Receive 70–85% of your share value today with full tax deferral, by pledging shares into a collar contract.
In a VPFC, you pledge your private stock to a financial institution in exchange for an immediate lump-sum cash payment, typically 70–85% of the current fair market value. Simultaneously, the parties establish a pricing collar: a Floor Price (e.g., 80% of current FMV) and a Cap Price (e.g., 120% of current FMV). The floor acts like a protective put, guaranteeing you won't lose value if the stock declines. The cap acts like a sold call option. You give up appreciation beyond the cap in exchange for the floor protection and the advance. Because the final number of shares to be delivered is variable and depends on the future stock price at contract maturity, IRS Revenue Ruling 2003-7 treats this as an open contractual obligation, not a constructive sale.
At maturity, settlement operates on three boundaries based on the terminal stock price relative to the Floor and Cap. Downside scenario (price ≤ Floor): you deliver all pledged shares to the lender to satisfy the advance. The contract is non-recourse, so you keep the upfront cash and owe nothing further. Neutral scenario (Floor < price ≤ Cap): you deliver a fractional number of shares equal in value to the Floor amount, retaining the excess shares. Upside scenario (price > Cap): you deliver shares equal to the Cap value, forfeiting any growth beyond the Cap, but retaining all remaining shares for the IPO or sale.
Because the VPFC is not a constructive sale, capital gains taxation is completely deferred until the contract actually settles at maturity, even though you've received millions in cash today. This means you can fund immediate liquidity needs now without triggering a massive tax bill, then plan the settlement timing and tax strategy over a 2–5 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. VPFCs work best for founders and executives with very large, highly concentrated positions where immediate diversification and tax deferral outweigh the cost of capping the upside.
A constructive sale occurs when a taxpayer effectively disposes of an appreciated financial position without actually transferring it. A VPFC avoids this treatment because the final number of shares delivered is variable: it depends entirely on the future stock price. Under IRS Revenue Ruling 2003-7, this variable delivery structure means the transaction remains an open contractual obligation, not a completed sale, until maturity.
The SEC has signaled in recent guidance that forward contracts on private securities subject to absolute transfer restrictions may no longer qualify for the physical delivery exclusion. If the underlying shares cannot legally be transferred at the time the contract is struck, the SEC may reclassify the transaction as a 'security-based swap' under Dodd-Frank, which carries onerous reporting and clearing requirements. This regulatory risk has limited certain VPFC structures in the pre-IPO space unless the company explicitly waives transfer restrictions.
An outright secondary sale triggers immediate capital gains taxation on all your gain in the year of sale. A VPFC provides comparable immediate liquidity (70–85% of FMV vs. 100% in a sale, before tax) while completely deferring the tax event for 2–5 years. The VPFC also provides downside protection via the floor and retains some upside below the cap, features that an outright sale does not have.
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