Handcuffed to Uber • Hacker News Board

Re: Handcuffed to Uber

#61

Post by scurvy » Sun, May 01, 2016, 7:28 PM UTC

steven2012 wrote: post #45

scurvy wrote: post #34

Earlier quoted context omitted.

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 make…

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.

Options valuation is derived from your 409A valuation...and heyjon used Black Scholes to derive present option value. The two are related. Black Scholes is considered to be massively flawed by the larger public options market, but it's still used a lot in the private equity options side. Hence, why I said that it really could be whatever you wanted. If there were a legit requirement that it be an accurate valuation, you could never get away with Black Scholes. It's common knowledge that it's seriously flawed.

As for 409A valuation, I've never heard of an auditor seriously examining it or questioning its validity. It's mostly the "valuation expert" says, "What value do you want for 409A?" You tell them, they ask to see the books, and then say "OK I can sign off on that."

Re: Handcuffed to Uber

#62

Post by dmnd » Sun, May 01, 2016, 7:34 PM UTC

austinl wrote: post #24

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/ Disclosure: I work for Pinterest

Here's a list of such companies with extended exercise windows:

https://github.com/holman/extended-exercise-windows

Disclaimer: I work at Flexport which has a ten-year window.

Re: Handcuffed to Uber

#63

Post by matchagaucho » Sun, May 01, 2016, 7:34 PM UTC

steven2012 wrote: post #49

matchagaucho wrote: post #43

Earlier quoted context omitted.

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.

Do other companies have this clause in place?

The latest unicorn rounds are redefining liquidity preferences. Wouldn't be surprised if there are others.

VCs want protection when valuing a company at $60B+. Employees are, unfortunately, last in line under the current RSU models.

Re: Handcuffed to Uber

#64

Post by scurvy » Sun, May 01, 2016, 7:35 PM UTC

steven2012 wrote: post #44

scurvy wrote: post #26

Earlier quoted context omitted.

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 v…

This is wrong information. 409A valuations are generally based on revenue models, profit models (not applicable for most startups) or comparatives. It's not done based on funding rounds because there's a lot of goodwill based in that. Most companies push the 409A valuations as low as possible precisely because of income tax ramifications on exercise.

It depends on what the actual market value of your stock is upon exercise, not just 409A. Sure, it might be the 409A value, or it could be the last sales price on something like SecondMarket. If there's a secondary private market, that will trump whatever your company says the 409A value was.

If your company says the 409A is $1.50/share but people are selling on secondary markets for $4/share, you must use $4/share when computing your exercise benefit.

If there's no secondary market, it's the last 409A value.

Re: Handcuffed to Uber

#65

Post by scurvy » Sun, May 01, 2016, 7:49 PM UTC

YuriNiyazov wrote: post #50

a_small_island wrote: post #40

Earlier quoted context omitted.

It's not just the exercise price, it's the tax bill at the end of the year...

If you exercise upon getting hired, there is no tax bill, because there is no spread between FMV and your exercise price. There's only a tax bill later, upon liquidation.

Many (if not most) early stage companies won't allow you to do this. They claim that the "legal costs" are too high. When asked how much it is and offered to cover them, I've been met with blank stares.

Re: Handcuffed to Uber

#66

Post by brianmcconnell » Sun, May 01, 2016, 7:50 PM UTC

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.

Re: Handcuffed to Uber

#67

Post by scurvy » Sun, May 01, 2016, 7:51 PM UTC

_9vpl wrote: post #55

robbiemitchell wrote: post #38

Earlier quoted context omitted.

My understanding is, right of first refusal includes the option to render the equity worthless if this right is not honored. It's a threat I've seen made before by a CEO who did not want a secondary market to exist.

Can you expand on that? How would one be able to render the equity worthless? My best understanding of a typical "right of first refusal" clause is that it gives the company the right to match any offer by a third-party buyer. This would add some friction to the transaction, in that the company could have some specified period to consider the offer, leaving the pending transaction with a third-party buyer in limbo (o…

There's almost never a timeliness clause in the right of first refusal (ROFS) section. They can simply choose to ignore your request...indefinitely.

Re: Handcuffed to Uber

#68

Post by zwily » Sun, May 01, 2016, 7:51 PM UTC

austinl wrote: post #24

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/ Disclosure: I work for Pinterest

I heard that Pinterest has to issue NQOs instead of ISOs to do this. If that's the case, they come with their own potential downsides.

Re: Handcuffed to Uber

#69

Post by zwily » Sun, May 01, 2016, 7:56 PM UTC

dlandis wrote: post #59

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

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

Re: Handcuffed to Uber

#70

Post by zwily » Sun, May 01, 2016, 7:59 PM UTC

matchagaucho wrote: post #60

superuser2 wrote: post #57

Earlier quoted context omitted.

But the stock will be considered income in the IPO year and subject to withholding, right? So some employees will work for a negative potentially six figure salary (100% withholding + 5-6 figures owed to the IRS) with no way to pay the IRS until they can sell the stock in the next year? That can't be right. How does this work?

RSUs are "restricted" in the sense that employees do not own them until exercised, which defers the tax burden. Typically, a portion of the RSUs are withheld to cover taxes when exercised.

You don't exercise RSUs. RSUs are taxable as they vest. At my company, a portion of your vesting RSUs are sold every time to pay the tax on them, unless you provide some cash to pay the tax.