
Uber plays hardball with early shareholders - ilamont
http://fortune.com/2014/06/20/uber-plays-hardball-with-early-shareholders/
======
jeremymcanally
It's amazing to me what companies will stick in these contracts, and how deep
down the rabbit hole they'll stick it. It's their stock to do it with, of
course, but it's just annoying that seemingly employee-centric companies will
do such seemingly abusive things. For example, I've seen instances of sale
restrictions being _four_ contracts deep (e.g., "shall be governed by (x)
agreement", and that agreement says "shall be bound by terms in (y)", and so
on) in an agreement that employees were only ever officially given a draft
version of but apparently still held as effective. It should have never been
signed of course, but the obtuse nature and comforting language these things
are couched in can be confusing.

At the same time, it's also unfortunate that people don't do research to look
at other instruments for liquidity (like pre-paid forward transactions) that
the restraining company has zero control over. In Uber's case though, it seems
like they're actually paying on the up-and-up. Many companies intentionally
deflate the fair market value of shares far, far below the actual valuation
(like 1/25th the value paid by investors in the last round, for example), so
offering to sell at what the investors paid in at is pretty decent.

Private equity is confusing and usually doesn't work in your favor. My general
advice is to always appreciate it, but never depend on it as part of your
compensation in any way (and Good Lord, don't bank your retirement on it!).

~~~
pjc50
_never depend on it as part of your compensation in any way_

This is very true. I've been in the position of having worthless share options
before. It's something everyone who's tempted to work 80 hour weeks because
they have share options should remember. You should also remember the Google
cook, who had $200m in options that the company tried to do him out of because
he wasn't a _developer_.

~~~
simulate
Are we talking about Charlie Ayers, the Google Cook? He earned $26 million
from his options, not $200 million. He also had over 150 employees and 5
executive chefs reporting to him. He did well and was fortunate but he also
wasn't just some guy in a lunch room preparing cafeteria food.

EDIT: There is a nice description of Ayers in wikipedia:
[http://en.wikipedia.org/wiki/Charlie_Ayers](http://en.wikipedia.org/wiki/Charlie_Ayers)

~~~
malandrew
Exactly.

Bean counters and penny pinchers will never fully realize the value of someone
like that. He kept people well fed, with healthy options that let them spend
more time socializing with their peers and getting back to their desks to
code. The alternative is having people waste time in traffic commuting to the
dearth of eating options (many of which are far less healthy. many engineers
left to their own devices don't choose the healthiest options) near the Google
campus. There is no doubt that Google got their $26 million worth in the
productivity he accreted to his fellow employees in those early days.

------
paul
Pre-ipo transfer restrictions are pretty normal. It never even occurred to me
to try selling Google pre-ipo. It wasn't really a thing before secondmarket
came along, and arguably trading on those markets is taking a company public
without their consent.

If I ever start another company, I would definitely have transfer
restrictions. It's pretty important to control your equity, and I think the
day-trading mentality is toxic. (I would also avoid ever trading on the
traditional stock markets, but that's a larger topic)

~~~
dsl
> It's pretty important to control your equity, and I think the day-trading
> mentality is toxic.

Equity is compensation. You can't tell your employees what to spend paychecks
on, and you shouldn't be trying to block them from gaining liquidity. Maybe a
doctor just told them they have a year to live, and won't be around for your
planned 2019 IPO.

Unless you are granting them voting shares it is unfair to lock them into your
vision of the company going forward, especially if they have departed.

~~~
paul
I agree that it needs to be clearly communicated (and perhaps they did not do
that in this case), but there's no reason why equity must be liquid. I
certainly have no expectations of immediate liquidity in my startup
investments.

Voting is a non-issue. Assuming things are structured right, the founders
should retain majority control. The investment is primarily an investment in
their vision, not something to be micro-managed by shareholders.

~~~
robrenaud
As a founder, how do you attract engineers from places like Google to your
startup?

"I am Paul Buchheit, I made Gmail" seems like it would work for you, and
something similarly awesome might work for like 10s or 100s of founders.

As a Google employee (with pretty high, low variance, liquid compensation), it
seems having stock/options or options even a successful pre IPO company are
kind of terrible. When you seemed to have won (worked for a successful
company, vested), you don't even really win, or at least, not yet. Stay in
that same desk, working on that same project until some indefinite future
liquidity event happens.

------
throwoptions
I'm in what might be a very similar position: I'm employed at a startup and
was just given an option grant as a performance bonus. I believe I can't sell
the stocks, and we're not really looking to go public, so I don't know what
use they are or what any of it means. Is there a certain class of lawyer I can
take my paperwork to and pay some fee for them to go over it and tell me what
my options are (no pun intended)?

~~~
rickyc091
Are you upset you received options instead of cash for your bonus? If so, you
could have mentioned that you would take a salary raise instead of options.
There really isn't much you can do with options until they go public or the
company gets bought. You can also try to sell them on Secondary Market or
SharesPost.

~~~
throwoptions
Oh, I'm not upset, I'm doing quite well otherwise, I've just been unable to
find a law firm advertising anything related to what I'm looking for, which
either means to me I need a specific type of lawyer to evaluate it or any ol'
lawyer might work?

~~~
rickyc091
Ahhh, it's probably better to have an investor look over it as they probably
deal with hundreds of these. It would probably be the simplest route and they
have a clear understanding of this market.

------
joezydeco
_" This fear of being viewed as a startup enemy also is why none of the early
Uber investors we spoke with would allow us to publish their names."_

What is a "startup enemy" and how does wanting to recoup some of your
investment make you one?

~~~
opendais
If you got into a legal battle with your employer, there would be consequences
to future employment.

The same is true of investors. A legal battle with a company you invested in
might close off access to future deals.

Now, a reasonable person might evaluate the facts of the case if they have
time...but not everyone has the time and/or would agree that they should sue
Uber.

It is alot like having worked on a porn site I think. Some people would go
"Oh, cool, you worked on a big project there that had the kind of scale we
hope to achieve."

Others would look at it and drop your resume directly into the trashbin.

I suspect there is a similar effect on VC/Angel access to startups that are
popular enough to have a bidding war like Uber.

~~~
angersock
_" If you got into a legal battle with your employer, there would be
consequences to future employment."_

I mean, is this really the case though? Any reasonable employer I know of
would say, "Oh, well, that's unfortunate, but your business", and move on.

I think this repeated meme is just a good way to keep workers in their place.

~~~
opendais
I have an Aunt who is no longer able to find a job in the industry she
originally worked due to a legal battle with someone who is well known and
respected in that industry.

She has a job in a different industry now and makes significantly less [like
50%]. She doesn't think she'll be able to retire before 70 because of it.

Admittedly, the industry was very small and incestuous and it isn't like Tech
where labor holds alot of power at present.

I also have a family friend who is an idiot and did something similar for
stupid reasons [it turns out he signed paperwork he thought he never had,
didn't keep copies]. He ended up in a government job eventually but he spent a
couple years on welfare because he didn't believe my parents when they told
him no one would hire him.

It really has an impact, at least anecdotal. It is possible I'm unusual in
having close relationships with 2 people who had this happen and its much
rarer in the general population.

~~~
danielweber
_family friend who is an idiot and did something similar for stupid reasons
[it turns out he signed paperwork he thought he never had_

Was it a noncompete?

~~~
opendais
It wasn't a noncompete. It was an invention agreement.

~~~
danielweber
Was it something like "we own your inventions while you work for us, and a
year after you stop working for us"?

I've gotten that clause myself in an employee agreement. The company wanted me
to sign and they said their lawyers "wouldn't let them" change it.

~~~
opendais
Basically, yes.

He should have tried [or not done what he did]. However, he made a mistake and
paid for it.

------
bickfordb
It seems like reforms are needed to protect workers from predatory stock
option contracts like these. Workers have almost no negotiating power in these
cases, since they usually have common shares and no board voting power.

~~~
gohrt
Ultimately, workers need to value the options properly: ~$0.

Interestingly, with options/RSUs clauses in employement contracts, workers are
making "investments" in privately held securities on the order of ~$100K. In
general (outside of employment contracts) such investments are not legal if
the worker is not signed off as a "sophisticated investor".

I would like the SEC to close this loophole, by mandating some minimum
disclosure requirements about the potential risks of options/RSUs, and barring
employers from making misleading statements.

~~~
UweSchmidt
When we reach a point where all workers value options 0$, then the current
startup system is dead.

~~~
danielweber
Employers need to do something to address the candidates' concern if they
value options at $0.

And I don't mean "explain and promise really hard that the employee won't get
screwed over." How about letting the employee's options be safe against
dilution? How about not refusing third-party offers unless you agree to pay
the same asking price?

------
fiatmoney
If you can't sell it, you don't really own it.

~~~
gecko
Eh. I own a lot of stock in one of the companies I used to work for. I can't
legally sell it. That doesn't mean I don't own it, but I mentally adjust its
on-paper value appropriately, basically multiplying its on-paper value by the
chance that the company might go public. In effect, what I own is a lottery
ticket, but I do own that ticket.

------
bthomas
Is there room for legislation to ensure at least some liquidity in employee
stock? I hate turning to government, but the current system makes it literally
impossible for an employee to value options.

------
skizm
Isn't there a law that if there are more than 500 shareholders for a private
company that the company must go public? Sounds like a totally reasonable
reason for keeping a tight hold on the stock.

~~~
couradical
There's no requirement to go "public" in the sense of listing on an exchange,
and available for public purchase. What changes at that point is SEC
regulatory compliance kicks in: earnings/revenue go public, SEC compliance
paperwork has to be filed just like a public corp. That's really why people
try to stay under that number - you have all the drawbacks of being public,
except a floated share price, and it would effective crush any IPO pop that
they would expect to get, as financials would be totally available, so offer
price would have to reflect the company's financials.

~~~
lmm
Isn't an IPO pop bad for the company? It indicates that they priced too low,
no?

~~~
dsl
The underwriter of an IPO goes around and sells your stock to their largest
clients in advance (which is where the company gets its payout). They sell
your stock at say 10% less than what they think it will settle at. All the
pre-IPO buyers cash out within the first few hours of trading. Without a big
enough "pop" your stock is considered to have been a bad investment by the
underwriters and the pre-IPO buyers because they didn't see 10%+ one day
returns.

IPOs are layers upon layers of scams and shady dealings.

------
jcnnghm
I think that anything more aggressive that the right-of-first-refusal at the
third-party offer price is unconscionable.

------
winterchil
What hasn't been mentioned yet is that employees hold Common Stock, whereas
the investors generally hold preferred stock. The preferred stock is worth
more than the common stock because of special protections/provisions/voting
rights/etc.

It's perfectly reasonable that the price would be lower on a buyback program.
On the other hand controlling the equity is pretty important and it's not
surprising they won't let it go to open market.

Welcome to the wonderful world of being a minority shareholder.

------
jstalin
Not sure why this is news. Virtually every privately-held corporation or LLC
has a stock transfer restriction. Any company that _doesn 't_ is an outlier.

~~~
tzs
This part was interesting:

> The employee also learned that Uber had amended its bylaws more than a year
> earlier, in order to restrict unapproved secondary sales. It was unclear if
> the bylaw change actually applied to shareholders who had not been party to
> the vote — lawyers seem to disagree on this point of Delaware law — but Uber
> threatened litigation if he tried to proceed. So he held. The financial and
> reputational hassles of a lawsuit would have just been too much, even if he
> had won.

One of the main reasons to incorporate in Delaware is that they have an
extensive body of settled law on complex corporate issues. That Uber has
managed to handle what should have been a pretty common and routine thing in a
way that apparently is unclear under Delaware law is worthy of a story.

------
GFK_of_xmaspast
They shouldn't be surprised, they knew Uber was going ot be disruptive and not
inclined to follow regulatory practices when they signed on.

------
riter
I would imagine of they happen to be an S or C Corporations. I believe C-Corps
are mandated to go public if they exceed 100 shareholders per SEC. It also
depends.

~~~
sheetjs
This is a commonly held belief but is false:

> Companies with more than $10 million in assets whose securities are held by
> more than 500 owners must file annual and other periodic reports.

[http://www.sec.gov/about/laws.shtml](http://www.sec.gov/about/laws.shtml)

The reason people believe that it forces companies to go public is because, in
many cases, the incremental cost to going public (above and beyond the filing)
is insignificant compared to the advantages.

------
robbiemitchell
What a non-story.

This is a typical way for a private company to manage who owns its stock --
namely investors, employees, and former employees. It's basically a right of
first refusal.

You sell your options back to the company at the current market rate -- the
rate at which that most recent investors purchased equity. That's your
liquidity. The company will do this because it believes the options are
undervalued compared to what they'll be worth in the future. If you don't want
to do that, you hold and wait for the options to go up (or unfortunately down)
in value.

If the company doesn't want to buy them, you _should_ be free to sell to
others. Restrictions in _those_ cases would be worth writing about.

~~~
xtrumanx
> You sell your options back to the company at the current market rate -- the
> rate at which that most recent investors purchased equity.

Why should the "market rate" determined by the most recent round of
investments? A lot could have changed since then.

> If the company doesn't want to buy them, you _should_ be free to sell to
> others. Restrictions in _those_ cases would be worth writing about.

The issue isn't having to sell back to Uber but having to sell it at Uber's
price.

~~~
robbiemitchell
It's true that a lot could have changed since the previous investment round,
but isn't that often the case in venture capital funding?

Paying a different price for one person's equity changes the valuation for
everyone as the new market rate. This can be bad for an individual (could be
sold for higher on private market) but also good (prevents someone else from
selling at a major discount). Companies want to control valuation much more
closely than that, so valuation is pegged to investment or some other major
event.

Whether that's a good way to do things would be a nice discussion topic, but
that's not the same as saying uber in particular is playing hardball. A little
bit of research would reveal that it's standard practice.

