are knowledgable about investing and investment advisors registered with the SEC and their states.[4]

How to Open an Equitybee Account for Investors

To start funding employees' stock options, follow these steps:

  1. Register and complete your profile
    You must provide basic information about yourself, your accreditation status, and your investment interests.

  2. Browse and select investment opportunities
    Equitybee will present you with a variety of investment opportunities. You can select the ones that interest you and choose your investment amount.

    The Investor Relations Manager will walk you through the rest of the process and answer any questions you may have.

  3. Sign the funding agreement
    You will be asked to confirm your accreditation status and sign the funding agreement.

  4. Wire your investment to the paying agent
    To transfer your funding, you can wire your investment to Equitybee's paying agent.

Will investors own the shares from stock option?
No, investors will not own the shares. Investing in an employee's stock options, the employee exercises their options and owns the shares. If the company has a liquidity event, such as an IPO or acquisition, investors will receive their initial investment back plus a share of the proceeds.

How does Equitybee work for Employees?

As an employee, Equitybee connects you with investors who can help you fund your stock options or get cash without selling your shares. In return, you share a portion of the profits with the investor.

These are the three main steps you need to take to use Equitybee as an employee:[5]

  1. Choose how many stock options to exercise
    You can choose to request funding for all your stock options or just some of them. Investors will decide how much funds they want to give you based on their interest in your company.

  2. Get funded and become a shareholder
    After getting your funding and buying your stock option, you become a company shareholder and own the shares in your name. Equitybee will require you to show proof of the exercise and keep them updated on any important information about your shares (such as IPOs, acquisitions, or other exits).

  3. Share profits with the investors upon successful exit
    When the company has a successful exit like an IPO or acquisition, you'll need to repay the investor's capital plus interest. You'll also need to give them their agreed share of the profits.

Requirements for Employees

The requirements for employees to use Equitybee are:

  • Be an employee of a private company backed by venture capital.
  • Have vested stock options or shares worth at least $10,000.
  • Pay the commission fee if you profit from an exit.

How to Open an Equitybee Account for Employees

  1. Register and complete your profile
    You will need to provide basic information about yourself and your stock options or shares.

    Required Documents for Employees:[6]
    • Stock option grant notice
    • Option Agreement
    • Company's option plan
    • Proof of your vested and exercisable option

    Using Carta, you can link your account to your Equitybee profile.

  2. Submit your funding request
    Equitybee will present your funding request to its global investor network. Funding is not guaranteed.

  3. Sign contracts
    If a successful match is found, you and the participating investors will sign separate contracts to finalize the process.

Once you receive funding, you must prove that you have exercised your options. You will also be required to provide updates on any relevant information about your shares, such as IPOs, acquisitions, or other exits at your company.

Will employees own their stock?
Yes. Once you exercise your stock options, you become the owner of the shares. The shares will be listed in your name on the company's records. You can sell the shares or transfer them. But until you do, the shares will remain in your name on the company's records.

How much does Equitybee take?

Investors must take note of the following charges:

  • 5% Upfront platform fee
    This fee is deducted from the amount of money that the investor invests.

  • 5% Carry fee
    If the startup is acquired or goes public, the investor will owe Equitybee 5% of the profits from the sale.

While for employees, there will only be:

  • 5% commission fee
    If you make a profit from your shares you will have to pay a 5% commission fee. No profit, no fee![6]

  • 1% interest rate
    This is the interest rate on the borrowed amount

  • 25% to 50% investor share
    The investor's share of the profits will vary depending on the terms of the contract you negotiate. But it typically ranges from 25% to 50%.

What are the risks of Equitybee?

Employees face less risk when using EquityBee than investors. But either way, here are some of the risks to look out for when using Equitybee.

For employees:

  • Funding is not guaranteed
  • High fees from investors

For investors:

  • You do not own the shares
  • No reimbursement of investment if the company closes or goes bankrupt
  • The employee may breach your contract
  • High fees

If you're still not sure which platform is right for you, you can compare Equitybee, EquityZen, and MicroVentures.

What is your biggest concern when it comes to using a platform like EquityBee?

Equitybee Alternatives

  1. EquityZen
    EquityZen is a platform that connects accredited investors with people who want to sell their shares in private companies. This could be early employees, investors, or founders who want to cash out their shares before the company goes public.

    Its platform fee is 3% to 5% of the investment amount and the carry fee is 10% to 15% of the profits. The minimum investment is $10,000. [7]

  2. MicroVentures
    MicroVentures Marketplace is an equity crowdfunding platform that helps private companies raise capital from accredited and non-accredited investors. The platform offers a variety of investment opportunities, including primary and secondary offerings.

    It charges 0.50% of the investment amount per year for the platform fee, and the carry fee is 10% of the profits. You can check other fees in their website.[8]

    It also requires a $10,000 minimum investment for secondary, late-stage companies.

    MicroVentures Marketplace is also a registered broker-dealer, so you can be confident that your investments are safe and secure.

Bottom Line

To use Equitybee, investors and employees must sign up for an account on the platform. After signing up, you will be able to determine if you are eligible as an investor or employee. Be sure to have all required documentation ready.

However, there are also risks associated with using the platform. It is important to do your research and understand your risk tolerance before using Equitybee.

References

  1. ^ Equitybee. Equitybee FAQ, Retrieved 11/20/2023
  2. ^ Equitybee. Equitybee's Investment Process, Retrieved 11/13/2023
  3. ^ U.S. SECURITIES AND EXCHANGE COMMISSION. Accredited Investor, Retrieved 11/10/2023
  4. ^ U.S. Securities and Exchange Commission. SEC Modernizes the Accredited Investor Definition, Retrieved 11/21/2023
  5. ^ Equitybee. Funding Your Employee Stock Options With Equitybee, Retrieved 12/14/2023
  6. ^ Equitybee. FAQ, Retrieved 10/11/2023
  7. ^ EquityZen. FAQ: Are there investment fees?, Retrieved 10/14/2023
  8. ^ MicroVentures. What costs might I incur when I invest?, Retrieved 10/14/2023
Equitybee

Invest in High-Growth Startups

Equitybee gives accredited investors access to high-growth, VC-backed startups. By funding employee stock options, accredited investors can gain investment exposure to private companies at past valuations. In exchange for funding the options, you will receive a percentage of future proceeds from any successful liquidity events. Subject to availability. Investments involve risk; Equitybee Securities, member FINRA

EquityZen

Invest in Private Companies

  • Invest in pre-IPO companies through an EquityZen fund.
  • $10,000 minimum investment
  • Available to accredited investors only
Goldco

Free Gold IRA Kit

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  • Endorsed by Sean Hannity and Chuck Norris

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