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This is sort of similar to what Evergrande was doing with executives, right?

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.

> where you take out loans 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

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.

Can the SEC pursue Bolt for this?

For what? This thread is full of misunderstandings. What is it you think Bolt did that the SEC should pursue them for? If it’s alleged they fraudulently hid risks, etc., it’s one thing, but so far all that seems to have occurred is they offered something that has pros/cons, disclosed risks, half wanted to take the risk for the pros, and in hindsight, perhaps it was a bad deal since valuations are tanking industry wide.

> what is it you think Bolt did that the SEC should pursue them for?

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.

What conflict of interest?

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.

> What conflict of interest?

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.

Employers cannot replace financial advice from an advisor with a fiduciary duty. Providing general education is good, and so is getting them free sessions with a financial advisor. But I don't totally agree they should be liable.

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.

The VAST majority of employees at Bolt would not get life-changing amounts of money at an $11B valuation.

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.

No, and not just because it’s not a publicly traded security. They did nothing illegal. Maybe it should be but sadly it’s not.

> it’s not a publicly traded security

FYI, this is irrelevant with respect to the SEC's jurisdiction [1].

[1] https://www.sec.gov/oiea/investor-alerts-bulletins/ib_privat...

Your link outlined that unregistered securities don’t have oversight by the SEC and outlined how you better be careful what you’re getting into. It didn’t outline how the SEC regulates them beyond limits on what you can do with them without registering them. They wouldn’t be generally involved in non public shares agreements.

> unregistered securities don’t have oversight by the SEC

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.

[1] https://en.m.wikipedia.org/wiki/Securities_Act_of_1933

>this was just a way to pay employees with their loan

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.

It is not worthless! That's typical startup equity (common stock for employees at least).

The whole point is you're in debt (against worthless equity). It's negative worth!

>>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!<<

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.

"Taking loans for early exercise is risky, but ultimately, we're adults who are responsible for our own decisions." Yes, agree. If the situation was reversed and these employees made money from their investment no one would be complaining.

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)

I agree. I don't see any way that Bolt benefits from having outstanding loans to employees for early option exercise, so all this criticism of them seems misplaced. Say what you want about their business model, valuation, etc., but this looks to me like an honest attempt to help employees with early option exercises. Stock options are risky at any juncture, but I appreciate having the option to exercise early as the tax benefits can be substantial.

Agreed. The biggest issue I have with it is only having 90 days to repay if you leave. I hope they company works with those individuals, a few people might be in some serious trouble. And I'm curious how much was loaned, it's 200k just from the people who were laid off.

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.

This is like eating your own dog food then eating the dog.

> 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.

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.

Perhaps they plan to lay off a lot more of those employees in the next round and they want to get the process figured out early?

or they use the restructuring as a valid reason to do a layoff and get rid of "dead weight"

Can someone please ELI5 the parent comment?

Stock options (sometimes?) have an exercise date. If you don't exercise by that date, you give up on the options.

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'm more familiar with traditional retail options, but I'm confused.

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?

It's short term capital gains vs long term.

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.

What happens if they waive the loan? Does it count as LTCG + the income tax on the loan amount?

I'm not sure what exactly would happen, but forgiven debt is usually taxable.

Bolt isn't public so there is no sale option.

You have to pay to exercise, pay taxes, and pray for a sale option some future date.

> Bolt isn't public so there is no sale option

Private shares are actively traded. Bolt chose to restrict its employees from being able to sell.

Forgive me if this is a dumb question -

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)?

Yes, the main value is that maybe you can sell them someday.

This is why it is incredibly stupid that the IRS makes you pay taxes when you get them.

> I'd much rather have a (income tax marginal rate * loan amount) debt to pay than a (loan amount) one.

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.

Why would employees exercise prior to departing and/or with no exit in sight?

It's last year, and an employee wants to change jobs. But tech is sky high, they are confident about the companies future, and want to get the tax benefits of exercising before they leave.

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.

This depends on how much regular income the employee has, how much cash would be required to exercise the options and personal risk tolerance, but it could potentially be a way to avoid AMT tax (and instead pay long term capital gains tax) when the company eventually has an IPO or other exit and the employee decides to sell their equity.

>Why would employees exercise prior to departing and/or with no exit in sight?

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...

https://carta.com/blog/equity-101-exercising-and-taxes/