The founder also encouraged employees to take on what was effectively personal debt at an ~11B valuation when they only did $5.2M in Q1…
https://twitter.com/theryanking/status/1493390184897032201
HOLY CRAP. How is this even legal???
1. Ryan (was) the CEO, and can pressure employees to buy stock (or let them go because they aren't "committed" enough).
2. Ryan loses nothing if the company fails (his personal loss has probably already been covered since the first VC round), but each employee is left with a mountain of debt.
3. It's just bad advice. I know plenty of people who took out loans for stock; and I would never recommend it; it's incredibly risky especially if it can destroy you if it fails. If leadership plays so fast and loose with other people's money, you have to question how well they are doing their job.
Borrowing against one's shares shouldn't be illegal. Companies lining up recourse financing for their employees should.
How were the terms of the loans chosen? Who knew who was and wasn't participating? How was it ensured this wouldn't factor into personnel decisions? How were/are the people setting the strike prices of options segregated from the people setting the terms of the loans? There is too much already loaded onto the employer-employee relationship, we don't need to add lender-borrower to the damn mix.
(Side note: the $300 stipend for financial advice is laughable. You couldn't even get a lawyer to review a fraction of such an instrument for that amount, and yes, I'd put recourse loans against private shares in the risky as hell bucket which should absolutely be legally reviewed.)
Wait the companies set these loans up? I thought they were just going to a bank and getting something akin to a personal loan or some other 3rd party collateralized loan.
Might as well work for free at that point.
If you were to get a private loan, the interest would be much higher.
The company does not want to be in the business of making loans, but this is a way to allow the employee to exercise upfront (and thus potentially get certain benefits, like in a good exit scenario, of having gains be subject to LTCG and not ordinary income), in the best way possible. But in a downside scenario, like the company folding, the person is on the hook for the loan just like if they had decided to exercise with their own money.
Is it realistic for a bankruptcy trustee to come after employees that signed uo for a personal loan for shares in a company now worth zero.
Is there a documented case of this happening and suceeding?
These are "cashless" loans, which are recourse for tax purposes (so that the IRS respects this as a true purchase of shares, in order to start people's LTCG and QSBS clocks). The terms were likely very favorable, i.e. set with an interest rate equivalent to the AFR. This is not a situation in which the company is trying to make money as a lender.
This is no riskier than deciding whether or not to exercise your options, which typically employees have to decide within 3 months of leaving a startup.
The risk is not in the terms of the loan, but in whether the employee wants to exercise and lay out the cash (or the promise to pay the cash); in each case, it's an investment decision to decide whether it's worth it given that the stock is risky and could eventually be worth zero.
Note that all these issues are driven by tax rules, and generally not the startups. Startups are damned if they do, damned if they don't.
Every type of equity has pros/cons. If it's an immaterial amount of money, the employee should be a big boy and just decide whether or not to risk the cash. If it's a material amount of money, the employee should really be speaking to their own advisors, which if they have a material amount of equity, they should be able to afford to do.
Unless there was an agreement to forgive the loans if the options go underwater, which I haven’t seen reported here.
The potential outcomes if you spend money you have are that you recover your money (break even), lose the money, or make a profit.
The outcomes if you take a loan are that you break even, make a profit, or acquire a debt that you by definition weren’t really able to afford in the first place (or you would have just used the resources you have to fund the exercise).
I feel sorry for anyone who was hoping they were young and had tons of upside potential, who now needs to service a loan that they will never see a corresponding asset for, who is about to face a quite difficult job market for juniors.
Does that apply to Elon Musk as well? Leveraging Tesla to buy fucking Twitter when he could have had a strategic stake in Ford for less?
The risks here are not rocket science. If the most recent round of preferred stock financing was $100, and your exercise price is $20, the risk is that if the stock ends up being worth less than $20, it's a mistake in hindsight. You can talk all day about the risks, the numbers, etc. What's currently happening is macroeconomic -- inflation, fed tightening, asset prices dropping across the board, etc. This was not some Bolt-specific issue. People assumed it was more likely that the stock would be worth at least their exercise price (which still may be the case). A full half of the people this was offered to declined, because they were prudent and the risks were probably clear. The other half was probably optimistic, and also gambling on crypto and other startups at the same time.
It may not be rocket science, but this isn’t obvious unless you’re really savvy about startup deal structure, and all of the preference stack is disclosed.
Good advice I got from colleagues at a 2000 era company who took out loans to buy their options and cover the taxes when the stock was at $50/share and then watched it drop to <$1/share while they were in a lockout window. I worked with people who had 6 figure loans they owed on for worthless stock. Took years for the stock to recover.
Greed by the taxman.
It would be a non-issue if the tax authorities collected the tax at the point those shares are converted to something else, or used as collateral to a loan. But to tax them without any ability for the employee to extract value from them - especially relevant for privately listed companies with glacially illiquid stock - is abhorrent.
But instead the taxman has to always be the first to eat the pie. Even if that pie never turned into anything real.
In the UK it is horrid- share options of any meaningful value are taxed at ~%63 (including all hidden National Insurance taxes) and it could be years before you can cash your shares, if at all.
To answer your question, yes there are still companies that facilitate the secondary market for pre-IPO options, Forge/Sharespost is the one that immediately comes to mind.
In 2015, I talked to ESO fund for some fintech options I had where I couldn’t cover the tax when I quit (stock wasn’t public). I was very satisfied with my dealings with them. Ultimately, they pulled out on the deal. That was a pretty strong signal because, low and behold, that pre-ipo stock tanked in a month too. Luckily, the lessons I’d learned from the earlier stories helped me to walk away from those options. It was a tough, but ultimately good decision.
You missed the tweet directly under it:
> Therefore, we made sure to give every employee ample time to read about the pros and cons of this decision, including learning about all the risks in the business, and we gave every employee a $300 stipend to consult a financial advisor during the implementation process.
I understand making things illegal to protect people from being swindled because they don't know any better, but if you made decision even after consulting a financial advisor that's on you.
It may not be perfectly valid, but it’s very easy to see how someone could feel like they didn’t really have a choice if they didn’t want to sabotage their position and future at the company.
Conveniently the CEO has bailed the sinking ship and publishes daily tirades against the "establishment" that is victimizing Bolt specifically every day.
Obviosuly that’s different than a valuation, but that would immediately disqualify Bolt.
Responsible leadership will give you numbers, but leave you to make your own choice. Anything else should make you worry.
Source: https://twitter.com/theryanking/status/1493609864534315014
> if the common stock becomes less than exercise price, their personal assets are on the hook
Can someone explain what that may mean for the >50% of employees at Bolt that bought into this program, now? I'm really struggling to grok what my quoted sentence entails...
edit: thanks much for the quick explanations
If you don't happen to understand Stock options: At a later date you will have the OPTION to buy company stock at a set price (often referred to as a Strike price)
So some entity is lending you money because they know you have Stock options and presumably will be good for the money when they vest/mature.
Of course, if the value of the Stock at the point of your options maturing is LOWER than your strike price, you essentially have earned yourself the option to buy $4 apples at the price of $50 an apple. Eg: your options are worthless (beyond their ability to purchase shares which might not be buyable on a public market)
So since you took out a _personal loan_ you now have to pay it back.
EDIT: I missed one thing - you actually get to exercise _now_ if you take out this loan... This has slightly more upside because it means that you could have in theory, sold those shares for immediate upside on the secondary market and thereby have de-risked yourself. If you didn't, then you got hosed. You could also have a capital gains advantage by spreading the gains I suppose
For the Bolt employees who took this deal, I feel bad...
This is insane to me. I work at a startup with a similar valuation and we bring in almost double that amount of revenue a week... and I think we're overvalued.
Profit is a closer abstraction to cash flows (i.e. to the investor) than revenue, but it's still an abstraction. Investors looking at revenues and unit economics can sometimes--often--predict future profits and discount backwards, in the same way that a value investor can look at a company's profits and sometimes--less often, frankly--predict future cash flows from dividends or M&A and then discount backwards.
How can you have a successful business that spends more money than you make?
The term profit covers a number of metrics. All of them are abstractions. The number of assumptions that go into a GAAP profit figure is uncountable. Profit on a cash basis is less wiggly, but it's still--for valuation purposes--useful only inasmuch as it is an estimate of actual cash returns on the investment.
> you bring in more money than you spend, it means that you don’t have to worry about a “runway”, nor do you have to worry about outside funding
Lots of ways for cash-flow positive businesses to be running themselves into the ground. Garden variety is off balance sheet liabilities, though people certainly
> How can you have a successful business that spends more money than you make?
Nobody argued this, not for the long term. But there are loads of situations in which losing money in the short term is the long-term savvy move. (This literally describes all investing. You send cash out when you invest.) Valuation involves estimating the value of those future earnings today.
I wouldn't like to guess what the success rate of this game is though.
Recognize that, simplistically, Profit = Revenue - Expenses, and that expenses is a dial which can be turned somewhat arbitrarily.
People like to cite the one case where it worked and seem to be forgetting that most of Amazon’s profit comes from AWS. What are the chances that any of these startups are going to pivot to a competent different vertical to shore up their main business? That’s just like saying all you have to do is rehire the former CEO after a 10 year absence and become a trillion dollar company after almost going bankrupt.
And no Amazon did not use “excess capacity to jump start AWS”.
https://www.networkworld.com/article/2891297/the-myth-about-...
Today or tomorrow?
If a company has to spend more than they make today in order to build something they can sell for profit tomorrow, that's investing in the future.
Just looking at revenue or profit is too simplistic. It's also too simplistic to only look at a single point in time.
It’s not a single point in time, most of those same companies who IPOd before becoming profitable recently are still not profitable and being punished by the market more than the market in general.
That doesn’t help now that the public market doesn’t have an appetite for companies that aren’t profitable.
So if retail investors aren’t interested in non profitable companies, there is no profit it in it for investment bankers to flip the stock at IPO to take advantage of a “pop” meaning that VCs are less interested in throwing good money after bad.
How have the former “unicorns” focused on “growth” fared in the last few years?
For instance DoorDash couldn’t make a profit during a worldwide pandemic when everyone was ordering takeout.
If you service has complexity and needs lots of hand-holding and is expensive to generate the sales, then it's harder to say what to do with sales numbers.
For instance, even when Amazon was “losing money” for years, they were using cash flow to expand. If they were running short of money, they could have just stopped building infrastructure. They had marginal profit unlike companies that are losing money on each sell.
Cloudflare ($NET) TTM revenue is $0.73B and $16.9B marketcap (23x P/S).
DocuSign ($DOCU) TTM revenue is $2.1B with $15.5B marketcap (7.3x P/S).
UIPath ($PATH) TTM revenue is $0.9B with $9B marketcap (10x P/S).
Okta ($OKTA) TTM revenue is $1.3B with $13B marketcap (10x P/S).
I wonder whether they are prepared for the next reality where these multiples is no longer sustainable.
> At Bolt, we did it as a Series D company
> If your company has a strong growth trajectory, the benefits to your team from this program can be extraordinary.
https://mobile.twitter.com/theryanking/status/14933901919518...
This reminds me during the dot com crash, when employees exercised their options when the stock was sky high, so they had gigantic paper gains and big AMT bills. Then the stock crashed (like 99% and then some crash), so employees were not only left with near worthless stock, but they had huge tax bills with no money to pay them - and they were sometimes locked out of selling due to insider trading rules as the stock was crashing.
Turned out I left very early because the company wasn't doing great, in the current climate I think they're probably default-dead. All that cash is just gone.
I mean, I don't know the exact numbers / company profile. But I was in a similar situation 8 years ago. I could early exercise and I did. Estimating taxes was a pain (but a fun challenge too, lol). A couple of years ago they finally had a liquidity event and doing all these exercise shenanigans saved me a ton of money, so I'm glad I did that.
The business was doing well and I knew exactly what the risks were and I knew I could afford to lose that money. I joined early so it wasn't that much money to begin with.
I guess my point is that I wouldn't be too dismissive of early exercise / RSAs / etc — for the right kind of person / company it could be a great tool.
1) you must use corporate card for company expenses 2) you must not use corporate card for personal expenses 3) you cannot accrue points for use of corporate card 4) you are personally liable for corporate expenses on this card
I'm pretty sure amex was giving big perks to CFOs.
If you assume a limit of $10k per card and company (like the one I was at) had over 10k employees (though not all had cards) the amount is pretty astonishing and zero liability.
I once had an issue with Amex because I'd been travelling a lot and the boss was away and then slow to approve.
Do we have evidence to this encouragement?
There is basically no way to read that thread where it doesn't sound like an encouragement.
I presume the Twitter braggery counts as encouragement.