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Handcuffed to Uber
- zzalpha 10y agoI'm far more curious about what will happen when these companies start seeing significant portions of their workforce facing expiring option plans...
- vinceguidry 10y agoThe market solution here seems to be the companies poaching those employees giving them, as a hiring bonus, enough cash to exercise their shares. Not sure what would make that workable, or if it's even a big enough problem to demand such a solution.
- a_small_island 10y agoIt's not just the exercise price, it's the tax bill at the end of the year...
- YuriNiyazov 10y agoIf you exercise upon getting hired, there is no tax bill, because there is no spread between FMV and your exercise price. There's only a tax bill later, upon liquidation.
- scurvy 10y agoMany (if not most) early stage companies won't allow you to do this. They claim that the "legal costs" are too high. When asked how much it is and offered to cover them, I've been met with blank stares.
- YuriNiyazov 10y agoI've been met with "but if you quit without having vested all your shares, we'll have to pay you back at FMV!" - and this was a CEO that said this. Staggering ignorance w.r.t. equity.
- Illniyar 10y agoIs that a thing? I didn't know options can expire, what kind of an expiration date do they have?
- pcl 10y agoYes; options often expire 10 years after issuance.
- mifreewil 10y agoIt's common for companies to have a 90-day window to exercise your options after leaving the company. There are some friendlier companies with longer exercise windows. See: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows
- adam-a 10y agoI've not been in the position of buying options before, but is that really how the tax system works? I understand you have to pay tax on income from shares, but if you're buying shares you haven't had any income from them at that point right? I would have thought you'd just pay tax on any money you received when you sold the shares. Curious to know if that's how it works in the UK as well as the US, anyone have any pointers?
- deleted 10y ago[deleted]
- yummyfajitas 10y agoYes. It's a huge problem - the IRS demands liquid cash in order to pay tax on illiquid in-kind transfers. The problem isn't just in startups with stock options; another big place it arises is closely held businesses. You receive the family business as an inheritance and suddenly you need to pay - in cash - 40% of the value of the business. Such a large cash hit can and does destroy many companies. The solution is of course to require the IRS to allow payment in-kind (shares). Then you could exercise your options and hand over ~20% of your shares to the IRS. Or you could inherit the family business and give the IRS 40% of the the company (which suffers no cash flow hit and continues normal operations). This additionally would prevent the IRS from overvaluing in-kind earnings.
- jsprogrammer 10y agoWhy would the IRS want to own and manage family businesses?
- myblake 10y agoI think the suggestion is that they'd merely own part it, but nonetheless it's not surprising the irs would prefer liquidity.
- jsprogrammer 10y agoThe IRS wouldn't want to own any part of a business. There is no reason for them to.
- mkagenius 10y agoWhy can't they take loan from someone and give a 10% interest in a few weeks?
- deleted 10y ago[deleted]
- svisser 10y agoUber specifically does not allow this (mentioned halfway the article).
- kevin_thibedeau 10y agoThere's no reason they have to find out. You just won the lottery or received an inheritance from a distant relative. How you acquire capital is none of their business.
- sokoloff 10y agoYou can get a loan to exercise the options. You just can't pledge (use) the shares as collateral for that loan.
- URSpider94 10y agoThey'll find out. You can't get an under the table loan for millions of dollars from a reputable organization. Plus, the IRS and everyone else will be looking into where the money came from.
- phamilton 10y agoWhat do you do in a few weeks?
- heyjonboy 10y agoThis article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move the decimal one place to the left and the numbers in the article get a bit more realistic.
- pcl 10y agoYes, and the math early in the article doesn't account for dilution. But those numbers are still colossal, even when reduced by an order of magnitude or two.
- myblake 10y agoTrue but it's at least mentioned. Would be worth emphasizing the effect it would have though, that engineer is not really sitting on 300 million.
- viscanti 10y agoIt also pretends all of those would be taxed as income when that would likely be AMT.
- scurvy 10y agoFor sure, AMT is much worse than regular income tax.
- scurvy 10y agoActually, it depends. In Uber's case yes it would be the 409A as there is no secondary market. If there were a secondary market, it would be the last sales price from the day you exercised, not 409A value. The IRS guidelines say the spread between grant price and fair market valuation. If there's a secondary market, that's your fair market, not 409A (which is a joke anyway). Also, most companies use the last public valuation as a basis for 409A valuation rather than hiring someone to do it in a separate process. The investors buying shares are the experts here. Of course there are considerations for preferred vs common stock and things like warrants, but they start at the top line number from the last round.
- alistairSH 10y agoIn the past, when my wife has had options, we've always been able to use cash from the exercise and immediate sale to fund the transaction, with no cash out of pocket. Is this not an option available to Uber employees?
- dandandan 10y agoThat's an option if they're acquired or IPO. This is more about quitting and exercising before either of those events happen.
- ams6110 10y agoThat depends on whether there is actually a market for Uber shares. In the few cases where I've had the ability to exercise options, the company was still entirely privately held and there was no general market for the shares. And nobody was really interested in buying mine, so there was nobody to sell to, even though on paper you could calculate a value.
- pcl 10y agoThere's no liquid market for Uber shares. The article further states that Uber has taken measures to prevent a secondary market from developing. I wonder what those measures are. I imagine it's straightforward to prevent someone who wants to keep working at Uber from doing a secondary sale, but what sorts of contract terms can Uber put in place to prevent someone from quitting and then selling on the secondary market? Rights of first refusal are common, but how can Uber prevent a non-employee from selling? I'd love to see the language they use in their options agreements.
- robbiemitchell 10y agoMy understanding is, right of first refusal includes the option to render the equity worthless if this right is not honored. It's a threat I've seen made before by a CEO who did not want a secondary market to exist.
- mifreewil 10y ago
- forgetsusername 10y ago>His ownership stake at the time would have been $300,000. Yet today, that same stake (undiluted) would now be worth $300 million And at one point Elizabeth Holmes was worth billions, emphasizing that until you the have money in your bank account don't be tallying how much you're "worth".
- viscanti 10y agoExcept that it's taxable under AMT.
- austinl 10y agoPinterest allows employees to hold onto their options for seven years after leaving (if they stay at the company for two years) to avoid this scenario. I think there are a few other companies that have done similar things. http://fortune.com/2015/03/23/pinterest-employee-taxes/ http://fortune.com/2015/03/23/pinterest-employee-taxes/ Disclosure: I work for Pinterest
- kelukelugames 10y agoI read the Pinterest policy last year and ask my CEO about doing something similar during a company meeting. He just laughed. Then he apologized the next meeting for misunderstanding the question and still said no. I left the company.
- roflchoppa 10y agowhat happened to the company?
- kelukelugames 10y agoIt's chugging along. I exercised my options and just hope they IPO so I can cash out.
- hkmurakami 10y agoFrankly institutional investors still have leverage over founding teams, and unless the company is a "darling" that has investors fighting for cap space, being "nonstandard" will be a possible liability. Laughing at the question is obviously uncalled for, but there are legitimate cause for concern for adopting such policies. Currently, late stage high growth companies and YC companies are the two segments best positioned to negotiate against VCs for these terms to become "standard".
- kelukelugames 10y agoEmployees should have more rights. I wish we could make this standard.
- scurvy 10y agoOne thing to keep in mind is that you might not have until next April 15th to pay your taxes after exercise. If the exercise benefit is large enough compared to your typical income, you might owe estimated taxes that quarter.
- ryporter 10y agoThis is a great point. Additionally, you're fine if you pay 110% of your prior year's tax bill. For most employees referred to in this article, this amount should be payable.
- throwaway_exer 10y agoThe IRS will say that you "owe" quarterly, but there's no penalty for not doing so.
- scurvy 10y agoIt's a 3% penalty on the difference between what you owe and what you've paid. It's a pretty minor amount, but there is a penalty. http://www.inman.com/2012/06/08/dont-sweat-quarterly-tax-deadline/ http://www.inman.com/2012/06/08/dont-sweat-quarterly-tax-dea...
- phamilton 10y agoIf the difference is less than $1000 or if you withheld more this year than you owed last year or if you withheld 90% of your total bill, there is no penalty.
- pfarnsworth 10y agoI recently got an offer from Uber (didn't accept for various reasons), so I have a couple of data points. In the last two years, they started offering RSUs, not options, that addressed this issue. And two years ago, they had roughly 200 engineers vs 2000+ engineers now. The issues they had 2 years ago are different, as was the business, it wasn't nearly as ubiquitous and now since they offer RSUs, there isn't the same level of problems. So it's another hit piece on Uber that is completely unfounded.
- matchagaucho 10y agoThe latest Uber investment rounds require that employees hold onto their shares for one year after going public. This will prevent employees from flooding the market post-IPO and devaluing the stock.
- toomuchtodo 10y agoIt also prevents employees from realizing any value if the stock price drops in the first year. EDIT: Nothing quite like watching the public stock price decline while you're in your lockup period.
- steven2012 10y agoDo other companies have this clause in place?
- xiaoma 10y ago> Not only does it not allow employees to sell their shares to secondary buyers, it also won’t allow them to use services like those offered by 137 Ventures, which makes loans to founders and early employees using their stock as collateral. (Snapchat, Dropbox, and Airbnb have similar policies.) Does keeping early employees "handcuffed" essentially as indentured servants until IPO align with YC's ethics policy?
- ploxiln 10y ago"indentured servants"? That's ridiculous - startup tech workers are paid well compared to the average person, and they face no financial penalties for leaving their jobs if they do not exercise their stock options. They do face the gnawing possibility that they could be rich, if only they could sell immediately, or keep the options for later, or or or ... if only! But they can always just find another reasonably interesting job and get on with a pretty good life. I'm as interested in big success as the next guy, but let's be reasonable - these handcuffs are a lot more like "golden handcuffs" than actual handcuffs (or indentured servitude).
- xiaoma 10y agoYou disagree in terms of diction. It was an analogy, after all. History doesn't repeat itself. It rhymes. Do you actually support the practice from an ethical standpoint? Employees are recruited to start-ups with equity. That's a core part of their compensation for their work (for which they likely could have received more salary from Google, Amazon, Facebook, etc). Then after they've already done the work, that compensation can be taken from them if they leave the company. Do you feel this behavior is ethical?
- gogopuppygogo 10y agoAs long as the employee's enter into the agreement with full transparency that this is how the compensation works then it's completely fair. This isn't the result of some kind of secret court deciding that it's how a company should pay employees. Adults are consenting to this arrangement. There is only so much "fair" to be had in business. It's not like there aren't 1,000 other "mini ubers" that want to own the market Travis and Co built.
- dlandis 10y agoThe article says Uber does not allow employees to use services like 137 Ventures. Is that really something they can control?
- zwily 10y agoYes. The company can narrowly define what employees can do with their options.
- hkmurakami 10y agoTo elaborate, it's spelled out in even standard option plan paperwork.
- brianmcconnell 10y agoI am currently dealing with this issue, though on a smaller scale. The moral of the story is to forward exercise options if you can. Basically what this means is you pay to exercise on your start date. If you quit or get pink slipped before the standard one year cliff, the company does a buyback. Otherwise, the shares vest as per your vesting schedule. You can potentially avoid a lot of the AMT nastiness this way, and start the clock on long-term gains treatment on day one. That said, companies really should scrap the 90 day exercise window. Uber et al want to avoid employees selling shares on side markets. If they just allow them to hold onto their options for years, most will sit on them rather than feel rushed to sell. I know they want to retain talent, but they should be doing that via rewards versus punitive measures. In any case, its worth it to spend a couple hundred bucks on a tax expert to figure out in advance how to handle options so you don't get burned by taxes on fictional gains.
- aetherson 10y agoIt's different with Uber in hindsight, but in general, employees at start-ups are already overinvested in the success of the start-up, and that success is unlikely. I don't recommend that most people also sink their cash into their employer.
- zwily 10y agoUsually you do an early exercise when the company is very young, with a low strike price. In those cases, the cash outlay can be very small. For a later stage company, then math works differently, of course.
- redshirtrob 10y agoBe careful, the company may not be required to buyback the shares. The company may have the option to accelerate the vesting schedule on the options. It's best to assume they'll choose to do this only when it's optimal for them, which likely means when it's suboptimal for you.
- nraynaud 10y ago
- iamleppert 10y agoWhat happens if they decide to keep the company private? Travis, the CEO of Uber, has stated many times he feels like going public isn't needed anymore because of all the extreme amounts of capital available in the private market. And, they have found a spigot on the economy that can provide for returns for these private equity investors. So why even go public? To me, this just seems like a well thought out plan to keep employees locked into the company while not allowing them to ever exercise their equity, and keep the return focused on those who have provided capital. The "capital class" if you will. Carry on worker bee employees; one day you might see those options actually worth something and liquid.
- adrenalinelol 10y agoGiven Uber's general demeanor towards its drivers this wouldn't surprise me they'd try something like this towards its engineering/business talent.
- wdr1 10y ago> What happens if they decide to keep the company private? The shares can still be sold, but it's limited to qualified investors. The primary issue is that obviously the same information of a public company isn't available & the SEC doesn't want Joe Smith getting scammed by fly-by-night operations. It's also worth noting that once there are a certain number of shareholders, Uber has to publicly disclose its finances. That's even if they don't raise capitol & are not traded on the SEC. Historically this was 500 shareholders, but Facebook got an exception from the SEC. I wouldn't be surprised if Uber did too.
- linkregister 10y agoI think you haven't read the article yet. The issue with Uber as opposed to a standard private company is that part of the charter prohibits employees from selling shares on secondary markets or to second party investors. The only viable exit for the employees to exercise their options is for an IPO.
- geggam 10y agoseems like engineers are learning how they get screwed via the stock game
- seeing 10y agoUber’s position is that if it learns [of a sale or loan] that goes around its share-transfer restrictions, there will be consequences What consequences?
- grifter2000 10y agoThey give 'em the ol' cement shoes.
- hkmurakami 10y agoHmm. I've heard that Uber does have a stock buyback plan in place for employees. Maybe there are limitations on how much can be exercised/sold, so that someone with $300mm post-option exercise can't exercise their whole position.
- ChuckMcM 10y agoI draw the line[1] at amending the bylaws to prevent secondary sales. This just seems wrong to me. [1] The line being where your company ceases to be ethical at its core.
- __derek__ 10y agoThe evidence indicates that Uber gleefully jumped over that line a long time ago.
- jbrukh 10y agoThis is why what is happening with the digitization of private equity through blockchain technologies is going to make this kind of thing completely obsolete. https://blog.coinfund.io/explaining-blockchain-to-traditional-investors-through-growth-capital-2ca61971075c#.60bguvmr2 https://blog.coinfund.io/explaining-blockchain-to-traditiona...
- argonaut 10y agoNo amount of blockchain technology is going to stop a company from suing you when they find out you sold stock.
- jbrukh 10y agoSorry, my fault for not being clear. I didn't mean that digital equity would empower employees to circumvent company policies. Rather digital equity and governance systems [1] that are currently being built around blockchain and decentralized projects simply take a much more egalitarian and healthy approach to distributing ownership in the first place. And, hey, if you want to use equity as an incentive for retaining employees, you still can do that using (for instance) a smart contract in a way that is fair and not concentrated as a power in the signature of a single person. At the end of the day, traditional private equity whether it is an investment or as compensation has a lot of problems, as I'm sure HN readers on here know very well. [1] Most forward-thinking real world example: http://daohub.org http://daohub.org
- neilk 10y agoOkay, let's assume that a smart contract with a particular blockchain is going to remain viable and secure for an entire decade. The issue here is taxation before gains are realized. Are you assuming the government isn't going to tax you, just because it's a smart contract?
- jbrukh 10y ago(1) Okay, let's assume that. It's not exactly an outrageous assumption -- Bitcoin has been operating for 7 years. Ethereum has been around for 1 year, but even if it fails, there will be other smart contract platforms perhaps even on the Bitcoin chain (i.e. Rootstock). (2) Sorry, not following you. I never said or implied anything of the sort. I don't see how that's a central issue to our discussion, but perhaps you can educate me.
- mhartl 10y agoWhat happens if someone is fired? Surely they wouldn't have to exercise their options then, but it also seems ridiculous that they would lose them.
- rrhyne 10y agoMost companies have a clause that states options expire on termination for cause.
- phamilton 10y agoAs someone who has been fired and given 90 days to cough up a few grand to exercise, it sucks. Unplanned change of employment is a turbulent financial event and the last thing you can wrap your head around is whether the lottery ticket is worth it. Add in the feeling of distrust that often follows getting fired and it's really hard to objectively evaluate the company and its position. I ended up not exercising. Still not sure if it was the right call.
- ismail 10y agoI am not familiar with american tax law, why do you need to pay tax on buying share options? The reasoning behind this law? We have capital gains tax which i believe is only taxed on sale of the shares.
- schrodinger 10y agoWhen you exercise an option, you are paying the strike price for something that may be worth more. For example, you may have an option with a strike price of $1, but the shares are currently worth $10. That $9 is considered taxable income.
- URSpider94 10y agoThat's not quite right. It's not taxable income, per se, but it is figured into calculating the alternative minimum tax (AMT).
- amit_m 10y agoWhy is it the norm that employees even need to pay cash to buy their options? Why don't companies set the exercise price to zero? Or if one must have a non-zero exercise price - why isn't there a way to do something like a "cashless exercise"? (i.e. buy your vested options by selling a small fraction of them back to the company).
- PeterisP 10y agoJust another instance on why an employee shouldn't consider stock options as adequate equivalent to compensation. In theory, those employees were promised to receive x shares of the company that now (partly due to their personal performance) are worth some significant amount. In fact, that was a lie and they are not actually able to receive that part of their compensation despite having been promised and earned it, vested, etc. Beware of scams (the legal details cause similar sized of equity options to have extremely different de facto value) and/or treat the offered equity as having near-zero value when comparing compensation offers from different employers.