Exchange Fund
Risk Reduction
How can I reduce financial risk and protect my net worth?
Shareholders exchange some of their stock tax-free for an interest in the Exchange Fund's diversified portfolio of leading unicorns. The value of a diversified portfolio is substantially less volatile than a single stock
Over-concentration is risky
When the bulk of your net worth is concentrated in a single private growth company's stock, you are exposed to significant financial risk and volatility.
Reduce risk by diversifying
Reduce your risk by exchanging stock tax-free for a partnership interest in the Collective Exchange Fund, a diversified portfolio of leading unicorns.
Generate long term wealth
Build wealth by compounding your tax savings in the Exchange Fund at venture capital rates of return over the long term.
Talk to a Collective Liquidity representative
Our representative is happy to answer all your questions.
What is the Collective Exchange Fund and how can it help reduce risk?
The Collective Exchange Fund is the first exchange fund optimized for unicorn stock. Unicorn employees can exchange their shares for a partnership interest in a diversified fund of equal value without triggering capital gains tax. Exchange Fund limited partners seeking liquidity can typically borrow non-recourse against their partnership interest or, after the first year, redeem it for cash.
The fund is comprised principally of unicorn equities, and smaller allocations to real estate and cash
Collective maintains the quality of the fund's equities portfolio by targeting only the strongest unicorns backed by the best VCs
Only shares of approved companies (which represent less than 10% of unicorns globally) are eligible for exchange into the fund
Exchange Fund limited partners seeking liquidity can typically borrow non-recourse against their partnership interest or, after the first year, redeem it for cash
How Collective provides liquidity in 3 easy steps
For many unicorn employees, Collective is the best way to monetize their stock and reduce their risk by diversifying
Exchange into the Fund
Exchange your stock for a partnership interest of equal value in the Collective Exchange Fund, our diversified portfolio of leading unicorns like yours.
Example
If you hold $100,000 worth of shares in one of the companies in our Eligible Companies, you can exchange your shares for a $100,000 partnership interest in the fund. This diversifies your holdings and reduces your risk.
Get an Exchange Loan
Then, with a non-recourse Exchange Loan, receive a tax-free loan for up to 60% of the value of your partnership interest at any time.
Example
In our example, you can immediately borrow $60,000 (less interest) with an Exchange Loan. And because you don't sell your partnership interest for the money - you just borrowed against it - your partnership interest continues to appreciate in value over time.
Redeem your Fund Interest
When the time is right for you, redeem your partnership interest to pay off your loan and keep any leftover value - earning you even more in a tax efficient manner.
Example
Finally, if you decide to redeem your partnership interest when it is worth $150,000, the proceeds would pay off your loan and leave you with an additional $90,000 in cash. The total liquidity to you would be $150,000 (the $60,000 from the Exchange Loan plus the $90,000 in redemption proceeds after paying off your loan). This is substantially more than you might have expected from a stock sale.
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Diversification is the only free lunch in finance.
Harry Markowitz, Nobel Prize-winning economist
Why diversify to avoid over concentration?
When the bulk of your net worth is concentrated in a single private company's stock, you are exposed to significant financial risk. Though most unicorn employees are excited about their company's future prospects, they also know that the values of high growth, technology companies are extremely volatile (i.e., risky).
- The value of a single private tech company is highly volatile
- A diversified portfolio is much less risky; a loss in one company has limited impact and is offset by gains on other companies
- Collective enables tax-free exchanges of single company stock for a partnership interest in a portfolio of leading unicorns
Why is Collective the best way to diversify?
Before Collective Liquidity created the first exchange fund for private company stock, the only way to diversify was to sell the shares underlying your options and then use the proceeds to buy other assets (e.g., a basket of public securities, real estate, bonds, etc.). Due to taxes and commissions the end result is that for every dollar of stock you sell, you may have less than 50 cents left to purchase diversifying assets.
However, when you trade unicorn stock for a partnership interest in an exchange fund, it's not treated as a sale under U.S. tax laws and so no capital gains tax is triggered. Further, exchange funds don't charge brokerage fees. So, unlike with a stock sale, you get a full dollar's worth of a diversified portfolio for every dollar's worth of shares you exchange. And the dollar value of that difference compounds over the time you stay invested in the fund.
- Save up to 46% on taxes: Compared to a stock sale, which is typically taxed both on the state and federal level, an exchange into an Exchange Fund doesn't trigger capital gains taxes
- Save up to 6% on broker commissions: Collective is not a broker and doesn't charge brokerage fees
- Create long term wealth: In the long run, the difference in after-tax financial outcomes between an Exchange Fund partnership and proceeds from a stock sale can be enormous
This hypothetical illustration shows a $630,000 (90%) difference in value over time between (a) selling shares and investing the after-tax proceeds in a diversified portfolio vs. (b) exchanging on a tax deferred basis into a diversified portfolio. It makes the following assumptions:
- The stock has been held less than a year by a California resident and has a current value of $500,000 with a tax basis of $50,000
- Applicable federal tax rate is 35%; state tax rate is 11%; brokerage fee on stock sale is 6%
- The return on both the proceeds from the “Sell Holdings and Diversify” and the exchange approaches is 15% annually net of management and/or performance fees