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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

#61

Post by hkmurakami »

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" is a decent first order heuristic, but not everyone has that luxury.

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

#62

Post by hkmurakami »

khuey wrote: post #59
hkmurakami wrote: post #35

Earlier quoted context omitted.

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.

Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.

Is that the senate version?

Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.

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

#63

Post by gamblor956 »

JumpCrisscross wrote: post #46
gamblor956 wrote: post #38

Earlier quoted context omitted.

Uber isn't publicly traded, so its stock price couldn't have "started crashing." Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the…

> 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…

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 LLC; the choice of the LLC form is not what gives the large investors the right to sell. Though based on your response, you probably meant in your original comment to refer to SPVs rather than LLCs.

Disclaimer: I am a lawyer. This is not legal advice, it's legal commentary. The difference: advice applies to a client's specific legal circumstances; commentary applies to third parties.

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

#64

Post by robrenaud »

khuey wrote: post #56
rb808 wrote: post #50

Earlier quoted context omitted.

I dont understand this. if they're worthless & you can't sell, why do you pay tax as if the stock is worth $90? Edit: Can someone point me to IRS docs? or blog explaining?

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.

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

#65

Post by timr »

hkmurakami wrote: post #34
sockgrant wrote: post #23

Earlier quoted context omitted.

Yeah they always assign a dollar amount to options instead of a % amount which is what really matters. $100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall. Always insist on the % amount. Most founders will try not to share it.

If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage. Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc. It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at…

"If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage."

Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop.

If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.

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

#66

Post by JumpCrisscross »

gamblor956 wrote: post #63
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…

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, workaround. Their existence is rarely explicitly negotiated.

Another case, more directly tying power and economics: Some companies require Board approval for transfers. Guess who tends to get Board approval.

> you probably meant in your original comment to refer to SPVs rather than LLCs

LLCs are a common way to structure special-purpose vehicles (SPVs). This is Hacker News. Most here are familiar with LLCs; fewer with SPVs.

Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.

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

#67

Post by jenny_say_qua »

rb808 wrote: post #50
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…

I dont understand this. if they're worthless & you can't sell, why do you pay tax as if the stock is worth $90? Edit: Can someone point me to IRS docs? or blog explaining?

Honestly, I think the best answer is just "Because the tax code says so". It really doesn't make sense, you should be taxed on the sale of stocks, not the purchase, but the tax code as it currently stands doesn't work that way.

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

#69

Post by usaar333 »

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…

I'd argue that working at crappy companies is the problem and stock comp pain is just one symptom -- I find various forms of crappiness tend to correlate. At places with solid cultural values (Pinterest, Dropbox, Asana, Coinbase to name drop a few), employees are treating reasonably fairly on all dimensions.

There's just a few ground rules:

1. Is the company giving options? They better have a 7 year exercise window (https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... ); if not, don't work there.

2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!)

3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.

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

#70

Post by compiler-guy »

hinkley wrote: post #13
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…

The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options” As if options had a value.

Options have value, but the value comes with a large variance and serious risk.

From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options.

Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."

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