Uber Lawsuit Alleges Employees Were Misled On Equity Compensation (techcrunch.com)

An Uber employee has filed a lawsuit accusing the company of misleading employees about their equity compensation. Uber "devised a fraudulent scheme to recruit highly sought software engineers," according to the case. From a report on TechCrunch: The lawsuit claims that Uber promised a more tax favorable type of options at the time employees were hired and then later changed the plan. The case alleges that at least 100 others on the Uber staff may have been impacted and that these stock options can potentially be worth "hundreds of millions of dollars" to employees and also save Uber "millions of dollars of tax deductions." The plaintiff, Lenza McElrath, who was previously a lawyer and is now an engineer at Uber, says that he was under the impression that all his shares could be treated as ISOs, which do not require an upfront tax bill. He said he was later given a notice about a change to the exercisability schedule, that effectively turned most of his shares into NSOs, which are taxed at the time they are exercised. While many startups allow their shares to become exercisable over the course of a four-year vesting agreement, Uber has share agreements that become exercisable after just six months. In other words, Uber employees can buy the stock they are entitled to shortly after they gain employment.

Comments

Re: How dumb you have to be to work at Uber?

[ZipK]

Equity is the biggest scam there is

If you work for someone trustworthy, equity is a gamble that can pay of bigly. Particularly ISOs subject to an 83(b) election.

Re:I don't understand

[ShanghaiBill]

I must be misunderstanding something. "Does not require an upfront tax bill", to me, sounds exactly like "taxed at the time they are exercised".

You do indeed misunderstand. Let me mansplain it: If you exercise an ISO, you now own the stock, but you don't pay tax until you sell it. So if you hold onto it for at least a year after you exercise it, you can then sell it and only pay tax at the low long-term capital gains rate. An NSO is considered like cash income at the time it is exercised, and is immediately taxable. If you hold onto it, and the stock price declines, you can get royally screwed because you still owe tax at the exercise price, not the sale price. During the dot-com implosion, this bankrupted a lot of ex-tech employees that were slammed with a huge tax bill at the same time they were laid off and holding worthless stock.

Short answer: ISOs are always better than NSOs.