What is a Tap Fund?
A Tap Fund is a fund that allows startup employees to diversify the risk of holding a single company’s shares. Each employee contributes some of their company’s stock to the Tap Fund and in return gets a share of the whole pool of stock. By pooling your stock with others, you can dramatically reduce your concentration in a single company and potentially get cash flow sooner.
Who can use Tap Funds?
Tap Funds are available to U.S. residents who are accredited investors. It is intended for current or former employees of private companies.
How do Tap Funds work?
Each employee signs two key documents in relation to the fund.
- Forward agreement: In this agreement, each employee agrees to deliver a certain number of shares to the fund.
- Subscription agreement: In this agreement, each employee receives a share of the fund.
As an example we can imagine a Tap Fund that has 2 employees from each of 25 companies. Each employee contributes $100,000 of their individual stock and receives $100,000 worth of the fund in return based on share prices at the time they contribute.
Now let’s imagine that one of the companies, XYZ Company, gets acquired for cash. Tap collects the cash from the 2 employees of XYZ Company and distributes that cash proportionally to the rest of the holders of the fund. The fund wraps up once all companies have exited.
How much can I pool in a Tap Fund?
Tap Funds typically require a minimum contribution of $25,000. The maximum amount is typically 30% of your holdings. This may vary depending on the size of the existing positions in the fund.
How do you determine the price at which I am contributing my shares to the fund?
Tap’s team has years of experience in private secondary markets and an established secondary markets brokerage business. We have developed a straightforward methodology to determine the pricing for private companies. We utilize information from data aggregators, public markets, secondary marketplaces, and our network of large institutional buyers. The same methodology is used across all companies to determine prices.
What are the tax implications?
Tap does not provide legal or tax advice. Tap has attempted to allow you to make non-taxable contributions to the fund. Please see this FAQ on Forwards to learn more.
What are the fees?
There are no cash fees to run the fund. The expenses of running and managing the fund are paid instead from the shares of the fund itself. This keeps Tap and its partners aligned with the long term success of the fund.
How long does it take to receive a payment?
Tap Funds make distributions in a timely fashion whenever an underlying company has an exit event.
Can I redeem or sell my interest in the fund?
Because Tap Funds require that you deliver shares in the future, you cannot redeem or trade your shares in the fund. However, Tap Funds make distributions when each company has an exit so it is likely you will receive cash throughout the life of the fund.
How do I know the fund will receive the shares?
Each employee signs a forward contract to deliver shares to the fund. These forward contracts have been used for decades across many thousands of private stock transactions. They are constructed to be as iron clad as possible. Each contract includes a Power of Attorney which gives an added layer of security.
Who manages Tap Funds?
Tap Funds are managed by the advisory arm of Tap Technologies Inc.