Variable prepaid forward
Also: variable prepaid forward, VPF, prepaid variable forward
A private derivative where the shareholder receives discounted cash up front against future variable share delivery between a floor and ceiling price. Lets concentrated holders monetize without triggering immediate capital gain.
A variable prepaid forward is a tailored contract between an individual and an investment bank. The investor commits to deliver shares at a future date (typically three to five years) and receives a cash payment upfront, usually 75% to 85% of current share value. At settlement, the number of shares delivered varies based on the then-current stock price: more shares if the stock is below a floor, the maximum commitment if above a ceiling, and a sliding scale in between. The economic effect is monetizing most of the position while retaining some upside and deferring capital gains recognition.
Example: a pre-IPO founder holds $30 million of shares. A VPF provides $23 million upfront against delivery in three years. Floor set at 90% of today’s value, ceiling at 135%. If the stock rises 80%, she delivers the maximum (ceiling-capped) share count, keeping the delta above. If it falls, she delivers additional shares to cover the floor. No current capital gain is recognized because she has not disposed of the shares.
Common mistake: executing a VPF that eliminates most price risk, which may be recharacterized as a constructive sale under Section 1259.
VPFs matter at executive concentrated positions of $5 million plus, and at pre-IPO or lockup-constrained windows where other hedges are unavailable.