Stock Loans

[Scorpion Man]

mo - what is the term, and are you deferring interest?

[modaddy]

Well, the term of the deal I originally wrote about was 3 year interest only, paid quarterly, with no prepayment penalty after 3 months.

However, I got bait and switched, either intentionally or not.. This morning I got e-mail from them saying:


[ QUOTE ]
Apparently your application indicates a California address. Unfortunately
California is the only state in the country that requires that stock lenders get registered with the State and put up a substantial bond. Our Flagship loan is approved for sale in California but the STAR loan product is still pending approval (the process is a very slow one).

In order to move forward and produce loan documents for the STAR loan you need to apply for the loan using a non-California address.


[/ QUOTE ]

He then offered a couple of other loan products, such as:
90% LTV, 5% origination fee, 12.58% APR
90% lTV, 5% origination fee, 8.99% APR with 150% cap on appreciation

In short, nothing nearly as favorable as the first deal.

I was 90% sure I was doing the first deal. I'm 90% sure I'm not doing them now. I don't think applying for the loan with a false out of state address is a good idea.

Oh well, back to the drawing board. One thing I forgot to mention is that I do have unvested stock options that will be worth a fair amount if parent company takes off. So I'm not in terrible shape either way.

Thanks all for the advice. SnakeMan, got your PM and tried to respond but your box was full. Please PM your e-mail address.

[modaddy]

Oops, I mean Scorpion Man. :-)

[pig4bill]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[/ QUOTE ]

You sure piggy? Its not 9.5%, Its 9.5% PER YEAR>

[/ QUOTE ]

Yeah I'm sure. Check the price of ATM LEAPs for a high-growth tech company a year out. They are typically well in excess of 10%.

[Scorpion Man]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[/ QUOTE ]

You sure piggy? Its not 9.5%, Its 9.5% PER YEAR>

[/ QUOTE ]

Yeah I'm sure. Check the price of ATM LEAPs for a high-growth tech company a year out. They are typically well in excess of 10%.

[/ QUOTE ]

That is not my point. It's not 9.5%. It's 9.5% per year for each year of the leap (sorta...its not that simple because you can close out when the stock is down and stop paying interest...).

Also he is not buying calls. He is buying puts that are 15% OUT OF THE MONEY while continuing to own the stock.

[pig4bill]

[ QUOTE ]
So overall the reason to do this, as you state, is to avoid ST taxes

[/ QUOTE ]

That's a helluva good reason. If his company is like most Sillycon Valley tech companies, his incentive options represent a nice chunk of change (we're not talking 10 grand here) and the difference in tax rates means a substantial difference in the end results.

[ QUOTE ]
and probably because you are not allowed to buy long term puts on your company stock when you still work there (which is the b.s. of this product from a regulatory standpoint, as an aside).

[/ QUOTE ]

I've never heard of any such restriction at tech companies here.


[ QUOTE ]
Generally, if I am looking for risk reduction and diversification, I would much prefer to simply sell the stock and diversify. This cuts out all the middle man costs and caps your losses just as effectively.

[/ QUOTE ]

It also kills him tax-wise and erases possible future gains in this stock.

[ QUOTE ]
I think about it like this. If I were sitting around from scratch and constructing a portfolio, would I choose a regular old diversified portofolio? Or woudl I choose to have some buy LEAPs for me, so i could get way overconcentrated in a single stock, then borrow moeny from those people using my stock as collateral, then get diversified while paying a usurious rate.

[/ QUOTE ]

Usurious? 9.25% usurious? LOL

You're trying to look at every little detail and tear it apart. This is bad. That is bad. Instead of looking at the whole picture and what it would do for him - cut a big chunk of his tax bill, limit his possible loss to 15% while allowing unlimited gain potential, give him his cash right away so he can "build a portfolio" if he wants to, and all for a 9.25% rate.

Ah well, it's moot anyway since he can't get the original deal in California.

[pig4bill]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[/ QUOTE ]

You sure piggy? Its not 9.5%, Its 9.5% PER YEAR>

[/ QUOTE ]

Yeah I'm sure. Check the price of ATM LEAPs for a high-growth tech company a year out. They are typically well in excess of 10%.

[/ QUOTE ]

That is not my point. It's not 9.5%. It's 9.5% per year for each year of the leap (sorta...its not that simple because you can close out when the stock is down and stop paying interest...).

[/ QUOTE ]

That's what I said. The LEAP premium per year is in excess of 10%.

[ QUOTE ]
Also he is not buying calls. He is buying puts that are 15% OUT OF THE MONEY while continuing to own the stock.

[/ QUOTE ]

What's the difference? They both have the same effect. If you're going to pick nits and say the interest he's paying is a big deal, don't forget the time value of money offsets a large part of that because he's getting the money right now.

[DesertCat]

[ QUOTE ]


I don't think applying for the loan with a false out of state address is a good idea.


[/ QUOTE ]

It's a terrible idea. The guy is either a moron who didn't know where you worked and lived (very unlikely) or treating you as one, either way not someone you want to deal with. Sounds like he just wants to get his commission regardless of what personal risks you take. And he doesn't care if you lie to his company, so he has zero ethics. Stay far, far, away. You might consider talking to someone in charge of his group/company so they know what he's doing, and talking to your own corporate legal council so that other employees don't get bait and switched by the same company into bad deals.

[Scorpion Man]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[/ QUOTE ]

You sure piggy? Its not 9.5%, Its 9.5% PER YEAR>

[/ QUOTE ]

Yeah I'm sure. Check the price of ATM LEAPs for a high-growth tech company a year out. They are typically well in excess of 10%.

[/ QUOTE ]

I am getting ready to flame you, piggy, but first some facts. I said this:

Also he is not buying calls. He is buying puts that are 15% OUT OF THE MONEY while continuing to own the stock.

Your reply:
"What's the difference? They both have the same effect. "
This pretty much should disqualify you from opining on this board on these issues again...or at least from anyone with half a brain listening to you.

In terms of pricing,

It would help if we had the company name or at least an idea of its volatility characteristics. But if its a lot of money and these guys are willing to do it at the original high 85% LTV, its likely a larger company in acquiring mode...so for example lets just think about ORCL and CSCO.

ORCL -- At 78% LTV a Jan 09 put (a year and a half) with a $15 strike is $0.70 (3.6% for 20 months, not much more than 2% per year).

CSCO -- 80% of current mkt is $20.40. Taking a slight discount to the $20 Jan 09 puts would put them at <$1, or 5% total or 3.5% or so per year, if you want to think about it that way (obviously options are not priced in this fashion, but we are talking very broad brush for illustrative purposes.)

GOOG -- 80% of current is $386...the Jan 09 puts are around $19 for that level...4% of the current stock price, <2.5% per year.

It's nowhere near as expensive as you are saying. Only for a highly volatile company at this pricing would this begin to get interesting.

[modaddy]

I now have another lender offering me the same terms as the original deal, saying "I have done stock loans for CA clients in the past and can provide references if needed." but the company doesn't have as much "polish" as hedgelender.

You guys want to take a look at their website and let me know what you think? The BBB report here says "The Bureau's information on this company is being updated, and no report is available at this time."

Oh, and for those who were asking, my company does prohibit me from directly shorting our stock. I don't, however, see anything about this type of transaction.