Buying 2nd hand employee stock options.. Advice?

I'm involved with a company that issues internal stock options.
The company is highly profitable, majority employee owned (at this point), and private.
The options, typically, will either be worth substantial multiples of their exercise value - or perhaps will be worth nothing at all. Currently, the future of those options looks very bright and I'm willing to gamble on the theory that they will eventually be worth much more than current option price.
Lets assume for a second that I was in a position to provide the cash capital to people who are in a position where they either need to exercise options or lose them. These individuals are in a position where they are short of cash and either cannot exercise are unwilling to gamble enough to leverage themselves and raise the immediate cash.

The stock options themselves cannot be officially sold or change hands before they are public.

Any suggestions in regard to this type of speculative investment? (Other than don't do it)
Assume for a second that I want to do this reasonably safely, trust the other individual(s) involved, and I'm wanting to balance my speculative cash investment with some form of upside/risk split.

Three options that I've come up with:

1) structure the cash for the option purchase as a balloon loan w/ 5% interest accruing. No payments required until balloon date. This covers my "risk" - but I'd need to come up with some reward/split of option value when they can be exercised.

2) Straight up front cash for options, I assume 100% of the risk that the options will have zero value. Purchase the options at 110% of face value (or something similar). This would involve a lot of trust, as the options can't change hands, and the payment is essentially unsecured in the event of default, death, or some other problem.

3) Straight up front cash for options at $1 per $1 value. I assume all risk - equity at time of sale is split 90%/10% - after tax implications.

cbyahoo said: The stock options themselves cannot be officially sold or change hands before they are public.

This would involve a lot of trust, as the options can't change hands, and the payment is essentially unsecured in the event of default, death, or some other problem.

Deal breakers! I know you want answers other than "don't do it," but you know that's the right answer or you wouldn't have tried to exclude it right away. If there is no way to legally transfer ownership if you "buy" the options, what's to stop someone from saying a sale never occurred, or legally couldn't have occurred should things go well and a ton of money is made?

Get a lawyer involved. It's a lot of money and high risk for both individuals.

cbyahoo said:
The stock options themselves cannot be officially sold or change hands before they are public.

Any suggestions in regard to this type of speculative investment? (Other than don't do it)

Ignore anything else you wrote, and just read the 2 staements I quoted. Got your answer now?

Biggest risks in doing this are:
-Getting those involved in trouble with the employer.
-Details of this UN-Official investment coming to light AFTER the shares become public, and getting in trouble (getting others and the company) in trouble.
-The company never goes public... and never issues a private stock (or worse, issues a private stock that you can't hold, and your trusted buddies deny any involvement).

Technologist: Good points.. All valid.

SlimTrim: They will have a lot of ways to renegotiate if there is significant value. There are ways to cover the baseline investment, I would think the rest would be about keeping it "fair".

cbyahoo, I don't think you get it. "Fair" can change dramatically for many people, and the possibility of a lot of money vs the reality of a lot of money has done it many times. I've seen it cause huge strife among families - there's absolutely no way to know how someone will react or behave.

I think it severely limits the upside potential of a deal like this for you.

SlimTim said: cbyahoo, I don't think you get it. "Fair" can change dramatically for many people, and the possibility of a lot of money vs the reality of a lot of money has done it many times.

At which point they "lawyer up" and get the original contract voided.

What to ask a lawyer:

How do I structure a deal such that my coworker receives cash from me now, and I am guaranteed to receive the full payout from the options at some point in the future?

You really need a lawyer involved because if there really is huge upside potential, your cash-strapped co-workers are going to be very upset when they find out they would have been millionaires if they hadn't sold you their options (and that they still can be if they can break whatever deal you made).