Uber lawsuit alleges employees were misled on equity compensation
techcrunch.com
techcrunch.com
With all this pressure building up in the kettle, it spills over from time to time into lawsuits like this one.
It's worth remembering that starting in 2013, Uber started blocking secondary stock sales and sometime in 2015 shifted from issuing options to RSUs. This had two effects beneficial to Uber: it created golden handcuffs for early employees, and prevented Uber from being subject to SEC disclosure requirements as the number of shareholders expanded.
Uber's practices on stock options are fairly unique in several aspects:
* a 30-day exercise window if you leave (even shorter than the much-disliked 90-day windows!)
* restricted "trading windows" where employees can only exercise options during four or five months of the year. Mixed with a short exercise window, this can be poisonous, imagine if you left the company and couldn't exercise your options before you left. This happened to a friend of mine at a now-public company; he lost about a hundred and thirty thousand dollars.
* the ability to early exercise stock (eg, before it has vested), starting six months into an employee's tenure.
Uber's main counterargument is that the plaintiff is a sophisticated individual (Stanford Law grad, experienced engineer), and he should have been aware that early exercising more than $100,0000 worth of ISO-type stock options converted them to NSOs.
This is probably true, but if an engineer with a law degree screwed this up, imagine what's happening to everyone else.
It's more confusing than that. If your equity is valued at more than $100,000, if you exercise even one share early, the entire grant above $100,000 converts to NSOs.
This is a really, really easy point to trip up on.
These limits are set by the IRS[0]. As I understand it, if you're exercising vested options, you're fine as long as the value of the amount you exercise doesn't exceed $100,000. If you're early-exercising, though, your entire grant counts towards the total, because the IRS considers that all "early-exercise-able", even if you're only early-exercising one share.
However, I'm not a lawyer or an accountant, and this isn't legal or tax advice, so you should definitely seek advice from a tax attorney regarding this topic.
As I understand it, once you leave the company, you're no longer subject to restricted trading windows. So you should be able to exercise thereafter without restrictions.
I worked at a competing company a few years ago and we had to deal with this with many candidates we were recruiting.
I guess Amazon is a good example of that...
I think there are ways Amazon could improve its culture, but apart from widening the potential pool of effective hires, I'm not sure it would benefit the company a huge amount. However I think Amazon is the exception to the rule, and in general I think toxic cultures are a significant hindrance to most companies.
Let's say that a company is trying to hire for "a senior level position", as you put it. Let's also take it as an assumption that senior level positions are relatively unique, carry responsibility within the company, and are not a homogeneous fungible engineering role. In other words, you can't hire two people for one senior level position and squeeze them both in somewhere.
The company doesn't just interview one candidate at a time, much as a candidate doesn't interview only one company. If there are two candidates in the pipeline and the company likes both of them, it would be unethical to give both candidates an offer at the same time (since the company can only hire one person, it would need to rescind the offer from one of those two people if they both accepted).
So, the company might tell the candidate they like most: "We really like you for this position. We'll give you 24 hours to decide, and hold the position until then. After that, since we can't hold up our recruiting pipeline indefinitely while you decide, the offer may expire." If you are a candidate, getting an offer a day or two later than you're expecting could seem like a big delay, after all.
I assume that this is not what you were told, or how it was messaged, but how would you feel about a situation like that? How would you want it to be messaged? If multiple people are competing for one position, you can only have one outstanding offer at a time, which means it needs to have a reasonable time expiration so that the next-best candidate gets a chance to consider it.
Alternatively, I suppose you could say, "We're giving both you and someone else an offer simultaneously. First person to accept gets it." But that seems equally bad (especially since the candidate has no way to know whether it's even true).
It seems like the higher level a position you're interviewing for, and the more unique, the shorter a time window the company can have to leave the offer open. When someone is given the offer to be the CEO of a large company, do they get more than a day to decide?
Granted, none of this reasoning should apply to typical engineering positions that people regularly encounter, for companies that want to hire as many people as they can, and I am not trying to excuse pointless exploding offers.
If you already have the contract. Tell them back that you need a few days to check your notice period and paperwork. It's just not possible to move that fast. (How the hell did they even made up a contract and a background check before they get the information?)
The more you go up the chain. The more exclusive (i.e. no other people in the entire city for this position) and the longer the negotiation might be (you're hell not leaving your place at the snap of a finger from a 20 year old HR person who's bullshitting you).
P.S. EVERY ONE gets more than one day to decide. Don't expect people to be available on phone or email whenever you want.
It really depends on each side's BATNA [1]. If you have stronger walk away power, it's foolish for the offer to come with short acceptance terms.
[1] https://en.wikipedia.org/wiki/Best_alternative_to_a_negotiat...
>If you are a candidate, getting an offer a day or two later than you're expecting could seem like a big delay, after all.
In your very unrealistic CEO hypothetical, do you suppose it would be a big delay for you if you were offered the "CEO" position a week from Thursday instead of Monday, since between Monday and Friday they were trying to recruit another person?
I mean just how fast do you think these companies move! Do you imagine these people are basically in the waiting room, interviewing the same day - "So are you interviewing for the CEO position too?" "Yep. Do you know anything about this company?" "Just what I read in the Journal" "Me too. Hey, they're calling me." "Good luck!"
:)
My experience is exactly opposite: For low level candidates, candidates are often reasonably interchangeable, so losing a candidate by demanding quick decisions is ok - you just pick the next on your list. For really high level candidates, the search cost can reach five or even six digits, and can last for months, and negotiations can go on for weeks. (EDIT: for actually high level positions, it's not unusual for the candidate to have their lawyer review documents etc. prior to accepting an offer as well, so one day deadlines would often be impossible in practice even if there was nothing to negotiate)
There can be truly desperate situations where someone badly needs a position filled right away, but that's generally a warning sign that they're understaffed and/or have not ensured proper cross-training, and will be a nightmare to work for if they've not learned their lesson.
'A few days' at least should be warranted in all situations.
Yes.
You just check your email and then you discover the stupid offer is already gone. You can skip straight to the "acceptance" phase and the "god. they are really dumb".
If their compensation is substantially off, they deserve the employee churn.
If I was a good hire yesterday, am I a good hire today?
I like to ignore offer deadlines. I just don't understand them.
Both tends to make people think you're more important and worth more, not usually make them strike you off their list and move on to the next person.
The exception would be really low level positions where they see people as interchangeable, but even then in most cases people have already mentally chosen you when they call, and not being available makes you more desirable, not less, so for them to move on they need to have cared very little to begin with.
... which is another reason to not be instantly available - I for one don't want to work for people who see little enough value in me to be prepared to drop me if I don't answer the phone 24/7 unless I've been contracted specifically to be available at any time (and you better believe they'll pay through the nose for that).
A lot of younger employees could do with learning to set boundaries, be unavailable and say "no", and experience how that can often get them a lot more respect and better job conditions.
It's not if you're offering a contract with shitty fishhooks designed to fuck over anyone who hasn't had a good lawyer spend some time looking over the contract - then it's a very rational ploy, with the side-effect of checking how easy it is to bully a potential hire into acting against their own best interests.
What you as an employee should think about that is left as an exercise for the reader.
In terms of the equity portion, they were pretty straightforward with me and I had no surprises with my equity portion. In addition, none of my coworkers have complained about their packages either. I don't know this employee but he certainly doesn't speak for the vast majority of us.
That said I don't know what recruiters are doing these days. My boss would never let our recruiter pull shit like that, but I can't speak for other teams.
(1) the refusal to allow secondary sales and
(2) 30 day exercise window
among your colleagues?
2) most have RSUs. But if you're going to exercise in 90 days then you're going to exercise in 30 days so it doesn't even matter.
> none of my coworkers care. I'm sure very early employees may care but I don't know any and I can't speak for them
Interesting that your colleagues and you don't seem to care that the management had instituted policies that hurt the very engineers who first built up the company. I would be very wary of such a management that it would some day turn against me too.
I had a whole host of reasons for turning them down many of which felt dirty/scammy/untrustworthy and nothing about this story surprises me but I didn't have the specific experience that you've described.
Sounds like an effective filter to have applicants self-select for the combination of never questioning higher-ups and low diligence fast decisionmaking.
Brilliant in the same way as bad grammar in "Nigerian prince" mails.
In these cases you should just say "yes - I accept. Please send me paperwork for my lawyer to review and sign". Then the real negotiations starts :-) There is one book (forgot the name) which explains that tactic and how to respond to it.
With regards to this specific article, how common is this practice at other startups? From anecdotal experience, it seems common for startups to under inform employees with regards to their equity and how it works. I rarely meet a startup employee who understands what their equity is worth.
Uber is also aggressively recruiting. Many people on this board probably have been contacted by them or have been made offers by them. For what their comp promises, this would be very important for them, especially if they didn't do their due diligence on the company's financials and how their stock awards were set up.
I agree that very few people know how their stock works. To the valley's credit, a lot of places do RSUs which is a simple matter. But I definitely spoken with folks that didn't realize their exercise rights had expired.
I upvote those articles for a different reason - Uber is the single company I'm most waiting to finally die, possibly with enough mess around it to finally drive the point that sociopathic behaviour and blatantly breaking the law is not a way to run a company in a civilized society.
From the article: "Uber is rumored to go public within the next two years." Not unless they stop losing money so fast.
[1] https://www.bloomberg.com/news/articles/2016-05-20/selling-u...
Until this fraud is prosecuted, its costs are too cheap for its benefits.
Couldn't happen to a nicer group of people /s
The valuation isn't artificially high, it's a result of an unprecedented growth curve.
And pay incentives for drivers are not only the surge charges but how many completed rides. That's likely to make sure there's enough supply on the road.
Yes, this data is limited. But all signs point towards Uber hemorrhaging money with no easy way of becoming profitable. And we know that competition can easily swoop in by looking at Austin, where Uber and Lyft left. It's a race to the bottom until self-driving cars are a reality.
"... broadly speaking the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry." https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e....
Even if they can, they won't have a structural moat. Too many others are developing this technology. Either someone will disintermediate private self-driving car owners a la AirBNB, or other tech companies will run fleets, or the car manufacturers will run fleets in the manner of GE's engine-hours program.
Uber is the greatest transfer of wealth from VCs to middle-class professionals in history.
They have some obligation to other startups to keep valuations low, for what purpose? Are other VCs going to suddenly put irrational expectations on the companies pitching them?
Any VC/company that engages in some unrealistic valuation pissing contest deserves any big expensive failure that comes to them. Otherwise they can prove people wrong at their own risk.
Consider the "pressure" Bernie Madoff's fund put on his competitors.
http://gawker.com/5853754/the-seedy-spammy-past-of-airbnbs-c...
The dude paid his tuition by sending SPAMS. Should have seen the rare combination of tech and business talent earlier!
It's said that he received a few letters from the FBI and other law enforcements while he was running the operations. Nothing specific.
I wonder what sort of liquidation preferences the investments at those insane valuations carry?
Amazon has enough cash on hand to do it, isn't afraid of losing money for years on end, and enough legal power to defend it (see: Google buyout of YouTube). The extra work density of both programs combined would make the sum more valuable than the parts.
[Bias: former Amazon Flex dev, though with no knowledge of any actual plans Amazon has]
http://arstechnica.com/cars/2016/12/california-dmv-revokes-u...
Not only am I glad that post is gaining attention (the entire series is excellent), I'm glad Naked Capitalism is getting attention. It's my favorite finance blog.
Pretty much everyone prefers the six month cliff.
So this wasn't the TechCrunch author misunderstanding tax law. It is straight quoted from the lawsuit.
Let's say an employee has personal savings $100,000 and is granted $100,000 in stock.
If they have to pay 20% tax on what they exercise, then they can only exercise ~$83,000 of their options. The remaining $17,000 worth will need to be exercised at a later date.
Let's say the company then gets sold 3 years later and the employee's stock is worth twice what it was when they were offered it. The employee's additional stock now is exercised immediately and the difference of $17k between the strike price and the sale price is taxable as income.
Had they been able to exercise that $17k worth of stock 6 months after joining—which they would have had the money to do if they hadn't had to immediately pay tax on the amount they exercised—then that $17k would have been taxed as long-term capital gains, at a lower rate.
No.
The TechCrunch author may have a misunderstanding but you do as well. Assets which always trigger AMT can result in very different tax outcomes than assets which _may_ trigger AMT.
This is a huge difference though.
Either you pay taxes 'pre IPO' or 'post IPO' - obviously it's a big deal.
Many people cannot afford to pay the taxes before a liquidity event.
With ISOs, if you have a qualifying disposition, you get long-term capital gains on the entire spread between strike price and sell price. With NSOs you have to to pay regular income tax at the spread that exists at time of purchase: http://www.investinganswers.com/financial-dictionary/options...
This can be huge if shares are exercised post-IPO. For example, imagine you have an option with a strike price of $10. Your company goes public at $110 and stays roughly there for a year. With an ISO, if you exercise the option when the company goes public and sell it after a year for $110 you owe $15 of tax. With an NSO you are paying $30-40 of tax at time of purchase. This means you pay 25% more tax on the NSO.
Yes, there are AMT issues ignored in this analysis, but these work out to net-neutral once you account for AMT credits. This also ignores other benefits of ISOs such as not needing to come up with the funds for tax in order to exercise and secure your share. If you do owe AMT, Uncle Sam only charges 3-4% interest: https://proconnect.intuit.com/proseries/articles/federal-irs...
When one exercises an NSO, the company must legally withhold or collect money somehow (at the very moment of the exercise) to cover the employee's tax liability. When the stock is not public (or upon an employee's election), the employee must pay cash up-front. Thus it can be impractical or impossible to gain anything from NSOs while the company is private. Another factor is that even if the employee can cover the taxes, the shares could lose potentially all their value at some later time. In this case the employee loses MORE than the value of the stock because they're also out of pocket for the taxes paid. (I've personally gone through essentially this latter situation).
I've heard of Uber employees getting special deals from banks and mutual funds that forward them cash to exercise the shares; in exchange the banks get some percentage of the shares (or nothing if Uber does not IPO by some date). There are some ROFR issues here (pre-IPO Facebook employees tried to do similar things) so I'm not sure how well it actually works. It's certainly damn complicated.
I've personally had ISOs, NSOs, RSUs, and another special other type of stock agreement at different points of time. I've had an accountant charge me $1800 to handle some ISO / AMT complexities on stock that didn't make me much money (I actually had net losses on most of the shares due to taxes). I've had managers, directors, and legal teams give me false or misleading information about what ISO / NSO packages were worth. These games are really not worth it for stock packages worth (even in the very best of outcomes) ~$1m or less. (Unless you're a laywer or biz-dev kinda person and enjoy them! )
My recommendation for makers / individual contributors: request RSUs if possible and prefer a simpler path to having taxes-paid money in the bank. Outstanding employees who really move the needle deserve exec teams who can deliver compensation that's valuable without tax games. Employee time should be spent on product and furthering the craft, not legal BS.
A smaller delta fix here would be to convert ISOs to NSOs with a very long exercise period (10 years) so you don't have to pay taxes until you can sell to cover the tax. I can think of several companies doing that now e.g. Pinterest.
Another option for early startups is to support 83(b) and to, well, bonus the employee the strike so they can exercise immediately. I've seen a case where a key employee demanded they get a big bonus to cover a large strike in a new, large grant. (And he got it, and was butthurt over the bonus unexpectedly putting him in a higher tax bracket...). Facebook has handed out $100k signing bonuses to new grads... On one hand this all makes employee comp more expensive, on another hand there's the absurdity of CEOs and investors making several orders of magnitude more than the most influential employees.
See: http://stockoptioncounsel.com/blog/rsus-startup-restricted-s...
That is right. These typically make sense only when the IPO is imminent.
> Extending NSO exercise windows is so much simpler. Agreed.