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

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

#111

Post by [deleted] »

gamblor956 wrote: post #104
ryandrake wrote: post #86

Earlier quoted context omitted.

> 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 judg…

This law effectively allows rich people to do things that poor people can't. You're still not getting it. The law does not stop poor people from investing in a private company. It simply prevents the company from advertising its stock to "poor people" unless the company registers with the SEC and demonstrates at least a minimal level of financial controls. A company can sell its stock to poor people as long as it doe…

[deleted]

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

#112

Post by rconti »

hkmurakami wrote: post #61
ChuckMcM wrote: post #15

This -- "One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Both former employees took out loans from family members to make the payments, and requested anonymity to discuss their personal financial situations." Is how many many Sili…

Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period"…

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning.

Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary.

Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble.

It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.

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

#113

Post by mlazos »

influx wrote: post #103
lhorie wrote: post #42

Earlier quoted context omitted.

> Instead of using a cloud provider As I understand, we tried using AWS to power key infrastructure but ran into scalability/cost issues. We still use 3rd providers for various things but my understanding is that a lot of this eng work is to reduce the costs incurred from these services. I do agree though, as a new hire, that the culture here is quite a bit on the NIH side, compared to a more traditional software sho…

I probably can't say a lot due to NDA, but does it make sense to you that AWS or Google Cloud can't scale to the level of Uber, such that Uber has to build their own datacenters and write their own Lambda equivalent? Further, does it make sense that you'd rather buy hardware up front to scale for Halloween and New Years instead of being able to dynamically surge your infrastructure?

Does it make sense that managing your own hardware and data center is extraordinarily expensive? Why do you think public cloud providers are so popular? I don’t buy your scalability argument either. Netflix has about 100m users and moved from having their own data centers to AWS and is extremely profitable. Uber has 40m. Given they might have different requirements for a system it might make sense but if scalability is the main reason, that is a bad excuse to undertake a huge infra investment.

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

#114

Post by rconti »

hkmurakami wrote: post #35
bsimpson wrote: post #26

Earlier quoted context omitted.

Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill. As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a…

This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals. If you have NQOs, this tax always happens.

The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly".

This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill.

https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...

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

#115

Post by gfodor »

rconti wrote: post #112
hkmurakami wrote: post #61

Earlier quoted context omitted.

Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period"…

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped le…

if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you worked hard to earn. especially because in the crash scenario, you are surrounded by commiserating peers who also got burned, but in the upside scenario you missed out on, all of your peers except you are living the high life shaking their heads at your "foolish" (in hindsight) risk aversion.

edit: not sure why the downvotes. if you are interested in a treatment of peer-based utility functions that affect risk premia, see https://www.amazon.com/Missing-Risk-Premium-Volatility-Inves... -- in other words, risk may not be best measured as volatility but instead as the expected relative wealth gain/loss to your market peers. for private employee equity, those peers are other optionholders.

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

#116

Post by kudokatz »

rconti wrote: post #112
hkmurakami wrote: post #61

Earlier quoted context omitted.

Yeah this just looks like poor/risky financial calculus on the part of the former employees. Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps. Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period"…

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped le…

> They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning

"[over-]extending themselves" - risky

"underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share

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

#117

Post by seanmcdirmid »

SilasX wrote: post #105
seanmcdirmid wrote: post #98

Earlier quoted context omitted.

The rules are definitely not fair but that’s beside the point.

Beside the point of the GGGP's wish that tax liability on an unsaleable asset could be satisfied in kind?

I thought GGGP’s post was to propose a solution that worked under current rules.

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

#118

Post by mrep »

abalone wrote: post #29

This reflects one of the more notable changes of late in the basic SV startup template. More companies are going with so-called "extended" exercise windows, converting from 90-day-window ISOs to multi-year-window NSOs upon exit. Zach Holman (ex-Github) wrote a short, fun post on this a couple years ago.[1] Y Combinator has made it their standard around when Pinterest did it as well.[2] It was fun to watch Andreessen…

Here is the discussion where a16z gets flogged: https://news.ycombinator.com/item?id=11963551

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

#119

Post by paxy »

eddieplan9 wrote: post #17

Why is this even news? This is the case for pretty much every privately-held company in the valley, because the tax law dictates that [1]. When Pinterest changed their exercise window from 90 days to 7 years, it was big news [2]. When you leave a privately-held company, you have to convert your stock options to stocks to hold onto them, and then AMT kicks in and taxes you on the spread and that often hurt a lot. But…

There are better ways to manage employee equity, and lots of even the smallest startups do so. E.g. switch to RSUs as early as possible, and have "double-trigger" vesting so taxes are only owed when the shares have a real dollar value.

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

#120

Post by abalone »

ChuckMcM wrote: post #15

This -- "One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Both former employees took out loans from family members to make the payments, and requested anonymity to discuss their personal financial situations." Is how many many Sili…

Yeah, this always existed but the magnitude is so much greater for so many more people now because companies are staying private longer.

I think it's healthy to just let vesting mean you get to take it with you, period, no catch. But it's worth noting this means there will be fewer options returned to companies in comparison to the last boom. Scott Kupor made this point although he framed it in a poor way.[1] He notes that it will in theory result in more dilution for employees that stay.

[1] https://a16z.com/2016/06/23/options-timing/

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