How 137 Ventures hacked the stock option tax code by Jessi Hempel @FortuneMagazine May 17, 2012, 9:14 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons 137 Ventures founders (from left) Justin Fishner-Wolfson, Kathy Chan, and Alex Jacobson in San Francisco FORTUNE — In 2010, after three years as a communications manager at Facebook, Kathy Chan left. The 28-year-old’s Facebook shares were the equivalent of a winning lottery ticket — the company’s valuation in private markets had already soared to $23 billion, but it was still a few years from its IPO. To keep her stock options when she quit, Chan would have had to pay a tax that could have totaled more than 30% of their value. So she sold a portion of her stock — which is likely to be about 300% more valuable at the time of Facebook’s imminent IPO — to cover her taxes. The vexing nature of Chan’s problem provided the impetus for her next business. She teamed with Justin Fishner-Wolfson and Alex Jacobson — both alumni of the venture capital firm Founders Fund — to start a San Francisco-based investment group, 137 Ventures. (The prime number comes from Fishner-Wolfson’s grandfather, who for decades worked at the New York Stock Exchange; 137 was his annunciator code.) The trio has raised $50 million so far, landing shares at some of the hottest companies in the Valley while helping early employees gain liquidity without having to sell their stock. More: 10 brilliant tech visionaries Similar investment vehicles have been created before, but they are extremely rare because the tax structure can be complex. And not everyone qualifies for a 137 Ventures loan — most people don’t, in fact. Fishner-Wolfson, 29, and Jacobson, 40, are looking for late-stage companies likely to have outsize returns. The stock acts as collateral for the loan. Loan recipients negotiate interest rates (usually from 5% to 8%) and offer 137 Ventures the opportunity to exercise a small percentage of their options. The fund has made five loans, between $500,000 and $5 million each, to the likes of Joe Lonsdale, who helped found the analytics company Palantir Technologies in 2004. He calls 137 Ventures a “creative way of hacking the system,” adding that it works in part because investors know and trust these Silicon Valley aficionados. There’s another reason people haven’t had much success with this business model in the past. Employee stock options were designed in part to make it difficult for people to leave before an initial public offering. After all, if anyone could cash in early, everyone would be doing so. Still, many venture-backed tech companies were never intended to be private for so long, and their anticipated values have rarely been so large. In a way, 137 Ventures speaks to these heady times in the Valley — both to the problem it solves and the fact that the outfit exists at all. This story is from the May 21, 2012 issue of Fortune.