The Founder’s Hedge: Equity Collars & Prepaid Variable Forwards (PVF)
The Founder’s Hedge: Equity Collars & Prepaid Variable Forwards (PVF)
You are sitting on $50M of Amazon stock. You want cash to buy a ranch, but selling triggers a $15M tax bill. How to lock in your gains, borrow 85% of the value tax-free, and walk away even if the stock goes to zero.
Executive Summary
- The “Concentration” Paradox: To get rich, you concentrate (bet on one company). To stay rich, you diversify. But switching from “Founder Mode” to “Diversified Mode” usually costs **30%+ in taxes**.
- The Solution (Equity Collar): You construct a “Zero-Cost Collar” around your stock.
1. **Buy a Put Option:** Protects you if the stock drops below $90. (Floor).
2. **Sell a Call Option:** You give up gains above $120. (Ceiling).
👉 Result: The premium from selling the Call pays for the Put. You have locked your value between $90 and $120 for free. - The Monetization (PVF): Now that the downside is hedged, a bank will lend you **~80-90% of the value** upfront. This is a **Prepaid Variable Forward (PVF)**. You get the cash *today*, but you don’t sell the shares (and pay tax) until the contract ends in 3-5 years.
The “Constructive Sale” Trap (Section 1259)
The IRS Red Line: If you hedge too perfectly, the IRS says you effectively sold the stock.
👉 The Rule: To avoid triggering immediate tax, you must keep some risk. There must be a sufficient spread (usually roughly **15%**) between the Put and Call strikes. If you collar it at $100 Floor / $101 Ceiling, that is a “Constructive Sale” and you owe tax immediately.
Mechanic: The Non-Recourse Loan
Simulation: Monetizing $10M of Stock
| Feature | Margin Loan (SBLOC) | Prepaid Variable Forward (PVF) |
|---|---|---|
| Liability | Recourse (Personal Guarantee) | Non-Recourse (Walk Away) |
| LTV Ratio | Low (~50%) | High (~80-90%) |
| Downside Risk | Margin Call (Force Sell) | Protected (Put Option) |
“A PVF is not just a loan; it is a partial exit. You are selling the volatility of your stock to Wall Street in exchange for cash today, while deferring the tax bill to a future date when you might have losses to offset it.”