Prepaid Variable Forward Contracts for Executives with Restricted Stock

 

A four-panel educational comic strip titled "Prepaid Variable Forward Contracts for Executives with Restricted Stock." Panel 1: A financial advisor explains, “A PVFC gives you cash today for shares to be delivered later,” while handing money to an executive. Panel 2: The executive asks, “So I don’t have to sell now—and trigger taxes?” while holding a “Restricted Stock” document with a “TAX” stamp. Panel 3: The advisor replies, “Correct! Taxes are deferred ‘til settlement in the future,” while pointing to a sign labeled “FLOOR ↕ CAP.” Panel 4: The executive smiles and says, “Nice—liquidity and downside protection all in one!” with a shield icon in the background.

Prepaid Variable Forward Contracts for Executives with Restricted Stock

📌 Table of Contents

What Are Prepaid Variable Forward Contracts?

A Prepaid Variable Forward Contract (PVFC) is a sophisticated financial tool that allows an executive to get upfront cash in exchange for agreeing to deliver shares in the future—based on the stock’s market value at that time.

Unlike a straight stock sale, it defers capital gains tax and keeps the executive economically invested in the underlying shares.

It’s often used by C-suite leaders with large positions in their employer’s stock who want liquidity without triggering SEC reporting or tax consequences immediately.

Why Executives Use PVFCs for Restricted Stock

Many executives receive significant portions of compensation in restricted stock units (RSUs) or long-term incentive stock grants that have vesting schedules or blackout restrictions.

These positions may represent **millions in unrealized wealth**, but they are illiquid due to company policy or securities law restrictions.

PVFCs offer a path to **access capital**, fund diversification, or even invest in private ventures—without a public stock sale.

How a PVFC Works Step-by-Step

1️⃣ The executive enters a contract with a financial institution, pledging a number of shares.

2️⃣ The institution provides an upfront **prepayment**, typically 75–90% of the stock’s current value.

3️⃣ At contract maturity (e.g., 2–5 years), the number of shares to be delivered depends on the stock’s price—subject to a **floor and cap**.

4️⃣ If the stock goes up, fewer shares are delivered. If it drops, more shares are delivered, up to the full pledged amount.

This “collar” structure allows partial participation in upside while protecting against downside.

Key Benefits of a PVFC Strategy

✔️ **Liquidity without immediate tax:** Unlike selling shares, no tax is due when the contract is executed.

✔️ **Asset diversification:** Proceeds can be used to invest in other asset classes or reduce concentration risk.

✔️ **Downside protection:** The embedded put option protects against stock depreciation.

✔️ **Compliance with Rule 144:** PVFCs can be structured to avoid triggering insider trading restrictions.

✔️ **No loss of voting rights:** Executives often retain dividends and voting rights during the contract period.

Risks and IRS Considerations

⚠️ **Tax classification:** If not properly structured, the IRS may view the transaction as a constructive sale (under IRC §1259), triggering capital gains.

⚠️ **Market risk:** If stock plummets, more shares must be delivered—or cash if share delivery is not possible.

⚠️ **Loan vs. forward contract risk:** Improper structuring could be classified as a loan, invoking margin rules.

⚠️ **SEC scrutiny:** Executives must ensure PVFCs don’t violate insider trading or disclosure obligations under Section 16.

Always coordinate with tax, legal, and compliance professionals before execution.

Conclusion

Prepaid Variable Forward Contracts are powerful liquidity and planning tools for executives with restricted stock.

They allow access to capital, mitigate downside risk, and defer tax exposure—if structured properly.

But they’re not for everyone. Risks abound, and missteps can result in significant IRS penalties or public scrutiny.

For executives with complex portfolios, a PVFC can unlock flexibility—but only with the right team behind it.

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Keywords: prepaid variable forward contract, executive restricted stock, PVFC tax strategy, equity compensation planning, liquidity without stock sale