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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

#171

Post by jsjohnst »

sjg007 wrote: post #121
JumpCrisscross wrote: post #46

Earlier quoted context omitted.

> Uber isn't publicly traded, so its stock price couldn't have "started crashing" "Crashing" is a function of value, not registration status. For example, CDOs "crashed" in the crisis [1]. > Large investors aren't able to sell because they hold their shares in LLCs With all due respect, this is wrong. Selling SPVs (or stakes therein) containing the shares of a single company is a common institutional tactic. [1] http…

Huh.. the LLC thing is a smart idea.. Seems rational for employees to start their own LLCs for the purpose of buying their options. Maybe the could group together.

An employee can’t sell their options to an SPV any more than they can sell it to any other investor if their agreement places restrictions on selling (most do now days). While otherwise stating several facts, OP is wrong in his overarching premise that the SPV had basically anything to do with large investors being able to sell their ownership or not.

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

#172

Post by sjg007 »

jsjohnst wrote: post #171
sjg007 wrote: post #121

Earlier quoted context omitted.

Huh.. the LLC thing is a smart idea.. Seems rational for employees to start their own LLCs for the purpose of buying their options. Maybe the could group together.

An employee can’t sell their options to an SPV any more than they can sell it to any other investor if their agreement places restrictions on selling (most do now days). While otherwise stating several facts, OP is wrong in his overarching premise that the SPV had basically anything to do with large investors being able to sell their ownership or not.

I think you can exercise the options and sell the stock subject to whatever rules you’ve agreed to, like right of first refusal etc... at any rate employees should refuse to work at startups with crappy schemes.. even uber.

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

#173

Post by jsjohnst »

gshulegaard wrote: post #142
niuzeta wrote: post #129

>> 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. Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in…

Disclaimer: This a lay-man's understanding... So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up. These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares…

One small detail, an ISO can be priced at literally any value the company wants (within fiduciary responsible limits of course). They don’t have to be (albeit commonly are) set with a strike price of the value of the company at time of grant. This is partly why ISOs are so heavily regulated.

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

#174

Post by sjg007 »

caseysoftware wrote: post #168
astura wrote: post #163

Earlier quoted context omitted.

Maybe not in a startup? I have company stock given to me in my 401k. https://www.fidelity.com/viewpoints/personal-finance/company... >More than 15 million people own about $400 billion of company stock in Fidelity-administered workplace retirement plans alone

I've never heard of it either but have some reading ahead of me. Though I've been at both companies pre-IPO so that is probably the first distinction. Post-IPO, the rules are quite a bit different so maybe it's an option now..

Mitt Romney did this I believe.

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

#175

Post by xapata »

cityzen wrote: post #144
xapata wrote: post #126

Earlier quoted context omitted.

Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.

Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?

In this case, the bank that gives you a loan is the one taking the risk. Theoretically. The trouble is that the government doesn't like to let banks fail.

Trump is special. The fact that Deutsche Bank was still willing to lend so much, despite his repeated bankruptcies is very interesting. If I recall correctly, he was involved in a lawsuit with one department at Deutsche over missed payments while a different department was signing over $700 million.

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

#176

Post by jsjohnst »

chii wrote: post #148
niuzeta wrote: post #134

Earlier quoted context omitted.

Right. So in the eyes of IRS you just didn't buy something, you in fact gained in net worth, except all those new assets you've purchased is illiquid.

except the valuation is a private estimate. why can't the tax be levied when the same stock is liquidated into cash? then you'd get a real price, rather than an estimate.

There’s regulations around the 409a valuation of the company, it’s not completely based on the unicorn fairy dust that VCs use to value a company. Admittedly 409a valuations are far from perfect for many reasons, but they aren’t the same as the valuations you commonly hear when a company closes a round.

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

#177

Post by jsjohnst »

sjg007 wrote: post #172
jsjohnst wrote: post #171

Earlier quoted context omitted.

An employee can’t sell their options to an SPV any more than they can sell it to any other investor if their agreement places restrictions on selling (most do now days). While otherwise stating several facts, OP is wrong in his overarching premise that the SPV had basically anything to do with large investors being able to sell their ownership or not.

I think you can exercise the options and sell the stock subject to whatever rules you’ve agreed to, like right of first refusal etc... at any rate employees should refuse to work at startups with crappy schemes.. even uber.

> at any rate employees should refuse to work at startups with crappy schemes

I agree, but not everyone is in a position to do that.

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

#178

Post by toast0 »

gamblor956 wrote: post #106
rahimnathwani wrote: post #89

Earlier quoted context omitted.

"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 th…

I would say their situation is unusual, but based on Uber's valuation in 2016, they would have been accredited investors under the asset test if they held more than 20,000 shares. It's unusual because the offer values the stock at significantly less than last year's valuations, so they might not be accredited investors anymore...if the Softbank deal goes through and sets a new FMV for Uber stock. (If the deal falls t…

At the end of the day, the investor self-accredits. There's a form to sign that says 'I read and understand the requirements and I meet them'

I don't know how much duty the counterparty has to investigate the validity of the declaration.

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

#179

Post by TheCoelacanth »

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…

It seems like this is a kind of a loophole in the SEC's accredited investor rules. These people aren't accredited investors, yet a private company like Uber is able to take an investment from them by giving them options beforehand.

Perhaps private companies should be forbidden from allowing the exercise of options for non-liquid stock by non-accredited investors, and then also forbidden from requiring un-exercised options that they have granted to non-accredited investors to be forfeited at the end of an exercise window so as to not be ludicrously unfair to the people holding unexercisable options.

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

#180

Post by jessriedel »

huac wrote: post #170
jessriedel wrote: post #160

Can employees reasonably hedge the risk of Uber taking a nose dive by buying put options?

If it were a public company sure but it's difficult to find a counterparty (at some point of the hedging process, somebody is gonna need to settle the trade with a share of Uber stock, and Uber stock is notoriously illiquid, and we're back to step 1).

A good point, thanks.
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