
Uber lawsuit alleges employees were misled on equity compensation - derwiki
https://techcrunch.com/2016/12/22/uber-lawsuit-alleges-employees-were-misled-on-equity-compensation/
======
calcsam
Uber's attracted a lot of attention over how it issues stock, because as the
largest private unicorn, there are billions of dollars of wealth currently
locked up in illiquid stock held by employees who would prefer to sell it.

With all this pressure building up in the kettle, it spills over from time to
time into lawsuits like this one.

It's worth remembering that starting in 2013, Uber started blocking secondary
stock sales and sometime in 2015 shifted from issuing options to RSUs. This
had two effects beneficial to Uber: it created golden handcuffs for early
employees, and prevented Uber from being subject to SEC disclosure
requirements as the number of shareholders expanded.

Uber's practices on stock options are fairly unique in several aspects:

* a 30-day exercise window if you leave (even shorter than the much-disliked 90-day windows!)

* restricted "trading windows" where employees can only exercise options during four or five months of the year. Mixed with a short exercise window, this can be poisonous, imagine if you left the company and couldn't exercise your options before you left. This happened to a friend of mine at a now-public company; he lost about a hundred and thirty thousand dollars.

* the ability to early exercise stock (eg, before it has vested), starting six months into an employee's tenure.

Uber's main counterargument is that the plaintiff is a sophisticated
individual (Stanford Law grad, experienced engineer), and he should have been
aware that early exercising more than $100,0000 worth of ISO-type stock
options converted them to NSOs.

This is probably true, but if an engineer with a law degree screwed this up,
imagine what's happening to everyone else.

~~~
chimeracoder
> Uber's main counterargument is that the plaintiff is a sophisticated
> individual (Stanford Law grad, experienced engineer), and he should have
> been aware that early exercising more than $100,0000 worth of ISO-type stock
> options converted them to NSOs.

It's more confusing than that. If your equity is valued at more than $100,000,
if you exercise even one share early, the entire grant above $100,000 converts
to NSOs.

This is a really, really easy point to trip up on.

~~~
alasdair_
Can you elaborate on this? I'm about to exercise my first options before the
end of the year.

~~~
chimeracoder
> Can you elaborate on this? I'm about to exercise my first options before the
> end of the year.

These limits are set by the IRS[0]. As I understand it, if you're exercising
vested options, you're fine as long as the value of the amount you exercise
doesn't exceed $100,000. If you're early-exercising, though, your _entire_
grant counts towards the total, because the IRS considers that all "early-
exercise-able", even if you're only early-exercising one share.

However, I'm not a lawyer or an accountant, and this isn't legal or tax
advice, so you should definitely seek advice from a tax attorney regarding
this topic.

[0]
[http://fairmark.com/execcomp/isoearly.htm](http://fairmark.com/execcomp/isoearly.htm)

------
kevinburke
On a related note about candidates not understanding offers, has Uber stopped
the practice of calling candidates in the morning, making them an offer, and
demanding that they accept or decline by the end of the day? I doubt it was
helping candidates understand their compensation package.

I worked at a competing company a few years ago and we had to deal with this
with many candidates we were recruiting.

~~~
employee8000
I was given an offer with non-aggressive deadline of 2 weeks.

In terms of the equity portion, they were pretty straightforward with me and I
had no surprises with my equity portion. In addition, none of my coworkers
have complained about their packages either. I don't know this employee but he
certainly doesn't speak for the vast majority of us.

That said I don't know what recruiters are doing these days. My boss would
never let our recruiter pull shit like that, but I can't speak for other
teams.

~~~
mavelikara
Thanks! What is the general sentiment about

(1) the refusal to allow secondary sales and

(2) 30 day exercise window

among your colleagues?

~~~
employee8000
1) none of my coworkers care. I'm sure very early employees may care but I
don't know any and I can't speak for them.

2) most have RSUs. But if you're going to exercise in 90 days then you're
going to exercise in 30 days so it doesn't even matter.

~~~
mavelikara
Thanks!

> none of my coworkers care. I'm sure very early employees may care but I
> don't know any and I can't speak for them

Interesting that your colleagues and you don't seem to care that the
management had instituted policies that hurt the very engineers who first
built up the company. I would be very wary of such a management that it would
some day turn against me too.

------
jayjay71
I realize Uber is a big company and it obviously deserves some press, but I'm
surprised just how many articles about Uber have made it to the front page of
hacker news the past few days. And (almost) all of them have been very
negative. I wonder if public perception will change and people will use their
competitors more? Probably not enough to be noticeable. I wonder how Uber
considers managing its brand, as they rarely seem to shy away from bad
publicity.

With regards to this specific article, how common is this practice at other
startups? From anecdotal experience, it seems common for startups to under
inform employees with regards to their equity and how it works. I rarely meet
a startup employee who understands what their equity is worth.

~~~
withdavidli
Making it top front page: Uber and AirBnB are likely the two startups that
most people are waiting to see IPO (Dropbox like a year or two ago). Any of
these companies is bound to garner attention when something big happens.

Uber is also aggressively recruiting. Many people on this board probably have
been contacted by them or have been made offers by them. For what their comp
promises, this would be very important for them, especially if they didn't do
their due diligence on the company's financials and how their stock awards
were set up.

I agree that very few people know how their stock works. To the valley's
credit, a lot of places do RSUs which is a simple matter. But I definitely
spoken with folks that didn't realize their exercise rights had expired.

~~~
TeMPOraL
> _Making it top front page: Uber and AirBnB are likely the two startups that
> most people are waiting to see IPO_

I upvote those articles for a different reason - Uber is the single company
I'm most waiting to finally die, possibly with enough mess around it to
finally drive the point that sociopathic behaviour and blatantly breaking the
law is not a way to run a company in a civilized society.

~~~
meddlepal
The lesson Uber has taught me at scale is that if you break the law make sure
you break a law that has perceived benefit to the people. Uber has the hearts
and minds of the population because it's perceived as de-fucking the Taxi
industry regardless of how it's gotten to where it is.

~~~
TeMPOraL
That is very true. Not only people do not go by themselves to learn who
they're dealing with, they will _ignore_ the negative stories if told - what
matters is that taxis are considered expensive and crappy, while Uber is
cheaper (and _hot_ \- at least within my social circle they won a lot by just
marketing themselves as a startup!).

------
Animats
What do you do with Uber stock? They're not a public company. It's possible,
but not easy, to sell Uber shares to sophisticated investors in bulk.[1]

From the article: "Uber is rumored to go public within the next two years."
Not unless they stop losing money so fast.

[1]
[https://www.bloomberg.com/news/articles/2016-05-20/selling-u...](https://www.bloomberg.com/news/articles/2016-05-20/selling-
uber-shares-may-be-tougher-than-you-think)

------
JumpCrisscross
This sounds like a recent exchange I was relayed regarding Magic Leap. There,
a former employee was promised certain rights––in writing, no less!––only to
be defaulted on by the company's counsel, again in writing.

Until this fraud is prosecuted, its costs are too cheap for its benefits.

------
thesimpsons1022
uber seems to be run very poorly from my exposure to them. when i was applying
for jobs, they contacted me and said that theyd interview me in 2 to 3 weeks.
My deadline for another company was in 3 weeks as well. They failed to
schedule anything and contacted me after 3 weeks were up and said it'd be
another month before they could interview me. For reference, Facebook flew me
out and interviewed me on campus 2 days after I had my phone interview and 3
days after they contacted me originally. Either way, I wouldn't work there in
a million years considering everyone i've ever met that works/interns there
said they worked 60 hour weeks.

~~~
Tempest1981
Your 60 hour week comment refers to Facebook, or Uber, or both?

~~~
thesimpsons1022
uber. talked to an intern there and they said it was standard to not leave
until after 10pm.

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Analemma_
Boy, this is shaping up to be a terrible week for Uber isn't it? Kicked out of
California, the Naked Capitalism post about their inevitable doom is gaining
attention, $800MM loss this quarter, the UK labour board ruling means they may
have to (retroactively and in the future) pay VAT, and now this.

Couldn't happen to a nicer group of people /s

~~~
edgyswingset
I'm certainly happy. I can't think of a single company that as "ruined it" for
startups more than Uber. Skirting around laws and regulations combined with
absolutely insane valuations must have put completely unfair pressure on other
startups.

~~~
dmix
Unfair pressure?

They have some obligation to other startups to keep valuations low, for what
purpose? Are other VCs going to suddenly put irrational expectations on the
companies pitching them?

Any VC/company that engages in some unrealistic valuation pissing contest
deserves any big expensive failure that comes to them. Otherwise they can
prove people wrong at their own risk.

~~~
hueving
Pressure to "do whatever it takes" to grow, including break laws.

------
HappyTypist
There is no tax _difference_. The only question is when you pay your taxes (on
options above n 100,000); it's merely a cash flow thing. The TechCrunch arthor
misunderstands that somehow there are tax savings (there are none; the strike
price doesn't change over the course of the option plan).

Pretty much everyone prefers the six month cliff.

~~~
tomnipotent
So you don't consider ISOs triggering the alternative minimum tax (AMT) on
exercise as a tax difference? Or that a company can deduct the spread when
NSOs are exercised? These are non-trivial tax differences.

~~~
bickfordb
Also, AMT credits: [http://www.marketwatch.com/story/an-upside-to-the-
alternativ...](http://www.marketwatch.com/story/an-upside-to-the-alternative-
minimum-tax-2014-04-01)

------
abalone
Wait, wouldn't the AMT apply to his desired all-ISO scenario anyway? This is
an actual problem; people can't afford to buy their ISOs either because of the
AMT. What's the actual damage here done by NSOs?

~~~
choppaface
Yes, there would probably be a lot of AMT to pay, but the taxes aren't
_immediately_ due as it is with non-quals / NSOs. Furthermore, the AMT can be
used as a credit in later tax years depending on how one does their
accounting... ISOs are very complicated.

When one exercises an NSO, the company must legally withhold or collect money
somehow (at the very moment of the exercise) to cover the employee's tax
liability. When the stock is not public (or upon an employee's election), the
employee must pay cash up-front. Thus it can be impractical or impossible to
gain anything from NSOs while the company is private. Another factor is that
even if the employee can cover the taxes, the shares could lose potentially
all their value at some later time. In this case the employee loses MORE than
the value of the stock because they're also out of pocket for the taxes paid.
(I've personally gone through essentially this latter situation).

I've heard of Uber employees getting special deals from banks and mutual funds
that forward them cash to exercise the shares; in exchange the banks get some
percentage of the shares (or nothing if Uber does not IPO by some date). There
are some ROFR issues here (pre-IPO Facebook employees tried to do similar
things) so I'm not sure how well it actually works. It's certainly damn
complicated.

I've personally had ISOs, NSOs, RSUs, and another special other type of stock
agreement at different points of time. I've had an accountant charge me $1800
to handle some ISO / AMT complexities on stock that didn't make me much money
(I actually had net losses on most of the shares due to taxes). I've had
managers, directors, and legal teams give me false or misleading information
about what ISO / NSO packages were worth. These games are really not worth it
for stock packages worth (even in the very best of outcomes) ~$1m or less.
(Unless you're a laywer or biz-dev kinda person and enjoy them! )

My recommendation for makers / individual contributors: request RSUs if
possible and prefer a simpler path to having taxes-paid money in the bank.
Outstanding employees who really move the needle deserve exec teams who can
deliver compensation that's valuable without tax games. Employee time should
be spent on product and furthering the craft, not legal BS.

~~~
abalone
Any examples of pre-IPO companies handing out RSUs? I've seen posts about that
on HN but it doesn't seem to be proven in the field. I've read that FICA taxes
may actually be due on vest with RSUs, so either the employee pays or the
cash-strapped pre-IPO startup spends cash on that, both of which are dumb when
there are fully tax-deferred instruments available.

A smaller delta fix here would be to convert ISOs to NSOs with a very long
exercise period (10 years) so you don't have to pay taxes until you can sell
to cover the tax. I can think of several companies doing that now e.g.
Pinterest.

~~~
mavelikara
Using double trigger vesting (the RSUs vest only when both the normal vesting
period is up _and_ the IPO/exit happens), the tax situation can be managed. I
know of pre-IPO startups doing RSUs.

~~~
abalone
Sorry for the late reply but... doesn't double trigger vesting mean you
forfeit the equity if you leave before the second trigger?? That's insanely
employee-unfriendly. Extending NSO exercise windows is so much simpler.

See: [http://stockoptioncounsel.com/blog/rsus-startup-
restricted-s...](http://stockoptioncounsel.com/blog/rsus-startup-restricted-
stock-units-what-you-need-to-know/2014/2/10)

~~~
mavelikara
> Sorry for the late reply but... doesn't double trigger vesting mean you
> forfeit the equity if you leave before the second trigger?? That's insanely
> employee-unfriendly.

That is right. These typically make sense only when the IPO is imminent.

> Extending NSO exercise windows is so much simpler. Agreed.

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rajacombinator
Gonna be hilarious watching this company go down in flames. Unfortunately it
is sure to burn a hole in the 401ks of America during the process.

