Bolt Financial's loans come due
axios.com
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If the amount was less than $200k, which is about the salary for a single employee these days, Bolt should just have annulled them entirely. The PR alone would be worth more than the $200k.
I agree when it's 10s of thousands or more the optionality isn't worth it for almost anyone. And it's hard to imagine borrowing to exercise could ever be worth it.
I've never encouraged or discouraged any employee from making an exercise decision (I don't want to get the liability of giving tax or investment advice). I don't even encourage them to file 83(b) except that when I explain why it's a pain for the company if they don't do so, everyone has figured it out immediately :-).
But some amount of the remaining 83% had student loans and paid them off. Comments on HN and Reddit notwithstanding, a non-trivial fraction of those will be put off by a decision to forgive current student loans.
Some other amount of people, probably a majority, never went to college to begin with. From their perspective, you just gave free money to a minority of people who were already privileged to begin with, by even being able to go to college at any price.
This is not how you win elections, and politicians primarily exist to win elections. It is entirely possible that forgiving student loans would result in a net-negative change in votes in the next election, and maybe for a while after that.
At the very least they need to fix the underlying problem before creating such a moral hazard, or the next round will be much bigger. If they really want to buy votes this way, it would probably be more effective to just give yet another stimulus -- a nice, big one -- to every voter in the country.
These loans were made cashlessly as part of an early option exercise. That is steeped deeply in the internal revenue code. The forgiven principal would be at the very least income. Then the tax benefits from the early exercise would retroactively apply with penalties and interest. All of this assuming the IRS doesn't view the move as a heads I win (if the company does well, a cashless loan produces early exercise tax benefits) tails you lose (if the company does badly, the loan is forgiven and there is no downside to the dodge).
I'm somewhat blown away by this whole thing. Leverage to finance an already-leveraged derivatives position on illiquid stock. From the issuer of said stock. Who is also the borrower's employee. That's both risky and dodgy! Bolt positions the "below $200,000" sum as a win. I don't see it that way. That's below the lower bound of the accredited investor income test. The people taking out these loans by legal definition couldn't afford the risk. Yet Bolt doubled down and gave them leverage?
IIUC, Evergrande strongly "encouraged" execs to take loans (secured against their income - which was considerable) to buy Evergrande "investment products".
Obviously, this was just a way to pay employees with their loan. If things blew up - the employee is completely screwed. If things don't blow up (which seems unlikely when an employer has reached this level of desperation) - then it's still not clear it was worth the risk premium to the employee.
This literally feels like something from a dystopian novel - where you take out loans to get your salary - and you only actually make money if your company grows 10x in one year - and even in that case your benefit is slim - while the VCs and founders walk off with 85% of the gains.
Hardly anyone understands finance - and most people underestimate how greedy some people can be. I feel like there would be no end to suckers who would fall for this trap.
Better: the VCs own stock with liquidation preference over the common stock they loaned you money to buy. If there's venture debt, they are also part of the estate that will be paid by those loans if the company goes bankrupt.
This all smells. Especially given, to my knowledge, Bolt didn't let even its employees take liquidity in their shares through traditional channels.
Bolt offered, with multiple conflicts of interest, what are essentially margin loans to potentially unsophisticated borrowers. The $300 credit for a financial advisor the CEO tweeted about should, alone, be presumptive.
To be clear, I don't think anyone did anything intentionally wrong. (Also, I learned about this yesterday, so there’s that.) But wanton incompetence bordering on--perhaps crossing into--negligence, enabled by a Board that absolutely should have known better, can and should create liability.
The company tried to do something beneficial for its employees, although perhaps it was misguided. They gained nothing here except the marketing benefit of trying to be employee friendly.
Margin loans are risky because you can get liquidated and lose your other principal. This was a cashless loan, that was only 50% recourse, so the only risk is that you may have to pay back half of what you bought the stock at if it ends up worthless.
I don’t think there was any incompetence or negligence here, and even if there was some incompetence, that’s not a theory of liability.
Issuer is the lender is the employer. This is a mess of conflicts.
> company tried to do something beneficial for its employees, although perhaps it was misguided
I agree. (Though it ignores the stupidly simple, entirely common alternative: cut the loan crap and just give them the money.)
> was a cashless loan, that was only 50% recourse, so the only risk is that you may have to pay back half of what you bought the stock at if it ends up worthless
For that 50%, it’s identical to a margin loan. We regulate those because lending against magic numbers that go up is a consistent failure mode in capital markets.
This was an incredibly risky program, and I don't understand how Bolt was valued last year. But engineers were potentially sitting on a life changing amount of money. Not exercising could have cost engineers hundreds of thousands in additional taxes if Bolt had a great IPO. They needed to get financial advice from an independent advisor.
Unfortunately, they'll probably never be able to sell their shares for even a fraction of that amount anyway.
The first 5 engineers would be incredibly lucky if they got 0.1% - who knows how many of them fully vested and still have shares. I'm guessing less than half. There's MAYBE one person who was looking at close to $11M.
Engineers after that would be incredibly lucky to even get 0.01% of the company. That's $1.1M. Again - I'd be surprised if there's even 5 fully vested that still have shares.
And even if they still have the shares, they'll be lucky to sell them at a $2B valuation - let alone $11B. So cut those numbers by 1/5th (or more).
Bolt would've been a SCREAMING success for a startup. Unless you were engineer #1-5 - you'd be better off as an L4 at FAANG.
FYI, this is irrelevant with respect to the SEC's jurisdiction [1].
[1] https://www.sec.gov/oiea/investor-alerts-bulletins/ib_privat...
The SEC created a safe harbor for registration. The Securities Act of 1933 regulates all securities [1]. This is why private companies issuing shares have to hire securities lawyers.
This feels like a more complex, insidious version of company scrip. At the end of the day, you’re getting paid in fake company money that’s worthless if they go belly up.
The whole point is you're in debt (against worthless equity). It's negative worth!
It's risky, but not necessarily dodgy. Many employers do not even permit early exercise and I wish more did as I could have substantially reduced my tax burden in some situations. Taking loans for early exercise is risky, but ultimately, we're adults who are responsible for our own decisions. Certainly it would be bad if Bolt misled employees into thinking it was a risk-less proposition, but I've not heard anyone claiming that.
>>Bolt positions the "below $200,000" sum as a win. I don't see it that way. That's below the lower bound of the accredited investor income test. The people taking out these loans by legal definition couldn't afford the risk. Yet Bolt doubled down and gave them leverage?<<
If the aggregate loan amount to laid-off employees was $200k, that says nothing about whether they qualified as accredited investors. Further, the accredited investor designation is an arbitrary one. It's perfectly possible to not be an accredited investor and still be able to afford the risk of early option exercise.
My guess is overall Bolt was actually being nice to their employees and allowing them to get in early on the action (i might be wrong but i've been in similar situations and usually the intent is good)
But I'm not sure how Bolt significantly benefit financially from this program. And $200k is not a ton of money for a unicorn. If you're an early employee at a unicorn you can work with 3rd parties to make more aggressive financial decisions.
But some of them would incur a tax liability at option exercising (the IRS values the "gain" at "stock price - option exercise price" and I believe now causes mark to market at the exercise time?) which would need to be paid also.
Bolt offered to loan people money to exercise their options (and pay the tax?). But if Bolt forgives the loan, the IRS will consider it as income to the loan recipient.
But even then, I'd much rather have a (income tax marginal rate * loan amount) debt to pay than a (loan amount) one.
I understand why the employees would want a loan - they need money to buy the shares required to exercise the loan - and I guess they can't do it through a normal broker?
If the employees Exercise-to-sell-to-cover or Exercise-to-sell they should be fine right because they would have closed the loan? This would explain why so many took the loan but so few of the layoffs were affected.
Is the only issue the ones that didn't Exercise-to-sell? I understand that tax will need to be paid but I'm not sure what benefit they'd have would be?
Unless, its because the capital gains + loan rate < income tax?
If you don't exercise and just sell short term capital gains tax applies.
If you exercise ISOs and hold long enough you pay AMT, which can be refundable, and LTCG when you sell the shares.
You have to pay to exercise, pay taxes, and pray for a sale option some future date.
Private shares are actively traded. Bolt chose to restrict its employees from being able to sell.
Assuming you're an employee with a relatively small number of shares (in terms of company control) - what's the point of shares if you can't sell them? Just _in case_ you can sell them later? Some type of dividend/profit sharing (which seems unlikely for a startup)?
This is why it is incredibly stupid that the IRS makes you pay taxes when you get them.
Depends on your ability to pay. In some cases a large debt to a corporation is far preferable to a small debt with the IRS.
I guess then the solution would be some form of redundancy payment, sufficient after taxes to cover the loan. The ex-employee could at their discretion use the payment to cover the loan. Or not. This way you’d avoid IRS penalties.
Or it's last year, and an employee wants to lock in the FMV for AMT before the next round/IPO.
It's definitely an aggressive move, but I can understand why someone would exercise.
Mainly to avoid taxes if stock price goes up.
If the price is $1 today and you exercise the option to buy stock, you pay taxes on $1.
If the price goes up to $20, you pay taxes on $20.
If the company fails before you can sell, you loose moeny in both cases. However, if you wait, you payed a lot more taxes on stock that is worthless.
People can easily pay hundreds of thousands in taxes on stock that they can never sell. Also, sometimes the stock goes up so much that employees cant afford the tax bill to exercise the option, because the stock cannot be sold until IPO.
https://secfi.com/learn/exercise-stock-options-tax-implicati...
How is that possible, except by Bolt explicitly not laying off employees with loans? I don't know if such a thing is illegal, but "you are indebted to us so we'll give you preferential treatment" doesn't feel _not_ illegal.
Example - some staff may not have had loans/shares (eg; customer support, etc) and the loans may be for senior and up roles who have enough shares to worry about the high taxes on shares.
Maybe the layoffs were mostly of newer, unvested employees.
* You don't need to take out a loan to exercise your options until you vest some options, which would typically take a least a year
* Bolt grew really quickly and so had a high % of employees with low tenure
* The layoffs disproportionally affected newer employees, which is extremely common and reasonable
(All that said -- these loans are an absolutely terrible idea and I think offering them is irresponsible.)
It's not on the list of protected classes in CA, and CA has at-will employment, so it's probably not illegal, but IANAL.
Also, as others have said, we're missing important information, but offering the loans was obviously sketchy and sets up a bad incentive structure.
Glad I dodged that bullet
https://www.forbes.com/sites/stevenbertoni/2022/04/04/meet-t...
> After sunset, he avoids electric lights and screens because they disrupt his sleep. Instead, he lights candles and plays a buffalo-skin drum (he made it himself with the help of a local indigenous tribe) to wind down before bed.
https://jesuschristsiliconvalley-blog.tumblr.com/post/465392...
But yeah, oh boy, this guy took Dave Morin and said "Him. He's my role model."
Lolololololololololo
I always imagined it being a much smaller startup, not an $11B valuation. And it seems the market has backed me up on that.
"a "dot-com dead pool" that chronicled troubled and failing companies in a unique and abrasive manner"
It was a nice counter-weigh to corporate PR-speak.
The risk you take on as an employee with those options is much greater than 15%. If you have used loans to purchase the options, you have a substantial risk of being underwater.
It's time we callout options for what they are, a way for companies to protect their equity pool while being able to sell a story that the options are going to shoot through the moon.
Early exercise is a big play. You do it if you’re super early and super confident. You don’t have to. Pretty traditional if you’re early enough since it’s cheap.
So the tax free options are really just locking in long term cap gains. Of course the con is that it’s not actual compensation as the stroke will be equal to the present valuation.
Also FWIW the company can withhold some shares as they vest but max 22% for federal.
Is it really true that tax is only if the asset is liquid? Does the IRS make a distinction between liquid and illiquid here?
- At year 0, you're granted 100 RSUs on a double trigger with a 1 yr cliff, monthly vest after
- At year 1, you have vested 0 but if the company went public you will immediately vest 25
- At year 4, with the company still private, you have vested 0 but if the company went public or had a liquidity event you will immediately vest 100
- At year 5, with the company still private, you are going to quit. If you vest now, you must pay tax, but no way to do that with cash unless company withholds RSU percentage
In the double trigger case, at year 5, you leave empty handed. In the single trigger, you pay tax with illiquid stock (through withhold or pay cash).
I've always only had options or stock, so do correct me if I'm wrong.
- If you want to minimize risk in return for higher taxes (call ~40%), just hold your ISOs and exercise-and-sell as a same-day sale when you're liquid (ie forgo the tax advantages of ISOs). There's absolutely no way for you to get screwed over if you're willing to take the gain as standard income.
The IRS is only involved at the time of exercise [1][2]. Companies are the ones making ISOs expire, versus convert to NSOs, three months following termination of employment.
[1] https://thestartuplawblog.com/incentive-stock-options-post-t...
[2] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/
1. accept compensation in ISOs, likely taking a salary hit
2. exercise, and pay AMT in the exercise year on the spread
3. hold until you can sell, but at least for 12+ months so you qualify for LTCG treatment
So you get hit with a lower cash comp in (1) which is an opportunity cost. Then you have to pay taxes in (2) maybe well before the stock is ever liquid in any way. Then you still have to wait for liquidity (3).
Plus normally the company does not tell you, an ordinary employee, when its beginning fundraising. If it did, you could at least time your exercise so as to minimize spread.
Conversely if I want to take a bet on a public company which I have no relationship to, I just buy and hold. Why is it easier to get favorable treatment for a company I have nothing to do with, versus one that I helped build?
It would probably make good outcomes less good (companies would probably grant fewer options, or instead grant RSUs) but a much better mean?
The market is what dictates this. You don't have to take a startup job.
Facebook, Google, etc. minted hundreds of millionaires when they IPO'd. It's hard for me to feel bad for people who take those risks.
I'd argue a whole lot of engineers should be much more judicious about joining startups and ask for more options. If engineers knew how to calculate startup risks better they'd probably know there is too much equity is concentrated to too few individuals (mainly founders).
They also have absolutely no idea how VC funding and the public markets for IPOs work during a bear market.
At least I can sell my RSUs for real money when they vest.
And this is precisely my point. If less IC's believed this, it would put market pressure on startups to give them more options and better outcomes (including taxes).
As OP said, it is taxing unrealized gains. It makes as much sense as making employees pre-pay 10 years of income tax when they start a job.
Bolt announces layoffs - https://news.ycombinator.com/item?id=31507599 - May 2022 (512 comments)
I would guess Ryan set it up this way in compliance with IRS regulations and on advice of his internal attorneys and financial experts.
Personally would avoid working at any startup that is in the awkward middle stage and would require you to shell out six figures just to exercise some questionable options especially now. Either join a very small company in the early stages where the valuation is still low or join a late stage or public company where you vest RSUs and don’t have to deal with options at all.
This is what Bolt was trying to solve. They did it the wrong way and hurt a lot of people, but they were trying to give people the opportunity to exercise early.
The correct answer is a 10-year extended window. It's not perfect, and there are downsides. But it's (currently) the fairest way to issue stock options to employees. By the time it comes time to exercise, the employee will be significantly de-risked because they'll know how the company is doing.
Also, $10k is a lot of money. Even if you have it in savings (and I'd agree a lot of tech people technically do), it's a huge gamble on an unknown startup. You're already gambling your time; now you're supposed to also gamble your money?
these types of work environments self select for people who are comfortable taking on risk. no one is forcing you or anyone else to join.
Sure people can not work at companies that don't provide 10 year exercise options. Its not like they are slaves.
But that doesn't mean there aren't better ways of structuring options and it is bad to point this out.
I make a a great wage and have savings in the bank. However I have a 6 month old baby at home and a wife who is taking time off from her career to look after our baby. I also left a job I was at for almost 5 years and exercised my options on the way out. This cost me almost $30k in cash. At my new job early exercising would cost me nearly $40k. Spending $40k to early exercise this startup's equity grant feels like it might be a little irresponsible. It wouldn't surprise me at all if other people didn't have that much lying around.
I don’t doubt that many people have the same thought process, but if I decline to early exercise from a company that offers that option the alternative is a massive tax bill down the road that I didn’t need to pay if the company does remotely well.
I'll vest my options here without exercising and if they turn into something one day that'll be nice. In the meantime I'll collect the nice salary I negotiated for myself and grow my career the way I wanted.
Edit:
A little clarification about my last role. I took that job because they were using tech I wanted to learn and they had a team I wanted to work with. They also offered me salary that was a healthy bump from where I was at at the time. I didn't early exercise those options back then because I didn't know enough about the company to justify plunking down the cash. After being there nearly 5 years I believe in the company a lot and see the exercise as a smart investment. I don't have that clarity yet for my current role and so it just doesn't make sense to me to early exercise.
How would that work? Very few people stay in a tech job for 10 years. I stayed in a software job for 9 years, until I was laid off, and that's extremely unusual.
Here's more: https://zachholman.com/posts/fuck-your-90-day-exercise-windo...
i feel like people who are acting like early exercise is money down a black hole aren’t aware that if the company is going nowhere you will probably know that long before 4 years, in which case if you leave you get a refund for unvested options. and even if you’ve vested shares you’re unsure about in many cases the company will offer to buyback shares.
worst case it’s a write off against capital gains.
It's starting to make sense that he did to shift the blame and deflect.
Having said that I don't think this is going to play out well for him. It was a huge mistake to get half of your staff to take on personal debt for stock options that mount to nothing.
But I thought I'd give an example of how what Bolt did made sense in some rare cases, and is also extremely dangerous in almost all cases
I worked for 4 years as a Staff Engineer for a company that went public beyond my wildest dreams. I have worked for startups over 20 years and this was the first time it paid off for me.
I had a mix of RSUs and ISOs. The value of those when the company went public (shortly before I became fully vested) was over 2.5 million. All in all, I made about 3 million dollars (I stayed an additional 6 month and left once I hit 4 years).
Taxes ate a huge portion (left with 1.8 Million after taxes). Had I early exercised the ISOs, I would have conceivably paid about 700K less in taxes (if I had early exercised and pain 200K or so in taxes)
So something similar to the option that Bolt provided would have given me 500-700K additional.
Sounds good, right?
However, keep in mind most startups fail, and very few do as well as the one I was in did (I've worked for ~6 companies over the course of my career). The first one struck big, but I didn't sell (I could have made 100K after taxes when I was very young) and then the first dot com crash happened and that was that.
And then this one.
Let's look at what would have happened had I had an option like Bolt gave employees and the company had not gone public or worse, got laid off. I would have owed over 200K on a loan taken against stock that was now worthless.
So the pragmatist in me things that making an extra 750K on the 1/10 chances that the company IPO'ed and did well, vs a 9/10 chance that I would owe 200K.
Now, keep in mind I worked with people who were on their 2nd, 3rd successful startup and could afford to pay 200K in taxes on stock that might never pan out. The risk for them was "that sucks!". The risk for me would have been bankruptcy.
If you cannot afford to early exercise and take the tax hit if it does not pan out, you definitely, definitely cannot afford to take out a loan to early exercise your stock.
Particularly egregious is the line which begins “Yes, it's welcome news…” You are ostensibly the news, Axios - why are you telling me how to feel about yourself? Axios repeats this pattern frequently - their signature bulleted snippets of supposed fact often being little more than tweets.
Also they carry obsequiously friendly reporting on Amazon frequently.
Was this mechanism intended to get around this tax problem and at the same time help out the company?
Serious question: Does this company have a future? Does it have any value, either as a profit-generating venture or sold to an acquiring company?
Maybe this is the JS boot camp effect.
(massive) Capital misallocation, i'd imagine
[1] https://news.ycombinator.com/item?id=31510453
[2] https://www.theinformation.com/articles/bolt-seeks-valuation...
I would not want to bet against any one of those companies, let alone ALL of them.
What I don't get is thinking it's so massively compelling as a competitor to these existing systems.
From what I've seen, you find a charismatic dude with a good story that they probably even believe themselves, and another dude with a lot of money who wants to make that into even more money and you get them together. Then you find more believers.
It's more akin to religion than anything else, but employment seems like the new religion for many - it's certainly an integral part of identity.
Either you are making an argument for "Netflix/AirBnB are considered tech companies, so why not WeWork?". Or you are saying that Netflix/AirBnB aren't actually tech companies? Or are you implying that given enough time, WeWork would have become a tech company, despite its non-technical beginnings?
To compare AirBnB/Netflix to WeWork from a technology standpoint doesn't make any sense IMO.
It is all unraveling now. No one was excited about "one click checkout". They were excited about the ROI.
It's not the fellow SWEs that care, it's the observation that every step removed from the checkout flow increases conversions and therefore revenue.
And of course there's always the money, for the right price I'll work on whatever you want me too. If someone offered me a job building Windows Vista widgets for $1M/yr, you can bet I will take the job and be very happy.
It is also a high-value problem, and thus there is compensation to support the hard work.
Compare this to Stripe (which I currently use at 2 different companies in 2 different industries) which manages to be very transparent about all pricing and still have an enterprise sales channel that can make larger deals with discounts.
I'd be willing to bet like 80-90% of SWEs are just people who write code 9-5, have little passion for the job, and just collect paychecks like most people in America. HN and Slashdot and so forth provide a very skewed view on our profession.
So when Bolt offers people over-market wages for skills writing JS/PHP and some basic database stuff... a four day work week... strong culture of "doing enough" (aka Fried's mantra at Basecamp), why not take it? It's just a job to them.
For the users, it provides a great UX and prevents the need to give your personal/CC info to every random site that you wish to purchase from.
For the business, it can significantly improve conversion, reduce fraud, and reduce eng time for payment integration.
How is bolt going to be better or different than PayPal checkout or the amazing Apple Pay checkout (I literally use Safari for this).
PayPal checkout kinda sucks (the UX was bad when I used it years ago, not sure how its improved). Apple Pay is way better on UX, but can only be used in specific cases.
Simplifying something complex that the user uses as a one-click can/is exciting. I don't think Bolt is the solution though.
You don't have to be a kernel hacker to be a good or motivated engineer.
In simpler words: Bolt helped employees take out personally guaranteed loans to give Bolt money.
In the loan terms, if the employee leaves for any reason, the employee owes Bolt the entire loan amount within 90 days of end of employment.
Never hold company stock. If you work there you’re already incredibly long. Diversify.
It's Enron-ish because it's a deal that creates additional demand for the stock, then when the price of the stock rises, it's used as proof that doing deals with company stock is profitable to all parties, which makes it more enticing in the future. When the stock falls (always unthinkable), the rank and file are holding the bag.
Not just the tax burdens, the exercise price as well
Sure, but the exercise price is effectively set by the taxman. If you set it too low, they’ll just charge more tax.
See https://assets.fenwick.com/legacy/FenwickDocuments/409_Valua...
“Employees, officers, directors and consultants who receive stock options with exercise prices that cannot be shown to be at or above the reasonably-determined FMV on the date of grant face immediate tax on vesting at a combined federal and state tax rate as high as 85% or more.”
The game is rigged in the taxman’s favour.
If the tax was calculated at the exercise (or grant!) date but only due upon sale of the shares (or using those shares as collateral to loans etc), the system would be a lot fairer. Especially for illiquid shares in private companies, where it may be years until you could receive cold hard cash for your shares.
Seriously pay nothing back until you speak to a lawyer. Bolt will be out of business by the time the loans go into collection, then offer to settle for $1.