This engineer was slapped with a $1.8 million tax bill from his stock options and he just raised $550 million to help others avoid the same fate

0 0 Wednesday, January 15, 2020 Edit this post

Secfi founder Wouter Witvoet

On Tuesday, a startup called Secfi announced it had secured $550 million in capital from Jody LaNasa's Serengeti hedge fund.
Secfi was born after the founder, Wouter Witvoet, left a previous startup, bought his stock options and was slammed with a $1.8 million tax bill.
After many failures at convincing conventional Silicon Valley VCs to invest in his idea of a startup that helps employees safely cash out, he nabbed LaNasa as an investor.
This new $550 million in capital from Serengeti is not a VC investment.
It will be used to underwrite what's known as "non-recourse, equity-backed loans."
Those are loans that will help startup employees turn their stock options into cash without losing it all to taxes.
The loans also don't require employees to pay back the money until an equity event happens like an IPO or acquisition and if the IPO tanks, the employee may not have to pay back the loan at all.
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On Tuesday, a startup called Secfi announced it had secured $550 million in capital from Jody LaNasa's Serengeti, which is better known as a hedge fund than a bank.

More than just an important financial milestone for the startup, the deal is an ironic twist of fate for Secfi's founder, who created the company after getting slammed with a surprise $1.8 million tax bill from buying stock options.

He used that experience, and his wits, to convince LaNasa to help him launch a new kind of fintech company.

Secfi was born after the CEO founder, Wouter Witvoet, thought he had become rich on stock options from his job at a then-hot ride sharing startup in London called Karhoo. Back in 2015, Karhoo was gobbling up hundreds of millions in VC investment to take on Uber and Lyft.

He had recently graduated college and, like a lot of startup employees, his salary included a boatload of stock options. As Karhoo's early valuation soared, "I counted myself rich," he said because his stock was worth "a lot of zeros."

"After two years, I wanted to leave, and I figured,'I'll pay the $50,000 to exercise [my stock options] and leave on good terms,' which I did. Then I got hit with this huge tax bill," he said.

"I wound up with this tax bill of $1.8 million and I didn't have the money. I was stock rich but cash poor," he said. The bill was due within 90 days and "at end of day, I lost all my stock."

When he had gone to exercise his stock options, the HR department connected him to an assortment of so-called experts who never really explained the risks and liabilities of the transaction, Witvoet said.

"I was sent to brokers who lied to me, funds that didn't speak my language. I didn't understand what I was signing, who I was signing it with and etc," he remembers.

Once it was all over, he realized that he couldn't possibly be the only startup employee with this problem.

So he launched Secfi to help educate startup employees. Secfi offers free services that helps startup employees figure out the stock parts of their compensation.

The tax man cometh

When most employees think about what their stock options will cost them, they think about the strike price, the price they pay to buy the stock. But they may not realize that options will impact their taxes.

Secfi can help them cash out their options and fund their tax obligation by offering what's known as "non-recourse, equity-backed loans."

Secfi allows employees to borrow against their options and repayment isn't due until there's a liquidity event like an IPO or acquisition. Secfi charges a loan origination fee, interest on the loan and will also take a "small" percentage of the profits on the stock, calculated deal-by-deal, Witvoet explained.

Secfi calculates the tax obligation and the loans include that amount.

While the employee pays interest and shares the profits on their stock with Secfi, the benefit for employees is that these are "nonrecourse" loans. That mean that if the IPO fails and the stock tanks, the lender writes off the loan and the employee doesn't have to pay it back, Witvoet explained.

Speak the hedge fund lingo

Secfi was founded in 2017 and despite this huge sum it now has under management, the company hasn't raised a lot of venture investment yet. It raised an initial $1 million seed from FJ Labs, and then a $6 million Series A in July, according to Pitchbook. Investors include a host of angels, a few funds like Social Leverage and Serengeti's fund also invested.

Witvoet said that he went through the usual headaches trying to raise money from traditional VCs until it occurred to him that his idea would fly with hedge funds. They are masters at higher risk, very high reward financing.

Witvoet had known LaNasa for a few years and started going to him for advice.

But the key to getting LaNasa to kick in half a billion dollars as the underwriter was to speak the hedge fund language.

"When talking to a hedge fund, you have to go into the lingo they understand," he explained. "That's what gets them excited to say, 'let's do it."

Once LaNasa put his toe in as an investor during the seed round, Witvoet had to prove the idea by doing a handful of loan deals. He also had to put the governance in place to run the highly regulated finance business.

When all went well the $550 million deal came together in about a 10-minute phone call pitch to LaNasa, where Witvoet discussed his ideas for the loan product and LaNasa said, "Ok, let's do it."

Now Witvoet has the funds to serve the masses. "Rather than sell your shares, we want to deal with people super bullish on their companies," he says.