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?
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.
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.
Conveniently the CEO has bailed the sinking ship and publishes daily tirades against the "establishment" that is victimizing Bolt specifically every day.