
Handcuffed to Uber - felarof
http://techcrunch.com/2016/04/29/handcuffed-to-uber/?sr_share=facebook
======
xiaoma
> _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?

~~~
redshirtrob
Sam Altman has commented on this before. Among other things, he advocates for
much longer (10 years) exercise periods for equity grants.[0]

He also discusses the need for a change in tax treatment by the IRS. One of
the fundamental issues is how options are taxed. Should you exercise an
option, you will need to pay taxes on the spread (delta of strike price and
current FMV, i.e. latest 409A valuation).

In many cases, the spread is so small or nonexistent, that the tax bill is
irrelevant. But, in a few cases it's so large that most people can't possibly
raise the capital to cover the tax bill.

I think the fundamental issue is the definition of FMV. When there's no public
market, and employees are covenanting away any rights to sell their equity on
secondary markets, is there really a fair market? I would say no.

[0] [http://blog.samaltman.com/employee-
equity](http://blog.samaltman.com/employee-equity)

~~~
cplease
If the spread is nonexistent, why exercise at all? Why not just dump your
money in an index fund?

~~~
caseysoftware
I early exercised at Twilio when the spread was pretty small.

The key is that you pay taxes on that spread. If you're early enough - _I was
roughly #25_ \- and do it early in your tenure, then you only have to come up
with the cash to buy the shares and a minor tax bill. If I had waited until I
left to execute, the spread would have been 12-15x. I know a few people who
stayed 4 years to fully vest and then executed. I don't know detailed numbers
but it sounded painful.

 _If /when_ Twilio eventually IPOs, then the ROI will be far better than any
index fund.

(I don't know anything about the "if/when" as I haven't been inside in over 2
years.)

~~~
cplease
Okay; I don't know anything about Twilio in particular, but in the _usual_
non-founder startup employee scenario, where you are busting your balls
working crazy hours for less than you could get at a real company, you are
already assuming a risk in the form of opportunity cost and job insecurity in
exchange for equity; you would triple down on this risk by dumping your
savings (or borrowings) into illiquid company stock at zero or nearly-zero
discount?

How do you know there will ever be a spread? If your startup fails, your
shares are worthless. Or better yet, your shares are diluted out of most of
their value by several subsequent rounds of private equity, which generally
you have no control over whatsoever, but which will certainly go to enrich the
founders. Resulting in even more direct transfer of wealth of your investment,
to the founders and venture capitalists.

I'm having trouble understanding why any startup employee would do this, as
opposed to exercising stock options when they actually have value and ideally
some liquidity. Yeah you have to pay taxes, but that's because you came out
ahead.

I don't see anything other than a massive gamble. You've already staked enough
of your future on one speculative start-up as an employee; why would you then
put a big chunk of your own money at risk? An index fund has reliable long-
term returns.

~~~
caseysoftware
In my particular case, I had worked in the telecomm industry before and had a
good understanding of the alternatives and felt that I understood where things
were going and my prediction - still yet to be proven - was that they would
win.

But you are right, it is yet another risk. At Twilio, the pay was _awful_ but
I felt the longer term risk/reward was worth it.

If I was with $startup and the strike price was $texas-sized, I wouldn't do it
while the shares were still illiquid because executing would be _so_ much.

~~~
cplease
Still sounds like an all-around terrible deal to me. But best of luck and hope
you see some kind of payoff.

------
austinl
Pinterest 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
I 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.

~~~
hkmurakami
Frankly 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
Employees should have more rights. I wish we could make this standard.

~~~
zenlikethat
Employees have plenty of rights, you're talking about giving them additional
privileges. No one forces people to take equity compensation instead of salary
and as long as employees continue to do so the practice will continue.

~~~
jamra
I don't believe equity should be instead of salary but if you are given the
option of owning what you create, you shouldn't be enslaved by it.

~~~
zenlikethat
It's horribly insensitive to even mention slavery in the same breath. There
are actual slaves in the world and this is a completely different situation.

------
iamleppert
What 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.

~~~
wdr1
> 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
I 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.

------
brianmcconnell
I 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.

~~~
redshirtrob
Be 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.

~~~
brianmcconnell
It's a real dilemma, as the company is doing well enough that the 409a value
is not trivial, but its not clear that they will have a liquidity event in the
near term. So on one hand I don't want to get screwed on a fictional profit on
taxes, but on the other I don't want to forfeit the options as I earned them,
and as far as I am concerned, that was part of my compensation for taking
below market salary.

It bothers me that the terms are unnecessarily anti-employee. 90 days simply
isn't enough time, especially when critical details related to the cap table
and liquidation preferences are obfuscated. If they are not prepared to buy
shares back at 409a value, they should allow an extended exercise window.

------
scurvy
One 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.

~~~
throwaway_exer
The IRS will say that you "owe" quarterly, but there's no penalty for not
doing so.

~~~
scurvy
It'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-
dea...](http://www.inman.com/2012/06/08/dont-sweat-quarterly-tax-deadline/)

~~~
phamilton
If 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.

------
heyjonboy
This 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.

~~~
scurvy
Actually, 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.

~~~
heyjonboy
No, that's incorrect (speaking as a founder who's raised $35mm and sold shares
on the private market). Private financings will trigger a new 409a valuation
but won't influence it. 409A valuations are typically based on Black Scholes
and have no connection to private funding valuations. Secondary sales only
affect fair market if there's a functioning secondary market, and AFAIK there
are no private startups with a FUNCTIONING secondary market.

~~~
scurvy
You can do 409A however you want which is why I said it was a joke. I've
worked in 2 places that based it off of last round after accounting for full
dilution. You can use black Scholes, last round, or your finger in the air it
doesn't matter. If it had to be accurate they wouldn't allow Black Scholes
which has been all but disproven.

Also there are lots of secondary markets for private companies right now. What
makes you think otherwise?

~~~
steven2012
Okay thanks for confirming you don't know what you're talking about. Black
scholes is options valuation and never used in 409A valuation. You can't just
make stuff up, you have to justify it to your auditors.

~~~
encoderer
Black Scholes is used to value options, eg to set the strike price on options.
So, it is used for this purpose by companies who need to set option strikes at
fmv. I have no idea why he says it's been repudiated. As far as I know, it is
still used in public market option pricing. Most people buying or selling
options are not pricing them, but accepting the market makers price. How would
you have any clue how they're coming to that value?

~~~
scurvy
I previously wrote software at a major market maker. I can't say (NDA) what
they use, but most professionals consider Black Scholes to be mickey mouse. If
you're using it in the public market, you're not going to fare well on
American style options.

As for real world proof of Black Scholes being garbage, it doesn't get any
better than Long Term Capital Management.

~~~
huac
Black-Scholes (and the Merton version) are useful as simple estimates of
option prices. Of course it's not going to be accurate (it assumes a lognormal
distribution for volatility, JFC) - but the model is public and easy to
calculate, providing a stable basis for these kinds of prices.

Edit: people buying/selling options are of course performing their own pricing
operations. They don't care how the market price is determined, since they
believe their model is the best and gives more accurate prices than anyone
else.

Edit 2: furthermore, to properly price startup options, you need to account
for their 'random-expiration' nature: we have no idea when Uber will IPO. this
makes it difficult to use traditional option pricing models which have fixed
maturities (you can take integrals over the model's results at each possible
maturity). additionally, choosing a discount rate is hard when realizing that
most employees are not well-diversified, unlike the investors/funds that the
traditional models are written for

~~~
scurvy
There's not much difference between an American style public equity option and
private equity option. Both can be exercised at any time. Perhaps you're
thinking of European style options, that can only be exercised on a fixed date
(expiry).

While neither are great, binomial is better for American style options than
BS.

~~~
huac
American options still have fixed expiration dates, and cannot be exercised
after that. While that's closer to a startup's option structure, it still
doesn't account for the uncertainty in when or if the startup will go public.
Additionally, you never exercise dividend-less American options early, and
startups generally don't offer dividends.

I guess you could choose an arbitrarily distant expiration date, but my bigger
point was that while BS is clearly not going to give perfect results, the
results are reasonable enough and transparent enough to justify their use for
tax purposes in lieu of actual market prices.

------
ChuckMcM
I 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__
The evidence indicates that Uber gleefully jumped over that line a long time
ago.

------
zzalpha
I'm far more curious about what will happen when these companies start seeing
significant portions of their workforce facing expiring option plans...

~~~
Illniyar
Is that a thing? I didn't know options can expire, what kind of an expiration
date do they have?

~~~
mifreewil
It'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)

------
dlandis
The article says Uber does not _allow_ employees to use services like 137
Ventures. Is that really something they can control?

~~~
zwily
Yes. The company can narrowly define what employees can do with their options.

~~~
hkmurakami
To elaborate, it's spelled out in even standard option plan paperwork.

------
adam-a
I'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?

~~~
yummyfajitas
Yes. 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.

~~~
sopooneo
I'm surprised financial services have not popped up just to help people in
such situations. The service could confirm the person has as much coming as
they say, have him sign his life away to them, and then float him enough cash
to buy the stock and pay the taxes on time. Then the employee pay some portion
of his new wealth to the financial services company.

Does that really not exist?

~~~
yummyfajitas
They do exist but are very expensive. Basically by the time you go to them
they know you are screwed and in desperate IRS-caused need of liquidity. So
while the actual estate tax may be 40%, you wind up paying 50% or more. This
is usually a debt deal, not an equity one - who wants shares in a closely held
family corporation?

For developers at unicorns I think services are somewhat better (e.g.
secondmarket, elite crowdfunder).

------
mhartl
What 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.

~~~
phamilton
As 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.

------
pfarnsworth
I 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
The 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
It 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.

~~~
phamilton
Similar vein is getting acquired by a public company and watching your stock
based retention packaged drop by 30% before the 1 year cliff hits.

------
seeing
_Uber’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
They give 'em the ol' cement shoes.

------
forgetsusername
> _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
Except that it's taxable under AMT.

------
PeterisP
Just 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.

------
amit_m
Why 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).

------
hkmurakami
Hmm. 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.

------
alistairSH
In 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?

~~~
pcl
There'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.

~~~
alistairSH
_There 's no liquid market for Uber shares._

I assume that in my wife's case, the company was buying the shares back
(privately held firm and we weren't dealing in a secondary market). I guess
I'm just surprised Uber doesn't do the same (actually, I'm not, given their
C-suite's history of being all-around dicks).

~~~
jvm
> I guess I'm just surprised Uber doesn't do the same (actually, I'm not,
> given their C-suite's history of being all-around dicks).

I've never heard of this in the valley, it's standard practice to not allow
shares to be traded and provide no option for liquidity until IPO. There can
be occasional secondary offerings (Facebook and Square had these) but they are
usually a one time deal. Definitely not a concept that Uber invented.

~~~
superuser2
It is a little different when the CEO is on record saying he has no interest
in doing an IPO in the foreseeable future.

------
mkagenius
Why can't they take loan from someone and give a 10% interest in a few weeks?

~~~
svisser
Uber specifically does not allow this (mentioned halfway the article).

~~~
kevin_thibedeau
There'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.

~~~
URSpider94
They'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.

------
geggam
seems like engineers are learning how they get screwed via the stock game

------
ismail
I 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
When 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
That's not quite right. It's not taxable income, per se, but it is figured
into calculating the alternative minimum tax (AMT).

------
jbrukh
This 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-
traditiona...](https://blog.coinfund.io/explaining-blockchain-to-traditional-
investors-through-growth-capital-2ca61971075c#.60bguvmr2)

~~~
argonaut
No amount of blockchain technology is going to stop a company from suing you
when they find out you sold stock.

~~~
jbrukh
Sorry, 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)

~~~
argonaut
The existence of a distributed ownership mechanism isn't going to convince
companies to _use_ that mechanism.

Honestly, the best way to decentralize ownership is to lead by example and
start a hundred-billion dollar company that distributes ownership. If the next
Google has decentralized ownership, that would be a model for other companies
to follow. Right now, there is no incentive for any company to do anything
nontraditional here.

~~~
jbrukh
That's what I'm saying. The next generation of companies will have all of the
tools and technologies to enable that distributed ownership. It's early days,
but "decentralized Uber" Arcade City is doing precisely that.

