These two financing approaches solve the same basic problem, needing cash to exercise options, but they allocate risk in opposite directions. This post lays out the core difference directly and where each tends to make more sense.
What’s the fundamental difference?
A loan (personal loan, HELOC, margin loan, or similar) is recourse debt: the lender can pursue repayment from you personally regardless of what happens to the shares you used the money for. Non-recourse financing is structured specifically so the financing provider’s only recourse is against your shares’ eventual value, meaning if that value ends up being zero, you typically owe nothing back out of pocket.
How does risk get allocated differently?
With a loan, you carry the full downside risk (you owe the money regardless of outcome) but keep the full upside if the company succeeds, beyond the fixed interest cost. With non-recourse financing, the provider absorbs the downside risk (they lose their advance if the company fails), but in exchange, they typically take a significant share of the upside if the company succeeds, commonly 20% to 50% of your eventual proceeds once fees and terms are factored in.
Which one costs more if the company succeeds?
Non-recourse financing usually costs more in dollar terms if things go well, since giving up 20% to 50% of a large eventual payout is typically a bigger number than the fixed interest on a loan of similar size. The tradeoff is that a loan’s cost doesn’t change based on outcome, meaning it’s cheap if the company succeeds but genuinely risky if it doesn’t, while non-recourse financing’s cost only materializes if there’s something to take a share of.
Which one costs more if the company fails?
A loan costs you the full amount plus interest regardless, since you owe it back either way. Non-recourse financing, by design, typically costs you nothing beyond any upfront fees if the company fails and the shares end up worthless, since there’s no recourse against you personally.
How do borrowing limits compare?
Personal loans are typically capped in the $50,000 to $100,000 range for most borrowers (higher for a few specialty lenders), based on your income and credit, unrelated to your equity. Non-recourse financing amounts are instead based on the estimated value of your shares and the provider’s own underwriting, meaning it can sometimes cover a larger exercise than a personal loan would allow, particularly for employees with substantial equity but limited personal borrowing capacity.
Worked example
Say you need $70,000 to exercise a batch of options, and you’re comparing a personal loan against non-recourse financing structured to cost 30% of eventual proceeds.
If the company later has a $600,000 exit for your shares: with the loan, you’d keep roughly $600,000 minus the loan principal and interest paid, likely leaving the large majority of that value with you. With non-recourse financing, the provider takes 30%, or $180,000, leaving you $420,000, a materially smaller amount, but one you’d have received without ever risking personal funds if the outcome had gone the other way. If the company instead fails: with the loan, you still owe the full $70,000 plus interest, a real loss on top of losing the equity. With non-recourse financing, you typically owe nothing further.
FAQ
Which option is better? Neither is universally better. A loan tends to cost less if the company succeeds but carries real personal risk if it doesn’t. Non-recourse financing costs more if the company succeeds but removes that personal downside risk entirely.
Can I combine both approaches? Some people use a smaller personal loan or cash for part of an exercise and non-recourse financing for a portion they couldn’t otherwise afford, though this depends on the specific amounts and what providers are willing to structure.
Does non-recourse financing show up as debt on my credit report? Generally no, since it’s not a traditional loan obligation, though this can vary by provider and structure, so it’s worth confirming directly.
Is one option more common than the other for small exercises? Personal loans, or simply cash, tend to be more common and typically cheaper for smaller exercises, since the relatively high cost of non-recourse financing is harder to justify on a smaller total amount.
Do both options require me to have already been granted options? Yes. Both are ways to fund exercising options you already hold, not ways to acquire new equity.
What to do next
The right choice depends on your own risk tolerance, how much cash you’d need to borrow, and your own view of the company’s prospects, none of which a general comparison can settle for you. You can model both scenarios with your own numbers at movewealth.io.
MoveWealth is not a broker-dealer, investment adviser, or lender. This is educational content, not financial, tax, or legal advice. Consult a qualified professional about your specific situation.