WeWork Needed a Bailout, But Adam Neumann Still Leaves a Billionaire
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While Travis & Adam make their billions, the employees at Uber and WeWork are granted overvalued options and stock that subsequently crashes.
The Uber stock is still below where it was 5 years ago and may never recover. The WeWork stock will likely never recover.
As an employee, I would avoid working for a company that is taking funny money from VF. Its a big warning sign to see a company raise from VF given what has come to light.
Twice burned (2001, 2009)...
Unfortunately, WeWork employees aren’t given that choice. They are getting fired with underwater options while Adam makes billions. I wonder how he can rationalize this to himself.
If they couldn't sufficiently exploit that, then that's on them (assuming they had access to all the relevant metrics).
It's great to diversify, but blindly selling isn't some sort of virtue to optimize for...
1) $300K in GOOG 2) $300K in cash
if you dont believe that using all of the $300K in cash to buy GOOG immediately is the smart move, yes, you should be blindly diversifying.
If you can't leverage the asymmetric information about your company to make a competent buy/hold/sell decision then yes by all means diversify it all.
I just want to make sure the point about asymmetric information is clear though. And it's more relevant in private companies than public ones.
If you're not willing to buy and hold private company equity even after having access to asymmetric information about the firm, then you should consider leaving the company entirely. If you don't then that defeats the entire purpose of taking a chance on a private company and being compensated in equity which can't be acquired through traditional means. You're accepting the equity presumably because you think it's worth a lot more based on the asymmetric information and market opportunity.
OTOH, it just as easily could've gone the other way, I suppose? Google truly is sui generis, and it's hard to fault me for not knowing that at 21
If you wouldn't do the latter, you shouldn't do the former (but yes, if you would have invested all your cash into google, more power to you to keep all your google stock as google stock)
I don't see any reason for working for overvalued options at a not-early-stage private company. Also I view being an early stage employee too risky to worth it.
When a startup takes money from an investor with significant preferences and ratchets, why is the 409a valuation for common stock the same as those the investors got? At the startup I worked, during the initial rounds the common and investor class were priced significantly differently. But in later rounds they converged almost to the same price. What is the rationale for doing this?
However, as those differences start disappearing, e.g. when WeWork and Uber were about to IPO, the 409a converges with the investor price.
By the price of common and investor class of shares converging, the implication is that the economic value of the preferences and other arrangements investors get is $0. That does not sound right to me.
Still, this is an awful analogy. What about 1-car collisions? And what if I hit a parked car?
In my ideal world, yes. But under the US justice system, perhaps not. Both political and business leaders have gotten away with amazing amounts of what I'd say is at best criminal negligence because they say, "I didn't know" or "I thought it was fine" or "I believe in my vision".
Claiming that it's a risk/reward tradeoff is nonsense, as ICs don't have any meaningful say on the path to exercising their "income", and there are huge incentives for founders and VCs to arrange deals like this.
I really hope that people start realizing that this is a core behavior in business and stop letting themselves be screwed by people who aren't actually taking on meaningful risk.
You might not be able to sell the shares you receive, but you should be able to exercise and hold them.
You might do this to manage tax exposure (to get the clock started on long term capital gains treatment and to make further gains capital rather than earned income).
There can be very serious tax consequences if the spread between your strike price and the FMV is large enough. The IRS doesn't care that you can't sell shares to pay the taxes. They're still due that year.
That said, you can probably do the math to stay outside AMT by limiting the number of shares you exercise. It's so hard to know whether or not to do that. I imagine a lot of employees felt pretty good about their WeWork options at the beginning of this year. I imagine. I don't know anyone there.
To add to that, it's not like when you join a low-performing company you can just leave because you think you can get better value somewhere else. The cost of switching as an employee is very high.
Obviously it's a bit less of a gamble than the lotto, but it's not like decisions that were made 30 days ago are being played now, it's much longer term than that.
Edit: to clarify I mean “$x of shares”
This news came out well before the s1. It's a miracle it took the s1 to get investors to give a damn when there were so many governance issues and conflicts of interest out in the open well before.
With the sheer amount of venture capital at your beck and call, you can also force out challengers trying to enter the market easily by dropping prices even further (and who cares, you're already non-profitable!) or just straight up buying them out.
Profitability doesn't even matter as long as your business is considered valuable! Even better if you can get tax payers on the hook for saving your asses.
The thing is, this is not going to work. Public market investors are wary and are not ready to buy over-valued assets without some really good reason. The party is over, and it doesn't mean we are entering into the apocalypse, but rather that the time of irrational dreams is over, and that we need to think things based not on irrational ideas, but by paying more attention to the fundamentals.
Money can still be made, but the whole VC world needs to stop thinking that every business is going to generate the absurd returns facebook and google gave. Those are black-swan events. Not every startup will give 6000% returns. Those were anomalies, it is not going to happen every day.
But, the thing is, even a 200% return over 5 years is a great investment. Most of time it would beat DOW or NASDAQ indexes even reinvesting dividends.
So, maybe excessive greed is breeding irrealistic expectations, which in turn is feeding terribly bad decisions.
The lunacy of this is astounding.
And being rich is a pretty good starting place for large scale change. You essentially get to take money from something you disagree with and reallocate it whatever way you see just.
So basically go beat them at their own game. It seems like there are chances to do that.
I'm comfortable calling 80 a failure.
You'd make a bad Saudi prince.
They could have spent it more wisely.
If you're worth less than 12 digits, you can easily "stash" your money in 3-month US treasury bills. They currently yield about 1.63%. https://www.bankrate.com/rates/interest-rates/91-day-treasur...
Granted, if you're a Russian Oligarch or similar, this might not meet your definition of "a safe home". Otherwise, they're about as low risk as possible.
I agree with your take on sovereign funds etc. The whole world can't just park its excess cash in T-bills.
But unless you're talking about the dumbest of this money, it should be very broadly diversified: worldwide stock markets, bonds, real estate, natural resources, and smaller amounts to things like venture capital.
One trick to rule them all.