- For cash-poor but equity-rich tech founders, loans are a no-brainer unless your stock crashes.
- Customers must provide more collateral or risk a forced sale of shares to satisfy a lender.
- These eight people in companies affected by the sale have pledged more than 10% of their shares.
For equity-rich but cash-poor tech entrepreneurs, loans are a no-brainer. It’s cheaper to finance your lifestyle – or your luxury yacht – by taking out a low-interest loan using shares as collateral than it is to sell your shares, resulting in
taxes and wipes out future market gains.
But 2022 has not been kind to tech stocks, with supply chain disruptions, anticipated interest rate hikes and the Russia-Ukraine crisis. the Nasdaq 100 Technology Index is down 22% since the start of the year, and it’s only March.
When the pledged shares fall, it attracts the attention of banks who have multi-million dollar loans against them.
Banks offer customers the option of filling a collateral gap by pledging other assets, including other securities, cash, or even artwork and real estate. But if they don’t repay their loan, the lender may issue a margin call and trigger an involuntary stock sale, potentially driving the price down further.
Peleton’s share price has cratered more than 80% in the past 12 months, causing concern for John Foley, its former CEO who has a loan with Goldman Sachs against 20% of his stake. Goldman is talking with Foley, who resigned as chief executive in early February, about adding guarantees or extending repayment terms, a person briefed on the matter told Insider. Representatives for Foley and Goldman Sachs declined to comment.
Foley isn’t the only one potentially in hot water. Insider analyzed proxy statements filed with the Securities and Exchange Commission to identify eight executives of tech companies affected by the sale who pledged more than 10% of their stakes to secure personal loans.
For example, Julie Wainwright, CEO of TheRealReal, pledged 1.7 million shares, with a current value of around $10.7 million, to secure personal debt. The luxury resale market debuted on the Nasdaq in 2019, and the stock has fallen 40% since the start of the year.
Jared Isaacman, the billionaire CEO of payment processor Shift4, has a margin loan for 10 million shares with Goldman Sachs. The shares are currently worth $498 million.
Electric vehicle battery maker Romeo Power has gone public via
in January 2021, and shares are down 61% so far this year. Michael Patterson, its founder, is using his shares as collateral for “personal residential real estate,” according to the most recent proxy statement.
None of the insiders named above reported having had to sell stocks due to SEC margin calls.
Spokespersons for Foley and cloud computing company Fastly, founded by Artur Bergman, declined to comment on Insider’s questions about the loans, including whether executives had to add more collateral. A representative for Shift4 told Insider that Isaacman did not receive a margin call from his lender Goldman Sachs and was not asked to provide additional collateral.
Representatives of the companies led by the other six insiders did not respond to Insider’s questions in time for publication.
Pledging shares involves risk. For example, in 2012, after shares of Green Mountain Coffee Roasters fell, company chairman Robert Stiller had to sell 5 million shares because of a margin call of Deutsche Bank. It was dismissed as chairman of the board to sell shares during a blackout period.
Some companies have policies to mitigate this risk and protect other investors. Romeo Power stock trading policy stipulates that Patterson’s indebtedness cannot exceed 10% of the fair market value of the collateral, using the average closing price of the last 10 closing days. A representative for Romeo Power did not respond to Insider’s question about whether Patterson had to repay any portion of the loan to comply with this policy.
Elon Musk, the world’s richest person, is using 36% of his stake in Tesla – 88.3 million shares – to secure personal loans. But he’s likely unaffected by the company’s 34% decline since Jan. 1, because he’s had the credit facility for years and Tesla stock has soared.
Margin calls are a last resort for banks
Banks are reluctant to resort to margin calls or involuntary sales, which must be reported to the SEC and are a surefire way to cut ties with customers. None of the executives identified above said they were forced to sell shares due to a margin call.
A senior executive at a private bank told Insider that clients’ pledged holdings are monitored so clients can add additional collateral long before the value of the securities hits margin. In the case of this executive, if the value of the collateral falls below 70% of the value of the loan, the bank contacts the customer if he has not already done so, which happens frequently.
“The objective is to have a guarantee surplus. I never want to sell a client,” the executive said on condition of anonymity in order to speak freely.
They added that margin calls were not a concern when selling tech stocks, unlike at the start of the pandemic.
“It’s not March 2020. We haven’t had 1,200 point down days,” they said.