Former Uber employees have gone into debt to exercise options they can’t sell • Hacker News Board

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#81

Post by jdavis703 » Tue, Dec 12, 2017, 6:41 PM UTC

hkmurakami wrote: post #41

foo101 wrote: post #24

Can someone tell me what the rules are from companies who are already listed on NASDAQ and trading publicly? For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested. I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20…

You can keep them in perpetuity. UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you). In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecti…

US banks are protected via FDIC insurance. In a similar manner your stocks are protected by SIPC insurance. They don't insure you against loss in value to the stocks. But if the firm winds up going bankrupt and somehow looses your stock, the CEO absconds with the money, they get hacked, etc, then you'll be protected up to $500,000.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#82

Post by seanmcdirmid » Tue, Dec 12, 2017, 6:42 PM UTC

robrenaud wrote: post #64

khuey wrote: post #56

Earlier quoted context omitted.

Because they're not worthless, they're just not liquid.

I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.

The IRS wants to be paid in cash, not illiquid stock.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#83

Post by sockgrant » Tue, Dec 12, 2017, 6:45 PM UTC

clairity wrote: post #39

sockgrant wrote: post #10

Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%. Now stay there until the company sells or goes public. Wait -- they got bought? Congratulations, you just wo…

libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take. instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that…

> they're like lottery tickets that are only mostly, but not completely, up to chance

> if you know some quantitative finance [...]

> a simpler approach is to do a rough back-of-the-envelope calculation [...]

You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture.

There are a lot of circumstances that do happen and can't be put into a math equation.

1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga

2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this.

3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here.

4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising.

There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#84

Post by gamblor956 » Tue, Dec 12, 2017, 6:45 PM UTC

JumpCrisscross wrote: post #66

gamblor956 wrote: post #63

Earlier quoted context omitted.

With all due respect, this is wrong. Selling SPVs (or stakes therein) containing the shares of a single company is a common institutional tactic. It sure is. But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. The SPV could have been a corporation, partnership, or L…

> But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaro…

Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated.

Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not mutually overlooked workarounds, they're usually not worth the hassle in most situations. When they exist, they do so because the use of an SPV to hold the stock of the issuing company was explicitly negotiated as part of the investment because the securities law, tax, financing, and other considerations for stock held through an SPV, especially through a pass-through SPV like an LLC, can be very different from stock held directly. This is especially true for startups or other privately held companies with relatively complex ownership structures. (The use of SPVs is not negotiated for publicly traded companies, because the company's permission isn't required to acquire their stock.)

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#85

Post by rahimnathwani » Tue, Dec 12, 2017, 6:47 PM UTC

robrenaud wrote: post #64

khuey wrote: post #56

Earlier quoted context omitted.

Because they're not worthless, they're just not liquid.

I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.

Yeah, it would be great also if supermarkets would accept a fraction of the stock, in return for baby food. But I'm not sure why they would be willing to do that.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#86

Post by ryandrake » Tue, Dec 12, 2017, 6:48 PM UTC

gamblor956 wrote: post #47

mabbo wrote: post #25

> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals. From the SEC link: > An accredited investor, in the context of a natural person, includes anyone who: > earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the cur…

Wow. There are actually laws in place that say the rich are able to do things that poor people can't. This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a…

> This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit.

This is all true, however laws should be judged by their effect, not by their purpose. This law effectively allows rich people to do things that poor people can't. It also may protect un-saavy investors, although I would argue that an un-saavy investor will inevitably find some other way to lose their money regardless of the accredited investor law. They're probably buying bitcoins right now or something.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#87

Post by JumpCrisscross » Tue, Dec 12, 2017, 6:48 PM UTC

gamblor956 wrote: post #84

JumpCrisscross wrote: post #66

Earlier quoted context omitted.

> But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaro…

Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated. Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not m…

Large investors bought stock. Small investors (employees) bought stock. Price went up. Price went down. The former could get cash for their shares, the latter could not. Price kept going down.

You don’t need to be an M&A lawyer to see why that’s problematic.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#88

Post by [deleted] » Tue, Dec 12, 2017, 6:53 PM UTC

gamblor956 wrote: post #47

mabbo wrote: post #25

> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals. From the SEC link: > An accredited investor, in the context of a natural person, includes anyone who: > earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the cur…

Wow. There are actually laws in place that say the rich are able to do things that poor people can't. This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a…

[deleted]

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#89

Post by rahimnathwani » Tue, Dec 12, 2017, 6:54 PM UTC

gamblor956 wrote: post #47

mabbo wrote: post #25

> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals. From the SEC link: > An accredited investor, in the context of a natural person, includes anyone who: > earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the cur…

Wow. There are actually laws in place that say the rich are able to do things that poor people can't. This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a…

"But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor."

The article suggests there are folks who exercised 20,000 options (presumably representing one share each), but who had to borrow the money to exercise and to pay tax. Are you suggesting these people probably qualify as an accredited investor, or that their situation is unusual?

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#90

Post by gamblor956 » Tue, Dec 12, 2017, 7:04 PM UTC

JumpCrisscross wrote: post #87

gamblor956 wrote: post #84

Earlier quoted context omitted.

Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated. Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not m…

Large investors bought stock. Small investors (employees) bought stock. Price went up. Price went down. The former could get cash for their shares, the latter could not. Price kept going down. You don’t need to be an M&A lawyer to see why that’s problematic.

I agree with you that it's not fair that the employees got screwed, but they got screwed because Softbank and Uber decided not to make the offer open to the employees that didn't have at least 10,000 shares.

It has absolutely nothing to do with US securities law (or any other US laws), as the current laws don't prevent acquirers from buying stock from unaccredited investors.