The obvious solution is to sell and diversify. But selling often comes with substantial capital gains taxes, restrictive insider trading windows, and the emotional challenge of giving up future upside.

Fortunately, there’s a sophisticated tool that can address these issues simultaneously: the Prepaid Variable Forward (PVF). This advanced derivative strategy allows investors to unlock liquidity, limit downside, retain partial upside, and defer taxes — all without selling a single share.

What Is a Prepaid Variable Forward?

A Prepaid Variable Forward is a financial contract that allows a stockholder to receive an upfront cash payment today in exchange for a future obligation to deliver a variable number of shares (or the cash equivalent) at a later date.

Think of it as a structured loan secured by your stock — but one with significant tax, liquidity, and risk-management advantages.

Here’s how it works in simple terms:

1. You enter into a contract with a financial institution, agreeing to deliver a variable number of shares at a future date (usually 3–5 years).
2. The institution prepays you a significant portion of the stock’s current value upfront — typically 75% to 90%.
3. At maturity, the number of shares you deliver depends on the stock’s performance relative to a floor price and a cap price set in the contract.

The key is the “variable” part: you pledge to deliver more shares if the stock falls and fewer if it rises, creating a balance of risk and reward that’s far more controlled than simply holding or selling.

How a Prepaid Variable Forward Works: A Detailed Example

Let’s walk through a practical example to see how a PVF might work for an executive with a concentrated position.

Scenario:

• You hold 100,000 shares of XYZ Corp.
• Current stock price: $100/share (total position = $10 million).
• Your cost basis: $20/share.

You want liquidity for diversification and tax planning but don’t want to sell your shares today.

Step 1: Enter into a PVF Agreement

• Floor price: $85/share
• Cap price: $130/share
• Prepayment: 85% of current value ($8.5 million)

Step 2: Receive Upfront Cash — You immediately receive $8.5 million in cash without selling any shares. This liquidity can be used for portfolio diversification, real estate, estate planning, or other investments.

Step 3: Settlement at Maturity (e.g., 3 Years Later)

• If the stock is below $85: You deliver the full 100,000 shares.
• If the stock is between $85 and $130: You deliver a variable number of shares (more if the price is lower, fewer if higher).
• If the stock is above $130: You deliver only enough shares to equal $13 million in value (your upside is capped, but you keep the rest).

This structure creates a defined risk and return corridor — protecting you from major downside losses while preserving some upside potential.

Key Benefits of a Prepaid Variable Forward

A PVF offers a rare combination of advantages that make it one of the most powerful tools for concentrated stock management.

1. Immediate Liquidity Without Selling

One of the biggest challenges for executives with concentrated positions is accessing liquidity without triggering a sale. A PVF solves this by providing cash upfront — often 75–90% of the stock’s current value — while you retain legal ownership of the shares during the contract term.

This liquidity can be used for:

• Diversifying into other asset classes
• Funding real estate purchases or lifestyle goals
• Gifting or funding trusts
• Paying down debt
• Investing in private opportunities

All without selling a single share today.

2. Downside Protection

The floor price in a PVF contract acts as a built-in safety net. If the stock falls significantly, you deliver more shares — but your effective sale price is never below the floor. This can dramatically reduce portfolio volatility and protect against catastrophic losses.

In our earlier example, even if XYZ Corp. falls to $50, you’ve effectively “sold” at $85 — nearly 70% above the market price.

3. Partial Upside Participation

Unlike most hedging strategies, a PVF doesn’t eliminate upside potential. If the stock appreciates, you still participate — up to the cap price. This balance between risk reduction and continued participation is one of the PVF’s biggest strengths.

4. Tax Deferral

One of the most powerful features of a PVF is tax deferral. Because you haven’t actually sold the shares, the IRS does not treat the transaction as a taxable event at the time of the contract. You retain ownership of the shares until delivery at settlement — often years in the future — and taxes are deferred until that point.

This allows you to:

• Defer capital gains taxes
• Potentially sell in a lower tax bracket in the future
• Time the transaction around legislative changes or tax reform
• Combine with other strategies (like charitable giving) for further tax efficiency

5. No Insider Trading or 10b5-1 Plan Required

Because a PVF is structured as a forward contract rather than a sale, it often avoids the trading restrictions and regulatory complexities associated with insider transactions. It can typically be executed even during blackout periods (subject to legal review), and it doesn’t require a 10b5-1 trading plan.

Key Risks and Considerations

While PVFs are powerful, they’re also complex — and not without trade-offs. It’s essential to understand these before implementing the strategy.

1. Upside Cap

The biggest limitation of a PVF is that it caps your upside beyond the agreed-upon ceiling. If the stock skyrockets above the cap price, you won’t participate in those additional gains. This trade-off is the “price” of liquidity and downside protection.

2. Constructive Sale Risk

If structured incorrectly, the IRS could deem a PVF a “constructive sale,” triggering immediate capital gains tax. To avoid this, the contract must preserve enough risk and reward to qualify as a forward contract. Working with experienced tax counsel is critical.

3. Counterparty Risk

Because a PVF is a private contract with a financial institution, you’re exposed to counterparty risk — the risk that the institution may not fulfill its obligations. Using reputable banks with strong credit ratings mitigates this risk.

4. Opportunity Cost

By pledging shares into a PVF, they are typically restricted from being sold or pledged elsewhere until settlement. Ensure you don’t need access to those shares during the contract period.

When a Prepaid Variable Forward Makes the Most Sense

PVFs are not one-size-fits-all tools — but they can be transformative in the right situations. They’re especially powerful when:

• 📈 Stock concentration exceeds 30–40% of total net worth
• 💰 You need liquidity but want to avoid capital gains taxes
• 🔐 You’re subject to trading restrictions or blackout periods
• 🏦 You want to fund diversification or estate planning strategies without selling
• 📊 You anticipate volatility but still want some upside participation

Many executives use PVFs as part of a broader, multi-layered plan, often alongside other strategies like collars, exchange funds, or charitable remainder trusts (CRTs) to balance liquidity, risk, and tax considerations.

Strategic Pairings: Enhancing the Impact of a PVF

A PVF can be even more powerful when combined with other advanced planning tools:

• With a Donor-Advised Fund: Use prepaid cash proceeds to fund charitable vehicles while deferring capital gains on the underlying stock.
• With an Exchange Fund: Use PVF proceeds to invest in a diversified portfolio, further reducing concentration risk.
• With a GRAT: Align PVF timing with wealth transfer strategies to freeze asset values and shift future appreciation out of your estate.
• With a Structured Note: Use PVF proceeds to invest in principal-protected or buffered structured notes, maintaining growth potential with reduced volatility.

A Real-World Case Study

Scenario: Maria, a 54-year-old CFO, holds $20 million of her company’s stock — 65% of her total net worth. Her cost basis is $5 million, and selling outright would trigger nearly $3 million in capital gains taxes. She’s also subject to regular trading windows and wants liquidity to diversify into real estate and municipal bonds.

Solution: Maria enters into a 5-year prepaid variable forward contract on $10 million of her holdings. She receives $8.5 million in upfront cash (85% of the current market value) without triggering a sale.

• If the stock drops below $85, she delivers the maximum number of shares but is protected from deeper losses.
• If the stock rises above $130, she delivers fewer shares but caps her upside.
• Taxes are deferred until maturity, and the liquidity allows her to fund diversification and estate planning initiatives.

Result: Maria cuts her concentration risk in half, gains liquidity for portfolio rebalancing, protects against downside, and delays capital gains taxes — all without selling a single share today.

Final Thoughts: Flexibility Without Forfeiture

The Prepaid Variable Forward is one of the most sophisticated — and underutilized — tools available to executives and investors managing concentrated stock risk. It provides a rare combination of liquidity, risk reduction, tax deferral, and partial upside participation that few other strategies can match.

While PVFs require careful structuring and expert advice, they are an elegant solution to one of the most common — and complex — financial challenges executives face. In a world where selling isn’t always the best or even possible option, a PVF can help you regain control over your wealth, protect what you’ve built, and plan for what’s next.