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Former Uber Employees Have Gone Into Debt To Hang Onto Shares They Can't Sell (qz.com)
An anonymous reader quotes a report from Quartz: Uber employees are lining up to sell their stock to Japanese technology giant SoftBank, which will buy up to 17% of outstanding shares for $33 each. The price represents a 30% discount to Uber's last valuation, of nearly $70 billion, but for current and former employees, the SoftBank tender offer is a rare chance to convert paper wealth into actual cash. 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. Current Uber employees can't sell more than half of their stake; there are no restrictions on former employees. The deal is on the table until Dec. 28, and could fall through if there aren't enough shares on offer for SoftBank and a small consortium of other investors to purchase at least a 14% stake in the company.
Working at a successful startup is often viewed as a quick path to prosperity, but the reality is more complicated. Startups tend to offer equity packages, typically in the form of stock options, to compensate for below-market salaries. But as companies like Uber have stayed private longer, most employees haven't been able to get rich from those shares. Quite the opposite, some former Uber employees have gone into debt to hang onto shares they still can't sell.
Working at a successful startup is often viewed as a quick path to prosperity, but the reality is more complicated. Startups tend to offer equity packages, typically in the form of stock options, to compensate for below-market salaries. But as companies like Uber have stayed private longer, most employees haven't been able to get rich from those shares. Quite the opposite, some former Uber employees have gone into debt to hang onto shares they still can't sell.
> create algorithms to take advantage of drivers and riders alike
If you think Uber was taking advantage of riders, you've never used the cab companies in Vancouver. Based on my usage of Uber in other cities (Vancouver has yet to get with the 21st century), I'd be happy to let them think they're screwing me as they'd still be half the price of a cab here AND faster.
When you get stock options, you get X shares at Y strike price, with Z vesting period.
Lets say you get 10,000 shares, at a strike price of $10 a share, with a 4 year vesting period.
Let's assume you worked there 4 years, so all of the shares are vested. If you want to "exercise" the shares, you have 2 options:
1) Buy the options with cash ($10 per share x 10,000 shares = $100,000).
2) If the company is publicly traded, you can also do a "same-day-sale". If the public price is higher than your strike price (lets say $20), you "buy" the shares at $10, then sell them on the open market at $20, and you pocket the difference, so you would make $100,000 (minus taxes).
Once you leave a company, all un-exercised options are forfeited after a time (90 days for example). For a private stock, you cannot sell them on the open market, so you only have the first option to buy them with cash. You now own all of those shares, but you cannot sell them publicly, so you have to hold onto them hoping that the company goes IPO, or an investor wants to buy them, like SoftBank.
The issue is not with strike prices and taxes. It's that options have an expiration date. As an example, I was granted some options in 2007 at a (now publicly traded) company. They had a four year vesting period that ended in 2011 and a ten year expiration. So in October of 2020 (I don't know why it's not 2021), I can either (a) buy the options for cash and incur a tax event of (b) let them expire and lose all the value. Since our company is publicly traded, when I buy the options and pay cash + incur taxes, I can sell some of them to soften the blow. In fact, for publicly traded companies, any broker will arrange an "exercise and sell to cover" which basically mean you exercise the shares and then sell just enough to cover the strike price. At tax time, if needed, I could sell more. But if your company is still private when the expiration date comes up, you have to buy the shares and incur the taxes but you have no way to generate cash from the shares to cover those costs. That forces people to either lose value or take on debt to hold shares in a private company.