Variable Prepaid Forward (VPFC)
Receive 70–85% of your share value today with full tax deferral, by pledging shares into a collar contract.
- Immediate cash advance
- 70–85% of current FMV
- Structure
- Non-recourse advance + floor/cap price collar
- Tax treatment
- Not a constructive sale (defers all capital gains)
- IRS authority
- Revenue Ruling 2003-7
- Contract maturity
- Typically 2–5 years
- Upside participation
- Retained up to the hard Cap price
How it works
You pledge your shares to a financial institution. In return, they hand you cash today, typically 70-85% of the shares' current value. At the same time, you and the institution agree on two price boundaries: a Floor Price (a minimum guaranteed value, for example 80% of current value) and a Cap Price (a maximum, for example 120% of current value). The floor protects you: if the stock drops below the floor, the institution absorbs the loss, not you. The cap is the trade-off: you give up any gains above the cap price. The institution keeps the upside above the cap in exchange for giving you cash today and protecting your downside. Because the exact number of shares you deliver at the end depends on the future stock price (it is variable, not fixed), the IRS does not treat this as a sale. Under Revenue Ruling 2003-7, it is an open contract, so no taxes are owed until the contract settles years later.
A concrete example
You hold 10,000 shares worth $20 each ($200,000 total). You enter a VPFC with a Floor of $16 and a Cap of $24, receiving an 80% advance: $160,000 in cash today. The contract matures in 3 years. The number of shares you deliver at settlement depends on the stock price. Scenario 1 (stock drops to $10): you deliver all 10,000 shares. The contract is non-recourse: you keep the $160,000 and owe nothing more. Scenario 2 (stock stays at $20): you deliver shares worth the Floor amount. That is $160,000 / $20 = 8,000 shares. You keep 2,000 shares worth $40,000 plus the $160,000 advance. Scenario 3 (stock rises to $40): the delivery ratio is locked at Floor / Cap = 16/24 = two-thirds of your pledged shares. You deliver 6,667 shares. You keep 3,333 shares worth $133,333 plus the $160,000 advance. The institution received shares now worth $266,667 but only advanced you $160,000, capturing the appreciation above the cap. That is the cost of the floor protection and the upfront cash.
Cash upfront
$103,040
74% of current value
Current value
$140,000
Floor price
$11.20
Cap price
$21.00
| Exit | VPFC total | Just hold | Trade-off |
|---|---|---|---|
| 0.5x ($7) | $103,040 | $70,000 | +$33,040 |
| 0.75x ($11) | $103,040 | $105,000 | $-1960 |
| 1x ($14) | $131,040 | $140,000 | $-8960 |
| 1.5x ($21) | $201,040 | $210,000 | $-8960 |
| 2x ($28) | $233,707 | $280,000 | $-46293 |
| 3x ($42) | $299,040 | $420,000 | $-120960 |
You receive $103,040 cash today (74% of current value). At a 2x exit, you keep $130,667 in retained shares plus the upfront cash, totaling $233,707 vs $280,000 from holding outright. Below the floor ($11), you keep the advance and deliver all shares, making the VPFC a better outcome than holding.
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Simplified model assuming ~92% advance rate on floor value. Actual terms vary by provider, share class, and company. Does not include taxes. This is not investment advice.
The core advantage: deferred taxation
Because the VPFC is not treated as a sale, you owe zero capital gains tax when you receive the cash. The tax event is deferred until the contract settles at maturity, typically 2-5 years later. This means you can use the cash today for a home purchase, debt payoff, or diversification, while planning your tax strategy over a multi-year horizon. The primary limitation is the hard cap on upside: if the company achieves a massive valuation above the Cap at IPO, you forfeit all appreciation above that level on the shares you deliver. VPFCs are most commonly used by founders and executives with very large, concentrated positions where immediate diversification and tax deferral outweigh the cost of capping some upside.
Common questions
Why isn't a VPFC treated as a sale for tax purposes?
When you sell shares outright, the IRS taxes your gains immediately. A 'constructive sale' is when a transaction is so similar to a sale that the IRS treats it as one, even if no shares actually changed hands yet. A VPFC avoids this because the number of shares you ultimately deliver is variable: it depends on the future stock price. Because neither you nor the institution knows the exact outcome when the contract is signed, the IRS treats it as an open obligation, not a completed sale. This is established under IRS Revenue Ruling 2003-7.
What is the regulatory risk with VPFCs and pre-IPO shares?
The SEC issued guidance (a Compliance and Disclosure Interpretation in 2022) indicating that forward contracts on private shares with absolute transfer restrictions may not qualify for the physical delivery exclusion. In plain language: if your company's equity plan prohibits you from transferring shares, the SEC may reclassify the VPFC as a 'security-based swap' under the Dodd-Frank Act, which imposes registration, reporting, and clearing requirements. This has limited certain VPFC structures in the pre-IPO space unless the company explicitly waives its transfer restrictions for the transaction.
How does a VPFC differ from simply selling my shares?
Selling triggers immediate capital gains tax on all your gain. A VPFC provides comparable liquidity (70-85% of value versus 100% in a sale, before tax) while deferring the tax bill for 2-5 years. The VPFC also gives you downside protection (the floor) and lets you keep some upside (up to the cap), features that an outright sale does not provide. The trade-off is that you receive less upfront and give up gains above the cap.
Providers for this path
These providers operate in the Variable Prepaid Forward (VPFC) space. StrikeRates does not endorse or recommend any provider. Review each independently.
Sources
This content is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws and regulations change frequently. Consult a qualified tax professional or attorney before making decisions about your equity compensation.
Use the scenario modeler to see how Variable Prepaid Forward (VPFC) mechanics play out with your specific grant. The full app goes deeper: per-grant modeling, fund signals, and competing lender terms matched to your situation.