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Handcuffed to Uber

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Re: Handcuffed to Uber

#111

Post by redshirtrob »

scurvy wrote: post #64
steven2012 wrote: post #44

Earlier quoted context omitted.

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 w…

This is an interesting conversation. I wish someone with readily verifiable credentials could weigh in. I'm not saying the parent, or GP do not have the credentials, just that they've not been established. I'd love to hear from an accountant or tax attorney on the topic.

From what I can tell, taxes will be based on the values in Form 3921 (for ISOs and ESPPs), which is delivered by the employer.[0]

Here's a sample 3921.[1] The FMV is delivered in Box 4. My question is where does that value come from? Is it the last 409A valuation, or is it required to use sale data from secondary markets?

I've received several of these forms over the years, and the FMV has always been the value from the last 409A. I have no idea if there was a secondary market for the shares.

[0] https://www.irs.gov/taxtopics/tc427.html

[1] https://www.irs.gov/pub/irs-pdf/f3921.pdf

Re: Handcuffed to Uber

#112

Post by redshirtrob »

home_boi wrote: post #98
matchagaucho wrote: post #60

Earlier quoted context omitted.

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.

What happens when private RSUs vest? Do companies withhold some RSUs and the government considers the tax bill paid by the withheld amount?

That depends on the stock plan agreement. One possibility is to make an IPO a vesting requirement. This guarantees a public market to sell them into.

Re: Handcuffed to Uber

#113

Post by Gustomaximus »

xiaoma wrote: post #81
gogopuppygogo wrote: post #77

Earlier quoted context omitted.

As long as the employee's enter into the agreement with full transparency that this is how the compensation works then it's completely fair. This isn't the result of some kind of secret court deciding that it's how a company should pay employees. Adults are consenting to this arrangement. There is only so much "fair" to be had in business. It's not like there aren't 1,000 other "mini ubers" that want to own the marke…

> "As long as the employee's enter into the agreement with full transparency that this is how the compensation works then it's completely fair." That's literally the logic that was used to justify indentured servitude.

Finding one similar fact (which sounds strange so I would question without evidence anyway...) doesn't make a point correct. Horses and dogs both have 4 legs. It doesn't make them the same animal.

Re: Handcuffed to Uber

#114

Post by aetherson »

brianmcconnell wrote: post #66

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, an…

It's different with Uber in hindsight, but in general, employees at start-ups are already overinvested in the success of the start-up, and that success is unlikely. I don't recommend that most people also sink their cash into their employer.

Re: Handcuffed to Uber

#115

Post by redshirtrob »

giaour wrote: post #108
xiaoma wrote: post #81

Earlier quoted context omitted.

> "As long as the employee's enter into the agreement with full transparency that this is how the compensation works then it's completely fair." That's literally the logic that was used to justify indentured servitude.

I don't think anyone believes that the issue with indentured servitude is that it was enforced by contract. As a society, we have decided that there are certain things you can't sign away (e.g., your freedom) and there are certain things you can (e.g., your right to exchange an illiquid asset for cash). The GP's point is that calling this arrangement "indentured servitude" is more than a little dramatic.

I read it as hyperbole for the sake of making a point. I don't think the OP meant it literally.

But, debating that term seems to be getting away from the main point--that an employee could have an option on a sizable asset with no way to assert ownership of the asset, despite having fulfilled the vesting requirements set forth in the stock option agreement.

Re: Handcuffed to Uber

#116

Post by 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.

Re: Handcuffed to Uber

#117

Post by redshirtrob »

brianmcconnell wrote: post #66

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, an…

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.

Re: Handcuffed to Uber

#118

Post by wdr1 »

iamleppert wrote: post #73

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 k…

> 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.

Re: Handcuffed to Uber

#120

Post by zwily »

aetherson wrote: post #114
brianmcconnell wrote: post #66

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, an…

It's different with Uber in hindsight, but in general, employees at start-ups are already overinvested in the success of the start-up, and that success is unlikely. I don't recommend that most people also sink their cash into their employer.

Usually you do an early exercise when the company is very young, with a low strike price. In those cases, the cash outlay can be very small.

For a later stage company, then math works differently, of course.

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