15 ms·

Former Uber employees have gone into debt to exercise options they can’t sell

193 points by chollida1 9y ago

bob_theslob646 9y ago
>Until this year, Uber gave former employees 30 days to exercise their options, an unusually short window of time. Is this the standard time window for exercise?
- dpeck 9y ago
  90 is more common, but in terms of being able to sell their Uber stock that difference doesn't matter much.
- infynyxx2 9y ago
  No. Standard time window is 90 days. Even that can be pretty short if you have to buy those options for companies with higher valuation.
- bsimpson 9y ago
  As far as I know, Pinterest was the first company to give a sane amount of time to exercise options: https://medium.com/@michaeldeangelo/unlocking-the-golden-handcuffs-6ac855a371f9 https://medium.com/@michaeldeangelo/unlocking-the-golden-han... They give you 7 years to buy, so you don't get stuck with a huge tax bill between exercising the options and being able to sell shares.
- rsynnott 9y ago
  Huh. Not in the US, but I get 7 years, which is pretty normal around here.
  - NonEUCitizen 9y ago
    Where are you?
    - rsynnott 9y ago
      Ireland. Every options scheme I'm aware of allows years after options mature to exercise them. Quite surprised that it isn't the same in the US; I don't know why anyone would take the risk of exercising options in a private company while it's private.
02thoeva 9y ago
Have seen this far too often. I was at a successful UK based startup very early on, so my strike price was pennies. Those who joined a year or two later were looking at strike prices in excess of £30 with hundreds shares. Recent investment rounds put the share price at around £120, but as always current employees can't sell until a full sale or IPO. The result? A swell of employees who want to leave/move on but can't afford to buy their shares and leave. It's lead to a number of people just hanging around, even when their enthusiasm and passion is waining. Not what options are designed for!
- gaius 9y ago
  Not what options are designed for! Not "deferred compensation"?
  - 02thoeva 9y ago
    Point being, lots of companies offer options on the 4 year vest, 1 year cliff in order to keep great employees. If the end result is that mediocre employees end up hanging around, not motivated, then it works for neither the employee, nor the business.
fragmede 9y ago
I'm sure Uber would like the secondary market to be illegal, but Uber embodies disruption. https://equidateinc.com/company/uber https://equidateinc.com/company/uber
luckyt 9y ago
The day Uber goes public there will be a mass exodus of employees waiting for years to leave the company. I wonder if Uber will stay private permanently to prevent this?
- sockgrant 9y ago
  Do you know anyone that works there? Is the engineering culture messed up or something?
  - jonathankoren 9y ago
    There's always an exodus after a liquidity event. As far as the culture goes, from what I understand it's very backstabby and culty. Basically, Travis set the culture, and it permeates the company.
- influx 9y ago
  There is a year lockout of Uber employees after an IPO. Source: ex Uber employee.
  - marioestrada 9y ago
    If you quit during that time can you sell?
    - mikeokner 9y ago
      I think the same rules apply. You can exercise but you'll owe taxes and can't sell any shares to cover the tax.
    - lhorie 9y ago
      I don't know details on stock options, but for RSUs, my understanding is that it works like this: your signing bonus and part of yearly perf bonus is in equity. Signing bonus matures in four years, incrementally. 25% vests at the end of 1st year, the rest vests incrementally by month. Perf bonus vests in 1 yr. Once a RSU vests, it's yours. If you leave the company before a RSU vests, you lose it. At IPO, RSUs get converted into stocks, however, there's a restriction that you can't sell them for 1 year from the IPO date. Tax obligation is handled by subtracting a portion of the units, rather than by paying out-of-pocket.
sjg007 9y ago
Uber employees have to be accredited to participate in the SoftBank tender? That sucks...
sockgrant 9y ago
Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%. Now stay there until the company sells or goes public. Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job! Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.
- hinkley 9y ago
  The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options” As if options had a value.
  - sockgrant 9y ago
    Yeah they always assign a dollar amount to options instead of a % amount which is what really matters. $100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall. Always insist on the % amount. Most founders will try not to share it.
    - hkmurakami 9y ago
      If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage. Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc. It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
      - timr 9y ago
JumpCrisscross 9y ago
Uber is specifically and wilfully shitty when it comes to employees’ stock. Large investors have always been able to sell, in part because they hold their shares in LLCs. Smaller investors, however, get blocked. When the price started crashing, the big guys got out. The little guys remain locked inside. Something similar happened at Palantir. When a big little guy sued, things changed [1]. [1] https://www.bloomberg.com/news/articles/2017-03-18/at-peter-thiel-s-palantir-allegations-of-theft-and-deception https://www.bloomberg.com/news/articles/2017-03-18/at-peter-... Disclaimer: I am not a lawyer. This is neither legal nor securities advice.
- hkmurakami 9y ago
  Palantir is worse. Far worse. They are still on options when they're valued at $10B+. They're smart though. This reduces their employee comp cost significantly through cheap internal buybacks.
  - JumpCrisscross 9y ago
    There is a diversity of approaches. Some companies let anything through. Some want to speak to the newcomer first. Some aggressively exercise their rights of first refusal, or outright block sales, while providing internal tenders for employees. Uber stands somewhat alone in doing none of those things.
    - hkmurakami 9y ago
      Imo at least Uber offers RSUs where your "$200k in equity" is actually $200k in equity if/when they do exit. "200k in equity in option strike value for a very late stage startup is very unlikely to be ever be worth $200k even if an exit event happens. I suppose that there are many different ways to be evil in this game, and we're just arguing which tactic is worse.
- gamblor956 9y ago
  Uber isn't publicly traded, so its stock price couldn't have "started crashing." Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the legal and tax considerations for the sale of stock held by the LLC. Also not sure why you're including a disclaimer? You're not offering any sort of advice so you don't need to disclaim anything.
ChuckMcM 9y ago
This -- "One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Both former employees took out loans from family members to make the payments, and requested anonymity to discuss their personal financial situations." Is how many many Silicon Valley horror stories begin. In the dot.com days it was "How working for a startup bankrupted me, and ruined my relationships." All because some situation forced a person to make the bet of whether or not their illiquid asset (stock in a private company) would ever become liquid. And that when it did, selling it would be more valuable than what you paid for it. Clearly not everyone is as out there as the person mentioned in the article is, although I knew many people who had anywhere from $5K - $50K at risk because they had exercised and were holding. I had stock losses from the dot com implosion that I wrote off for over 10 years (at $3,000 a year) and it would have gone on for the rest of my life if we hadn't had a bit of long term gains to offset it later.
- hkmurakami 9y ago
  Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.
  - rconti 9y ago
    I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary. Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble. It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.
eddieplan9 9y ago
Why is this even news? This is the case for pretty much every privately-held company in the valley, because the tax law dictates that [1]. When Pinterest changed their exercise window from 90 days to 7 years, it was big news [2]. When you leave a privately-held company, you have to convert your stock options to stocks to hold onto them, and then AMT kicks in and taxes you on the spread and that often hurt a lot. But in the case of these employees mentioned in the article, they are guaranteed to make a huge profit in the tender offer. Next up: evil companies in Silicon Valley invalidate employees' RSU when they leave the company. [1] https://news.ycombinator.com/item?id=9254299 https://news.ycombinator.com/item?id=9254299 [2] https://news.ycombinator.com/item?id=9253497 https://news.ycombinator.com/item?id=9253497
- JumpCrisscross 9y ago
  > This is the case for pretty much every privately-held company in the valley Many companies allow employees and ex-employees to sell shares.
  - Groxx 9y ago
    Being able to sell shares would imply it's a public company, not a private one, right?
    - vishnugupta 9y ago
      I believe the parent is referring to buy back event. In India, Flipkart has done that a few times delivering a handsome cash windfall to it's employees.
    - JumpCrisscross 9y ago
      > Being able to sell shares would imply it's a public company, not a private one, right? "Public" means your shares are registered [1]. "Private" usually means shares offered under Rule 506 of Reg D [2]. Public and private shares can be bought and sold. The processes, and their respective ease and restrictions, vary. Palantir [3] and Airbnb [4], for example, recently bought back their employees' shares. [1] https://www.sec.gov/fast-answers/answersregis33htm.html https://www.sec.gov/fast-answers/answersregis33htm.html [2] https://www.sec.gov/fast-answers/answers-rule506htm.html https://www.sec.gov/fast-answers/answers-rule506htm.html [3] https://www.nytimes.com/2016/06/29/business/dealbook/palantir-buyback-plan-shows-need-for-new-silicon-valley-pay-system.html https://www.nytimes.com/2016/06/29/business/dealbook/palanti... [4] https://www.nytimes.com/2016/08/12/technology/airbnb-and-others-set-terms-for-employees-to-cash-out.html https://www.nytimes.com/2016/08/12/technology/airbnb-and-oth... Disclaimer: I am not a lawyer. This is neither legal nor investment advice.
foo101 9y ago
Can someone tell me what the rules are from companies who are already listed on NASDAQ and trading publicly? For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested. I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20 vested RSUs. Is there a maximum time limit before which I must sell these 20 vested RSUs? Or can I keep these vested RSUs with me for life and choose to sell them whenever I wish? If it is indeed true that I can keep these vested RSUs with me for life, how exactly would I be selling these RSUs, say after 20 years? I mean, the company does not give me these RSUs directly on printed paper. The RSUs are held in an account in a website of a finance company such as UBS. I log into my UBS account to access my RSU details and sell them. What if UBS goes out of business in 20 years?
- bsimpson 9y ago
  They're your shares. They are held in an account sponsored by the employer, but they are yours just like if you bought them from schwab.com. I don't know what happens if a brokerage goes out of business, but I imagine you're in the same boat as all the people who bought those shares with cash on the open market. Once the stock vests, it's yours.
- mertd 9y ago
  All your granted shares go to your brokerage account. Those are insured by SIPC insured up to a limit. You can sell your shares whenever you want except for certain blackout dates around earnings if you are still employed by that company.
- hkmurakami 9y ago
  You can keep them in perpetuity. UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you). In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecting your equity holdings (cash is more at risk than equity in this regard since they lend it away I think?)
mabbo 9y ago
> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals. From the SEC link: > An accredited investor, in the context of a natural person, includes anyone who: > earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR > has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence) Wow. There are actually laws in place that say the rich are able to do things that poor people can't. If you're a former Uber employee who moved somewhere with lower incomes and cost of living, you probably no longer meet the criteria needed to sell these stocks.
- sokoloff 9y ago
  While it's obviously true what the effect of the law is, I find it a more good than bad law. It's intended to protect non-accredited investors from flim-flam investment schemes, by making it a federal crime to solicit money from them. Soliciting money from accredited investors has a certain supposition that they are at least one (if not both) of better able to withstand a loss of principal in an investment and better able to protect themselves from investment scams. Though the article says otherwise, I don't believe one has to be an accredited investor to liquidate any position, only to initiate one. (I suppose there's an argument that you could swindled on the sale as well, but I find that a lot less compelling than on the buy.)
- gamblor956 9y ago
  Wow. There are actually laws in place that say the rich are able to do things that poor people can't. This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit. In a nutshell, the law requires companies wishing to sell to the general public to register with the SEC and meet certain financial disclosure requirements, such as disclosing financials using standardized accounting practices, so that the people buying their stock can judge the financial condition of the company they're investing in. Startups choose not to register or adhere to these disclosure requirements so they can peddle their BS financial "metrics" to investors using magical unicorn fairy dust bookkeeping. But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor. The tender offer isn't intended for small stockholders with de minimis ownership, it's intended for stockholders with enough stock to represent significant fractions of the ownership of Uber.
abalone 9y ago
This reflects one of the more notable changes of late in the basic SV startup template. More companies are going with so-called "extended" exercise windows, converting from 90-day-window ISOs to multi-year-window NSOs upon exit. Zach Holman (ex-Github) wrote a short, fun post on this a couple years ago.[1] Y Combinator has made it their standard around when Pinterest did it as well.[2] It was fun to watch Andreessen Horowitz criticize[3] ten year windows and then backtrack[4] after a public flogging. That was when the power balance shifted towards more employee-friendly terms. The part of this I'm still trying to figure out is when does it makes sense to offer RSUs over ISO/NSOs. My general sense is it works better for bigger companies than tiny startups, but I forget the details. [1] https://zachholman.com/posts/fuck-your-90-day-exercise-window/ https://zachholman.com/posts/fuck-your-90-day-exercise-windo... [2] https://news.ycombinator.com/item?id=11198991 https://news.ycombinator.com/item?id=11198991 [3] "A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company" https://a16z.com/2016/06/23/options-timing/ https://a16z.com/2016/06/23/options-timing/ [4] "the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right." https://a16z.com/2016/07/26/options-plan/ https://a16z.com/2016/07/26/options-plan/
- hkmurakami 9y ago
  RSUs vs ISOs > before a priced round (83b is cheap at this point), and after you're a massive company, say $2-5B range (option upside is too small so you put a double trigger vest clause in to protect employees from taxes on illiquid shares)
  - jalonso510 9y ago
    Early stage would be plain Restricted Stock, as opposed to Restricted Stock Units, which are what is typically granted later on once the company gets large. RSUs are "units" not actual shares of stock with associated ownership rights. The recipient gets an award calculated based on the value of the stock, without actually owning stock.
- look_lookatme 9y ago
  > A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value. This is an investor bias toward recency that is ugly to see laid out so clearly. Work, foundational work even, only has intrinsic value if it happens between board meetings. On top of that, it's presented as a kind of wage-earner on wage-earner theft. Incredible.
post_break 9y ago
I think GoPro did this. Offered up stock and had an insane valuation that is useless since the tax is worth more than the stock.
osteele 9y ago
Something similar happened to Microsoft employees: * "Microsoft Employees Face Tax Nightmare", AccountingWEB, Apr 19, 2001. https://www.accountingweb.com/tax/irs/microsoft-employees-face-tax-nightmare https://www.accountingweb.com/tax/irs/microsoft-employees-fa... * "Why Microsoft's Stock Options Scare Me", The Motley Fool, Feb 17, 2000. https://www.fool.com/archive/portfolios/rulemaker/2000/02/17/why-microsofts-stock-options-scare-me.aspx https://www.fool.com/archive/portfolios/rulemaker/2000/02/17... * "Gates Regrets Ever Using Stock Options", Martin Wolk, NBC News, May 5, 2005. http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_economy/t/gates-regrets-ever-using-stock-options/#.WjA3QLaZPOQ http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_eco...
tzhenghao 9y ago
How many employees are allowed to participate? Seems like they need to be accredited investors. Many will be left out of this. under Wikipedia: In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. [1] [1] https://en.wikipedia.org/wiki/Accredited_investor https://en.wikipedia.org/wiki/Accredited_investor
niuzeta 9y ago
>> One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in what logic would you owe more tax to exercise the option(which amounts to purchasing at this point) for half the amount of tax you'll pay? How does purchasing something of $X force you to pay $2X in taxes? I've combed through this thread for answers and it seems like a commonly understood problem.
- niuzeta 9y ago
  Responding to my own inquiry, from the article: > Under current tax law, the income from exercising ISOs, a special type of option typically reserved for executives and senior employees, falls under an alternative tax calculation designed to prevent high-earners from using deductions to avoid paying tax. Non-qualified stock options, more commonly awarded to regular employees, are taxed the year they’re exercised on the gain in the stock.
- deleted 9y ago
  [deleted]
- adt2bt 9y ago
  I'm pretty sure it's because his strike price was far lower than the value of those shares. For example, if he pays $100 to get 20 shares at $5/share, but the shares are worth $100 each, he just got $2,000 and will need to pay taxes on that larger amount.
  - niuzeta 9y ago
    Right. So in the eyes of IRS you just didn't buy something, you in fact gained in net worth, except all those new assets you've purchased is illiquid.
    - chii 9y ago
somic 9y ago
http://www.somic.org/2015/12/28/on-employees-investing-in-their-startups/ http://www.somic.org/2015/12/28/on-employees-investing-in-th...
jessriedel 9y ago
Can employees reasonably hedge the risk of Uber taking a nose dive by buying put options?
- huac 9y ago
  If it were a public company sure but it's difficult to find a counterparty (at some point of the hedging process, somebody is gonna need to settle the trade with a share of Uber stock, and Uber stock is notoriously illiquid, and we're back to step 1).
  - jessriedel 9y ago
    A good point, thanks.
conanbatt 9y ago
If you could sell your options as an employee, employees in total would be richer and these circumstances wouldn't exist. Let's thank the sec for suppressing wages.
xster 9y ago
Can someone ELI5 this?
dbuder 9y ago
I hope they all get burnt, unfortunately they would easily be able sell their shares in some capacity.

193 points by chollida1 9y ago

>Until this year, Uber gave former employees 30 days to exercise their options, an unusually short window of time. Is this the standard time window for exercise?

dpeck 9y ago
90 is more common, but in terms of being able to sell their Uber stock that difference doesn't matter much.
infynyxx2 9y ago
No. Standard time window is 90 days. Even that can be pretty short if you have to buy those options for companies with higher valuation.
bsimpson 9y ago
As far as I know, Pinterest was the first company to give a sane amount of time to exercise options: https://medium.com/@michaeldeangelo/unlocking-the-golden-handcuffs-6ac855a371f9 https://medium.com/@michaeldeangelo/unlocking-the-golden-han... They give you 7 years to buy, so you don't get stuck with a huge tax bill between exercising the options and being able to sell shares.
rsynnott 9y ago
Huh. Not in the US, but I get 7 years, which is pretty normal around here.
- NonEUCitizen 9y ago
  Where are you?
  - rsynnott 9y ago
    Ireland. Every options scheme I'm aware of allows years after options mature to exercise them. Quite surprised that it isn't the same in the US; I don't know why anyone would take the risk of exercising options in a private company while it's private.

02thoeva 9y ago

Have seen this far too often. I was at a successful UK based startup very early on, so my strike price was pennies. Those who joined a year or two later were looking at strike prices in excess of £30 with hundreds shares. Recent investment rounds put the share price at around £120, but as always current employees can't sell until a full sale or IPO. The result? A swell of employees who want to leave/move on but can't afford to buy their shares and leave. It's lead to a number of people just hanging around, even when their enthusiasm and passion is waining. Not what options are designed for!

gaius 9y ago
Not what options are designed for! Not "deferred compensation"?
- 02thoeva 9y ago
  Point being, lots of companies offer options on the 4 year vest, 1 year cliff in order to keep great employees. If the end result is that mediocre employees end up hanging around, not motivated, then it works for neither the employee, nor the business.

fragmede 9y ago

I'm sure Uber would like the secondary market to be illegal, but Uber embodies disruption. https://equidateinc.com/company/uber https://equidateinc.com/company/uber

luckyt 9y ago

The day Uber goes public there will be a mass exodus of employees waiting for years to leave the company. I wonder if Uber will stay private permanently to prevent this?

sockgrant 9y ago
Do you know anyone that works there? Is the engineering culture messed up or something?
- jonathankoren 9y ago
  There's always an exodus after a liquidity event. As far as the culture goes, from what I understand it's very backstabby and culty. Basically, Travis set the culture, and it permeates the company.
influx 9y ago
There is a year lockout of Uber employees after an IPO. Source: ex Uber employee.
- marioestrada 9y ago
  If you quit during that time can you sell?
  - mikeokner 9y ago
    I think the same rules apply. You can exercise but you'll owe taxes and can't sell any shares to cover the tax.
  - lhorie 9y ago
    I don't know details on stock options, but for RSUs, my understanding is that it works like this: your signing bonus and part of yearly perf bonus is in equity. Signing bonus matures in four years, incrementally. 25% vests at the end of 1st year, the rest vests incrementally by month. Perf bonus vests in 1 yr. Once a RSU vests, it's yours. If you leave the company before a RSU vests, you lose it. At IPO, RSUs get converted into stocks, however, there's a restriction that you can't sell them for 1 year from the IPO date. Tax obligation is handled by subtracting a portion of the units, rather than by paying out-of-pocket.

sjg007 9y ago

Uber employees have to be accredited to participate in the SoftBank tender? That sucks...

sockgrant 9y ago

Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%. Now stay there until the company sells or goes public. Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job! Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.

hinkley 9y ago
The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options” As if options had a value.
- sockgrant 9y ago
  Yeah they always assign a dollar amount to options instead of a % amount which is what really matters. $100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall. Always insist on the % amount. Most founders will try not to share it.
  - hkmurakami 9y ago
    If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage. Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc. It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
    - timr 9y ago

JumpCrisscross 9y ago

Uber is specifically and wilfully shitty when it comes to employees’ stock. Large investors have always been able to sell, in part because they hold their shares in LLCs. Smaller investors, however, get blocked. When the price started crashing, the big guys got out. The little guys remain locked inside. Something similar happened at Palantir. When a big little guy sued, things changed [1]. [1] https://www.bloomberg.com/news/articles/2017-03-18/at-peter-thiel-s-palantir-allegations-of-theft-and-deception https://www.bloomberg.com/news/articles/2017-03-18/at-peter-... Disclaimer: I am not a lawyer. This is neither legal nor securities advice.

hkmurakami 9y ago
Palantir is worse. Far worse. They are still on options when they're valued at $10B+. They're smart though. This reduces their employee comp cost significantly through cheap internal buybacks.
- JumpCrisscross 9y ago
  There is a diversity of approaches. Some companies let anything through. Some want to speak to the newcomer first. Some aggressively exercise their rights of first refusal, or outright block sales, while providing internal tenders for employees. Uber stands somewhat alone in doing none of those things.
  - hkmurakami 9y ago
    Imo at least Uber offers RSUs where your "$200k in equity" is actually $200k in equity if/when they do exit. "200k in equity in option strike value for a very late stage startup is very unlikely to be ever be worth $200k even if an exit event happens. I suppose that there are many different ways to be evil in this game, and we're just arguing which tactic is worse.
gamblor956 9y ago
Uber isn't publicly traded, so its stock price couldn't have "started crashing." Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the legal and tax considerations for the sale of stock held by the LLC. Also not sure why you're including a disclaimer? You're not offering any sort of advice so you don't need to disclaim anything.

ChuckMcM 9y ago

This -- "One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Both former employees took out loans from family members to make the payments, and requested anonymity to discuss their personal financial situations." Is how many many Silicon Valley horror stories begin. In the dot.com days it was "How working for a startup bankrupted me, and ruined my relationships." All because some situation forced a person to make the bet of whether or not their illiquid asset (stock in a private company) would ever become liquid. And that when it did, selling it would be more valuable than what you paid for it. Clearly not everyone is as out there as the person mentioned in the article is, although I knew many people who had anywhere from $5K - $50K at risk because they had exercised and were holding. I had stock losses from the dot com implosion that I wrote off for over 10 years (at $3,000 a year) and it would have gone on for the rest of my life if we hadn't had a bit of long term gains to offset it later.

hkmurakami 9y ago
Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.
- rconti 9y ago
  I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary. Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble. It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.

eddieplan9 9y ago

Why is this even news? This is the case for pretty much every privately-held company in the valley, because the tax law dictates that [1]. When Pinterest changed their exercise window from 90 days to 7 years, it was big news [2]. When you leave a privately-held company, you have to convert your stock options to stocks to hold onto them, and then AMT kicks in and taxes you on the spread and that often hurt a lot. But in the case of these employees mentioned in the article, they are guaranteed to make a huge profit in the tender offer. Next up: evil companies in Silicon Valley invalidate employees' RSU when they leave the company. [1] https://news.ycombinator.com/item?id=9254299 https://news.ycombinator.com/item?id=9254299 [2] https://news.ycombinator.com/item?id=9253497 https://news.ycombinator.com/item?id=9253497

JumpCrisscross 9y ago
> This is the case for pretty much every privately-held company in the valley Many companies allow employees and ex-employees to sell shares.
- Groxx 9y ago
  Being able to sell shares would imply it's a public company, not a private one, right?
  - vishnugupta 9y ago
    I believe the parent is referring to buy back event. In India, Flipkart has done that a few times delivering a handsome cash windfall to it's employees.
  - JumpCrisscross 9y ago
    > Being able to sell shares would imply it's a public company, not a private one, right? "Public" means your shares are registered [1]. "Private" usually means shares offered under Rule 506 of Reg D [2]. Public and private shares can be bought and sold. The processes, and their respective ease and restrictions, vary. Palantir [3] and Airbnb [4], for example, recently bought back their employees' shares. [1] https://www.sec.gov/fast-answers/answersregis33htm.html https://www.sec.gov/fast-answers/answersregis33htm.html [2] https://www.sec.gov/fast-answers/answers-rule506htm.html https://www.sec.gov/fast-answers/answers-rule506htm.html [3] https://www.nytimes.com/2016/06/29/business/dealbook/palantir-buyback-plan-shows-need-for-new-silicon-valley-pay-system.html https://www.nytimes.com/2016/06/29/business/dealbook/palanti... [4] https://www.nytimes.com/2016/08/12/technology/airbnb-and-others-set-terms-for-employees-to-cash-out.html https://www.nytimes.com/2016/08/12/technology/airbnb-and-oth... Disclaimer: I am not a lawyer. This is neither legal nor investment advice.

foo101 9y ago

Can someone tell me what the rules are from companies who are already listed on NASDAQ and trading publicly? For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested. I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20 vested RSUs. Is there a maximum time limit before which I must sell these 20 vested RSUs? Or can I keep these vested RSUs with me for life and choose to sell them whenever I wish? If it is indeed true that I can keep these vested RSUs with me for life, how exactly would I be selling these RSUs, say after 20 years? I mean, the company does not give me these RSUs directly on printed paper. The RSUs are held in an account in a website of a finance company such as UBS. I log into my UBS account to access my RSU details and sell them. What if UBS goes out of business in 20 years?

bsimpson 9y ago
They're your shares. They are held in an account sponsored by the employer, but they are yours just like if you bought them from schwab.com. I don't know what happens if a brokerage goes out of business, but I imagine you're in the same boat as all the people who bought those shares with cash on the open market. Once the stock vests, it's yours.
mertd 9y ago
All your granted shares go to your brokerage account. Those are insured by SIPC insured up to a limit. You can sell your shares whenever you want except for certain blackout dates around earnings if you are still employed by that company.
hkmurakami 9y ago
You can keep them in perpetuity. UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you). In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecting your equity holdings (cash is more at risk than equity in this regard since they lend it away I think?)

mabbo 9y ago

> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals. From the SEC link: > An accredited investor, in the context of a natural person, includes anyone who: > earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR > has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence) Wow. There are actually laws in place that say the rich are able to do things that poor people can't. If you're a former Uber employee who moved somewhere with lower incomes and cost of living, you probably no longer meet the criteria needed to sell these stocks.

sokoloff 9y ago
While it's obviously true what the effect of the law is, I find it a more good than bad law. It's intended to protect non-accredited investors from flim-flam investment schemes, by making it a federal crime to solicit money from them. Soliciting money from accredited investors has a certain supposition that they are at least one (if not both) of better able to withstand a loss of principal in an investment and better able to protect themselves from investment scams. Though the article says otherwise, I don't believe one has to be an accredited investor to liquidate any position, only to initiate one. (I suppose there's an argument that you could swindled on the sale as well, but I find that a lot less compelling than on the buy.)
gamblor956 9y ago
Wow. There are actually laws in place that say the rich are able to do things that poor people can't. This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit. In a nutshell, the law requires companies wishing to sell to the general public to register with the SEC and meet certain financial disclosure requirements, such as disclosing financials using standardized accounting practices, so that the people buying their stock can judge the financial condition of the company they're investing in. Startups choose not to register or adhere to these disclosure requirements so they can peddle their BS financial "metrics" to investors using magical unicorn fairy dust bookkeeping. But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor. The tender offer isn't intended for small stockholders with de minimis ownership, it's intended for stockholders with enough stock to represent significant fractions of the ownership of Uber.

abalone 9y ago

This reflects one of the more notable changes of late in the basic SV startup template. More companies are going with so-called "extended" exercise windows, converting from 90-day-window ISOs to multi-year-window NSOs upon exit. Zach Holman (ex-Github) wrote a short, fun post on this a couple years ago.[1] Y Combinator has made it their standard around when Pinterest did it as well.[2] It was fun to watch Andreessen Horowitz criticize[3] ten year windows and then backtrack[4] after a public flogging. That was when the power balance shifted towards more employee-friendly terms. The part of this I'm still trying to figure out is when does it makes sense to offer RSUs over ISO/NSOs. My general sense is it works better for bigger companies than tiny startups, but I forget the details. [1] https://zachholman.com/posts/fuck-your-90-day-exercise-window/ https://zachholman.com/posts/fuck-your-90-day-exercise-windo... [2] https://news.ycombinator.com/item?id=11198991 https://news.ycombinator.com/item?id=11198991 [3] "A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company" https://a16z.com/2016/06/23/options-timing/ https://a16z.com/2016/06/23/options-timing/ [4] "the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right." https://a16z.com/2016/07/26/options-plan/ https://a16z.com/2016/07/26/options-plan/

hkmurakami 9y ago
RSUs vs ISOs > before a priced round (83b is cheap at this point), and after you're a massive company, say $2-5B range (option upside is too small so you put a double trigger vest clause in to protect employees from taxes on illiquid shares)
- jalonso510 9y ago
  Early stage would be plain Restricted Stock, as opposed to Restricted Stock Units, which are what is typically granted later on once the company gets large. RSUs are "units" not actual shares of stock with associated ownership rights. The recipient gets an award calculated based on the value of the stock, without actually owning stock.
look_lookatme 9y ago
> A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value. This is an investor bias toward recency that is ugly to see laid out so clearly. Work, foundational work even, only has intrinsic value if it happens between board meetings. On top of that, it's presented as a kind of wage-earner on wage-earner theft. Incredible.

post_break 9y ago

I think GoPro did this. Offered up stock and had an insane valuation that is useless since the tax is worth more than the stock.

osteele 9y ago

Something similar happened to Microsoft employees: * "Microsoft Employees Face Tax Nightmare", AccountingWEB, Apr 19, 2001. https://www.accountingweb.com/tax/irs/microsoft-employees-face-tax-nightmare https://www.accountingweb.com/tax/irs/microsoft-employees-fa... * "Why Microsoft's Stock Options Scare Me", The Motley Fool, Feb 17, 2000. https://www.fool.com/archive/portfolios/rulemaker/2000/02/17/why-microsofts-stock-options-scare-me.aspx https://www.fool.com/archive/portfolios/rulemaker/2000/02/17... * "Gates Regrets Ever Using Stock Options", Martin Wolk, NBC News, May 5, 2005. http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_economy/t/gates-regrets-ever-using-stock-options/#.WjA3QLaZPOQ http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_eco...

tzhenghao 9y ago

How many employees are allowed to participate? Seems like they need to be accredited investors. Many will be left out of this. under Wikipedia: In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. [1] [1] https://en.wikipedia.org/wiki/Accredited_investor https://en.wikipedia.org/wiki/Accredited_investor

niuzeta 9y ago

>> One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in what logic would you owe more tax to exercise the option(which amounts to purchasing at this point) for half the amount of tax you'll pay? How does purchasing something of $X force you to pay $2X in taxes? I've combed through this thread for answers and it seems like a commonly understood problem.

niuzeta 9y ago
Responding to my own inquiry, from the article: > Under current tax law, the income from exercising ISOs, a special type of option typically reserved for executives and senior employees, falls under an alternative tax calculation designed to prevent high-earners from using deductions to avoid paying tax. Non-qualified stock options, more commonly awarded to regular employees, are taxed the year they’re exercised on the gain in the stock.
deleted 9y ago
[deleted]
adt2bt 9y ago
I'm pretty sure it's because his strike price was far lower than the value of those shares. For example, if he pays $100 to get 20 shares at $5/share, but the shares are worth $100 each, he just got $2,000 and will need to pay taxes on that larger amount.
- niuzeta 9y ago
  Right. So in the eyes of IRS you just didn't buy something, you in fact gained in net worth, except all those new assets you've purchased is illiquid.
  - chii 9y ago

somic 9y ago

http://www.somic.org/2015/12/28/on-employees-investing-in-their-startups/ http://www.somic.org/2015/12/28/on-employees-investing-in-th...

jessriedel 9y ago

Can employees reasonably hedge the risk of Uber taking a nose dive by buying put options?

huac 9y ago
If it were a public company sure but it's difficult to find a counterparty (at some point of the hedging process, somebody is gonna need to settle the trade with a share of Uber stock, and Uber stock is notoriously illiquid, and we're back to step 1).
- jessriedel 9y ago
  A good point, thanks.

conanbatt 9y ago

If you could sell your options as an employee, employees in total would be richer and these circumstances wouldn't exist. Let's thank the sec for suppressing wages.

xster 9y ago

Can someone ELI5 this?

dbuder 9y ago

I hope they all get burnt, unfortunately they would easily be able sell their shares in some capacity.