- For cash-poor but equity-rich tech founders, loans are a no-brainer — unless your stock plummets.
- Clients have to put up more collateral or risk a forced sale of stock to satisfy a lender.
- These eight people at firms hurt by the sell-off have pledged more than 10% of their stakes.
For tech entrepreneurs who are equity-rich but cash-poor, loans are a no-brainer. It’s cheaper to finance your lifestyle — or luxury yacht — by taking out a low-interest loan using shares as collateral than it is to sell your shares, which incurs
tax 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’s tech index is down 22% since the beginning of the year, and it’s only March.
When pledged stocks plummet, it gets the attention of the banks that have multimillion-dollar loans against them.
Banks give clients opportunities to fix a collateral shortfall by pledging other assets, including other securities, cash, or even art and real estate. But if they default on their loan, the lender can issue a margin call and trigger an involuntary stock sale, which could push the price further down.
Peleton’s stock price has cratered by more than 80% in the past 12 months, which spells trouble for John Foley, its former CEO who has a loan with Goldman Sachs against 20% of his stake. Goldman is discussing with Foley, who resigned as chief executive in early February, about adding collateral or extending the repayment terms, a person briefed on the matter told Insider. Representatives for Foley and Goldman Sachs declined to comment.
Foley is not the only one potentially in hot water. Insider analyzed proxy statements filed with the Securities and Exchange Commission to identify eight executives at tech companies hit by the sell-off who have pledged more than 10% of their stakes to secure personal loans.
For example, Julie Wainwright, CEO of TheRealReal, pledged 1.7 million shares, currently worth about $10.7 million, to secure personal debt. The luxury resale marketplace made its Nasdaq debut in 2019, and the stock has dropped by 40% since the beginning of the year.
Jared Isaacman, the billionaire CEO of payments processing firm Shift4, has a margin loan against 10 million shares with Goldman Sachs. The shares are currently worth $498 million.
Electric vehicle battery manufacturer Romeo Power went public via
in January 2021, and shares are down 61% so far this year. Michael Patterson, its founder, uses his stock as collateral for “personal residential real estate,” according to the most recent proxy statement.
None of the insiders named above have reported having to sell shares due to margin calls to the SEC.
Spokespeople for Foley and cloud computing firm Fastly, which was founded by Artur Bergman, declined to comment on Insider’s questions about the loans, including whether the executives have had to add more collateral. A representative for Shift4 told Insider that Isaacman has not been issued a margin call by his lender Goldman Sachs, and has not been asked to put up additional collateral.
Representatives for firms led by the other six insiders did not respond to Insider’s queries in time for publication.
Pledging shares comes with risk. For instance, in 2012, after shares of Green Mountain Coffee Roasters nose-dived, the company’s chairman, Robert Stiller, had to sell 5 million shares because of a margin call from Deutsche Bank. He was removed as board chairman for selling shares during a blackout period.
Some companies have policies to mitigate this risk and protect other investors. Romeo Power’s equity-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 previous 10 closing days. A representative for Romeo Power did not respond to Insider’s query as to whether Patterson has had to repay part of the loan to comply with this policy.
Elon Musk, the world’s richest person, uses 36% of his Tesla stake – 88.3 million shares – to secure personal loans. But he is likely unaffected by the company’s 34% decline since January 1 as he has had the credit facility for years, and Tesla stock has skyrocketed.
Margin calls are a last resort for banks
Banks are hesitant to resort to margin calls or involuntary sales, which have to be reported to the SEC and are a surefire way to burn bridges with clients. None of the executives identified above have reported being forced to sell stock due to a margin call.
A senior private-bank executive told Insider that clients’ pledged holdings are monitored so the clients can add additional collateral well before the value of securities reaches the margin. In the case of this executive, if the value of the collateral dips below 70% of the loan’s value, the bank reaches out to the client if they have not already, which frequently happens.
“The goal is to have excess collateral. I never want to sell a client out,” the executive said on the condition of anonymity in order to speak freely.
They added that margin calls have not been a concern during the tech stock sell-off, unlike at the beginning of the pandemic.
“This isn’t March of 2020. We haven’t had 1,200-point-drop days,” they said.