Uber plays hardball with early shareholders
fortune.com
fortune.com
At the same time, it's also unfortunate that people don't do research to look at other instruments for liquidity (like pre-paid forward transactions) that the restraining company has zero control over. In Uber's case though, it seems like they're actually paying on the up-and-up. Many companies intentionally deflate the fair market value of shares far, far below the actual valuation (like 1/25th the value paid by investors in the last round, for example), so offering to sell at what the investors paid in at is pretty decent.
Private equity is confusing and usually doesn't work in your favor. My general advice is to always appreciate it, but never depend on it as part of your compensation in any way (and Good Lord, don't bank your retirement on it!).
This is very true. I've been in the position of having worthless share options before. It's something everyone who's tempted to work 80 hour weeks because they have share options should remember. You should also remember the Google cook, who had $200m in options that the company tried to do him out of because he wasn't a developer.
EDIT: There is a nice description of Ayers in wikipedia: http://en.wikipedia.org/wiki/Charlie_Ayers
Bean counters and penny pinchers will never fully realize the value of someone like that. He kept people well fed, with healthy options that let them spend more time socializing with their peers and getting back to their desks to code. The alternative is having people waste time in traffic commuting to the dearth of eating options (many of which are far less healthy. many engineers left to their own devices don't choose the healthiest options) near the Google campus. There is no doubt that Google got their $26 million worth in the productivity he accreted to his fellow employees in those early days.
Is this true? Serious question because I've never heard that before (quite the opposite, I've only heard other early Google employees defend him from external sources as being, if anything, (relatively) undercompensated).
Anyway, the point stands, being a lowly common stock holding employee is a lottery that you can lose on in an infinite number of ways even if the company is wildly successful, which is already a huge longshot.
If you get a bunch of money from it, great; but you certainly shouldn't rely on it to pay off anything.
If thats the case why would talented folks work for a startup? Go work for Facebook or Google...
More concretely, I would never accept a below market salary in exchange for equity in anything. I don't understand this practice. I will take equity as bonuses, perks, and so on, but I never factor it into my compensation considerations. Perhaps I'm at the place in life where risk doesn't attract me, but to me it's a foolish move even at 20 or whatever age it's apparently appropriate.
Take the real money and go buy lottery tickets. Your chance of success to become fabulously wealthy is about the same. Better yet, put it in a well-performing retirement account and guarantee yourself a bundle of money a little later in life. Why make yourself an underpaid, overworked slave for someone to make a few bucks when you could live a healthy, more comfortable life and have the same end game more reliably?
(And yes I know some people crave that sort of work environment, but I think those people are mentally ill ;))
I'm not saying you're a bad person if you prefer this situation or whatever. I just don't understand it, very likely never will understand, and at this point in life, have no interest in trying. :) I think there are a lot of people like me, though, who arrived at that conclusion the hard way by working their tails off for years and getting nothing in return, and then when it's over, looking back and seeing their mistakes in "taking the deal" so to speak.
If I ever start another company, I would definitely have transfer restrictions. It's pretty important to control your equity, and I think the day-trading mentality is toxic. (I would also avoid ever trading on the traditional stock markets, but that's a larger topic)
Equity is compensation. You can't tell your employees what to spend paychecks on, and you shouldn't be trying to block them from gaining liquidity. Maybe a doctor just told them they have a year to live, and won't be around for your planned 2019 IPO.
Unless you are granting them voting shares it is unfair to lock them into your vision of the company going forward, especially if they have departed.
Voting is a non-issue. Assuming things are structured right, the founders should retain majority control. The investment is primarily an investment in their vision, not something to be micro-managed by shareholders.
"I am Paul Buchheit, I made Gmail" seems like it would work for you, and something similarly awesome might work for like 10s or 100s of founders.
As a Google employee (with pretty high, low variance, liquid compensation), it seems having stock/options or options even a successful pre IPO company are kind of terrible. When you seemed to have won (worked for a successful company, vested), you don't even really win, or at least, not yet. Stay in that same desk, working on that same project until some indefinite future liquidity event happens.
My point was exactly about vision. Founders vision often change from what was pitched when you join.
Let them have a say or let them out at a fair market price.
There's also no reason why equity must be illiquid -- or skewed to benefit a company more than the employees that built it. There are ways for people who received equity as compensation to take a little out on terms that are fair for everyone. Just because it's always been done a certain way is not a good justification for this position... after all, Uber is breaking the taxi business in a similar fashion.
I was a start-up where the board just decided to be as difficult as possible, just to be difficult, and said, "you will need to hire an auditor to review the books to come up with an accurate market value, and we will not cooperate with the auditor", not in those exact words. Which of course completely breaks the books of a minority shareholder in a moderately successful company.
It's not the companys equity, its the shareholders equity - a company is owned by it's shareholders not the other way around.
It the same sort of issue thats allowed management teams in large listed companies to just do what they want even when it's not in shareholders interest - compare the compensation packages of many boards with the return they make for shareholders.
Option grants, employee benefits, bonuses...these are all carrot sticks employers use for employee retention. Bigger companies like Google can offer bus rides, better benefits, higher salary, etc. Make sense?
For instance a very common clause is called "first option" (don't quote me on these names, not 100% certain they are correct), in order to sell the stock you must first offer the company the stock at the same price.
An alternative (probably the one in the Uber example here) is "first option at market" where in order to sell you must first offer to sell to the company at the market rate ("helpfully" determined by the company).
In the case of stock options, you may want to do some preparation so you know what questions you need to ask:
1. Read the paperwork to get a general sense of what you have been given. Make a bullet point summary of the rights (exercise date, price) and obligations (e.g. deadlines for exercise, or what happens if you leave).
2. Read a general introduction about stock options, like some of the content in 'Venture Deals' and/or the blog post that Alex wrote: http://blog.alexmaccaw.com/an-engineers-guide-to-stock-optio...
You will also want to understand the tax implications of the grant, as there may be things you need to do now, in order to minimize your tax liability.
IANAL but feel free to email me at the address in my profile
How many shares am I getting? Roughly what percentage of the company does it represent? When do I need to pay for them? How much do they cost me? Do they expire at some point? Once I buy them, can I sell them?
That should cover most of what you need to know for now. Then read the paperwork and see if it matches mostly what you were told. Then forget about them and wait until something big happens at your company.
The (awesome) lawyer I've used for years is Adam Slote of Slote, Links, and Boreman: http://www.slotelaw.com/
But I'd encourage you to do your research first, so that you aren't paying a lot of money to be spoon-fed stuff you could get from Wikipedia and elsewhere. I'd start here:
http://www.payne.org/index.php/Startup_Equity_For_Employees
https://avc.com/2012/04/mba-mondays-live-employee-equity-arc...
What is a "startup enemy" and how does wanting to recoup some of your investment make you one?
The same is true of investors. A legal battle with a company you invested in might close off access to future deals.
Now, a reasonable person might evaluate the facts of the case if they have time...but not everyone has the time and/or would agree that they should sue Uber.
It is alot like having worked on a porn site I think. Some people would go "Oh, cool, you worked on a big project there that had the kind of scale we hope to achieve."
Others would look at it and drop your resume directly into the trashbin.
I suspect there is a similar effect on VC/Angel access to startups that are popular enough to have a bidding war like Uber.
I mean, is this really the case though? Any reasonable employer I know of would say, "Oh, well, that's unfortunate, but your business", and move on.
I think this repeated meme is just a good way to keep workers in their place.
However after the first job, nobody cares because you've proven yourself not to purposeful "trouble maker", and most likely makes the company look bad instead.
Markets are a fickle beast...
She has a job in a different industry now and makes significantly less [like 50%]. She doesn't think she'll be able to retire before 70 because of it.
Admittedly, the industry was very small and incestuous and it isn't like Tech where labor holds alot of power at present.
I also have a family friend who is an idiot and did something similar for stupid reasons [it turns out he signed paperwork he thought he never had, didn't keep copies]. He ended up in a government job eventually but he spent a couple years on welfare because he didn't believe my parents when they told him no one would hire him.
It really has an impact, at least anecdotal. It is possible I'm unusual in having close relationships with 2 people who had this happen and its much rarer in the general population.
Was it a noncompete?
I've gotten that clause myself in an employee agreement. The company wanted me to sign and they said their lawyers "wouldn't let them" change it.
He should have tried [or not done what he did]. However, he made a mistake and paid for it.
Doesn't this reduce every early investment in a startup into a binary thing? You either lose it all, or hit a home run. Unless you pull a Groupon and exit everyone before the IPO.
And no, I don't think it does.
(I'm not a big fan of him, personally, but at least he let the rest of us see how incredibly offended VCs get when you don't roll over and play dead.)
Interestingly, with options/RSUs clauses in employement contracts, workers are making "investments" in privately held securities on the order of ~$100K. In general (outside of employment contracts) such investments are not legal if the worker is not signed off as a "sophisticated investor".
I would like the SEC to close this loophole, by mandating some minimum disclosure requirements about the potential risks of options/RSUs, and barring employers from making misleading statements.
Warning, if I work somewhere, you should short that stock / not take options. Sorry.
Please keep your profile updated with where you work so I can short them. <3
1 - Your options will fully vest before you leave the company due to internal or external factors
2 - The company will reach an exit (as opposed to flop over and die)
3 - The company will reach an exit sizable enough that after accounting for cut price, your options are still worth the value when you got them (accounting for inflation, of course)
4 - That #3 is still true after accounting for dilution
5 - You will successfully be able to exercise and exit your position without running into restrictions like this scenario.
Personally, the odds of all 5 points being hit for a particular company is a lot lower than 5%. It may be worth doing the math, but almost all of the time the number is so close to 0 that it's useful just to value all options at $0.
tl;dr: Never take a pay cut for options. Good God.
But I think $0 is wrong as well.
http://online.wsj.com/news/articles/SB1000087239639044372020...
75% fail. 11% go public or acquired.
It is a lottery ticket but those don't sell at $0.
It is common for floundering companies to sell or go for acquihires, in which case your options are most certainly underwater and worthless.
Even in small acquisitions (that aren't just a fire-sale in disguise) it's quite possible for the investors and founders to get paid, but leave employees with little to no payout as well (certainly not the tune the options were originally valued).
Considering how difficult it is to differentiate between a "real" acquisition (with requisite payouts for all involved) and desperation acquisitions/acquihires, I doubt we'll ever see the true percentage. In any case, as an employee holding options, you are the last in line to get paid, never forget that.
My personal, unscientific ballpark is that the odds of exiting your options for at least the same amount as the original grant valuation is somewhere in the sub-1% range.
Fair enough, but lets call it .5%. Maybe I was off a decimal place. ;)
.5% of a chance at $200,000 is still worth something.
Of course, the entire intent of options in startups is to convince you that it's worth much more than $1000. Best not be fooled.
I just would go with my valuation of the total compensation, not theirs. Same as I would do selling/buying a car.
I.e., five people on a board, from VC group 1, VC group 2, VC group 3, the founder, and someone else. The VCs invested $44,140,000 into the company and get that at a minimum from any acquisition. Then the company gets acquired for $44,140,000.
I'm 99% sure this violates the fiduciary responsibilities a board of directors has, but, who the hell is going to sue?
And I don't mean "explain and promise really hard that the employee won't get screwed over." How about letting the employee's options be safe against dilution? How about not refusing third-party offers unless you agree to pay the same asking price?
Investors put money into a company. Company uses money to pay workers. Everyone goes home happy.
We're already there, only newbies and people who don't know any better are taking a discount on market salary for options. The bulk of the people I know who work at startups are demanding - and getting - market salaries, and the options are of negligible importance.
You cannot sell your arm, or your life, or so many other things.
And at the same time, it is not that they can't sell it. They can't at the price they expect. Which is different.
You don't screw people who had faith [investors; early employees with equity] in you. They shouldered a good deal of risk and you knifed them in the back by paying below market rates.
The venture investors bought Preferred equity, the shares being sold by the employee are almost certainly Common equity. Common equity is worth less than Preferred equity. The times I have seen offers to buy Common shares in connection with a Preferred round, the discount has been as high as 50%.
This makes sense: assume you are an investor putting $1.2 billion into a company that has previously raised $300 million (this is roughly the recent Uber situation.) You are investing at a $17 billion valuation. Now assume that you were very, very wrong on the valuation and the company ends up selling for 90% less: $1.7 billion. You still get your money back. If the company goes on and sells for $34 billion, you double your money. This asymmetrical payout is one reason venture firms are comfortable taking the risk of such a high valuation.
Now assume you bought $10 million of Common shares from a former employee. If the company ended up selling for $1.7 billion, you would get back roughly $100,000 (assuming the preferred owns half the company.) You don't really have an asymmetrical payout: you stand to lose money if the valuation is wrong.
A wider the spread between the Preferred price and the Common price implies less confidence in the Preferred valuation. The actual valuation is the Common valuation, and the extra amount paid for Preferred stock is a kind of option value. So an alternative explanation to Uber short-changing its Common shareholders is that they believe the expected value of the company is closer to $4 billion than $17 billion and the Preferred buyers think the range of possible outcomes has an extremely large standard deviation.
Read carefully, this was prior to that round closing. Assumably they'd offer more now. (~5x)
> Two months ago, an early Uber employee thought that he had found a buyer for his vested stock, at $200 per share.
Sorry I wasn't clear by what I meant by "market rates".
IPOs are layers upon layers of scams and shady dealings.
It's perfectly reasonable that the price would be lower on a buyback program. On the other hand controlling the equity is pretty important and it's not surprising they won't let it go to open market.
Welcome to the wonderful world of being a minority shareholder.
> The employee also learned that Uber had amended its bylaws more than a year earlier, in order to restrict unapproved secondary sales. It was unclear if the bylaw change actually applied to shareholders who had not been party to the vote — lawyers seem to disagree on this point of Delaware law — but Uber threatened litigation if he tried to proceed. So he held. The financial and reputational hassles of a lawsuit would have just been too much, even if he had won.
One of the main reasons to incorporate in Delaware is that they have an extensive body of settled law on complex corporate issues. That Uber has managed to handle what should have been a pretty common and routine thing in a way that apparently is unclear under Delaware law is worthy of a story.
> Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports.
http://www.sec.gov/about/laws.shtml
The reason people believe that it forces companies to go public is because, in many cases, the incremental cost to going public (above and beyond the filing) is insignificant compared to the advantages.
This is a typical way for a private company to manage who owns its stock -- namely investors, employees, and former employees. It's basically a right of first refusal.
You sell your options back to the company at the current market rate -- the rate at which that most recent investors purchased equity. That's your liquidity. The company will do this because it believes the options are undervalued compared to what they'll be worth in the future. If you don't want to do that, you hold and wait for the options to go up (or unfortunately down) in value.
If the company doesn't want to buy them, you _should_ be free to sell to others. Restrictions in _those_ cases would be worth writing about.
Why should the "market rate" determined by the most recent round of investments? A lot could have changed since then.
> If the company doesn't want to buy them, you _should_ be free to sell to others. Restrictions in _those_ cases would be worth writing about.
The issue isn't having to sell back to Uber but having to sell it at Uber's price.
Paying a different price for one person's equity changes the valuation for everyone as the new market rate. This can be bad for an individual (could be sold for higher on private market) but also good (prevents someone else from selling at a major discount). Companies want to control valuation much more closely than that, so valuation is pegged to investment or some other major event.
Whether that's a good way to do things would be a nice discussion topic, but that's not the same as saying uber in particular is playing hardball. A little bit of research would reveal that it's standard practice.