[upupandup]

> There IS risk to the employee; they now have a real loan outstanding and 100% personal recourse, so if the common stock becomes less than exercise price, their personal assets are on the hook

https://twitter.com/theryanking/status/1493390184897032201

HOLY CRAP. How is this even legal???

[nemothekid]

I can't see why it should be illegal. People take on debt to buy assets all the time. But this is just so irresponsible and immoral; I really doubt the leadership is actually running a sustainable business; and I'm also starting to seriously doubt there was any credibility to the whole YC/Stripe boys club thing.

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.

[JumpCrisscross]

> can't see why it should be illegal

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.)

[berberous]

The strike prices of options are set based on a 409A valuation.

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.

[synu]

If you can’t afford to buy your options, but take out a personal loan to buy them, that must have been a riskier approach than just buying them if you had the cash, no? The leverage increases the personal risk at least as I understand how that works.

Unless there was an agreement to forgive the loans if the options go underwater, which I haven’t seen reported here.

[SamReidHughes]

It depends on what your future income stream looks like. If you're a 22-24 year old software developer, getting to take on low-interest debt in an inflationary environment is a great deal. It's losing money on the stock that is the problem here.

[synu]

If it requires predicting the future isn’t that by definition riskier?

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.

[nemothekid]

>Companies lining up recourse financing for their employees should.

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.

[berberous]

It's a cashless loan. If you have options that cost $10,000 to exercise, the company lets you pay with a promissory note (promising to pay the $10,000, plus minimal interest set at the IRS's AFR). This is effectively the same as the company loaning you $10k, and then you hand it back over to exercise, but the cash does not change hands.

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.

[IG_Semmelweiss]

Re: last paragraph

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?

[TimJRobinson]

In that Twitter thread where the CEO originally announced the idea many people reported this happened in the dot-com bust. Private equity firms would buy the company and go after past employees for the loaned money.

[datavirtue]

"If leadership plays so fast and loose with other people's money, you have to question how well they are doing their job."

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?

[TimJRobinson]

He leveraged his own personal stock, not the company.

[tekknik]

Why would he buy Ford when his goal is to free up Twitter more, which he has stated a few times?

[pfarrell]

"Don't spend real money on fake money."

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.

[dominotw]

This is me currently. Bought my options before IPO markets went bust. Gives me anxiety when i think about it. Just reading this comment made my heart rate go up :(.

[pfarrell]

I am not a finance person, but maybe you should talk to a tax attorney or tax planner. That kind of person may be able to offer some guidance on what you can do. Good luck and remember at the end of the day, it's just money and you can recover no matter what.

[dominotw]

Thank you. Will do!!

[bogomipz]

Why would they have taken out a loan to buy their options? If the options are vested you can just sell them and pocket the difference between your strike price and the buy offer. If the options weren't vested you can't buy them anyway and you would still have the same strike price when they did vest.

[adrr]

Sell them to who? Are there any secondary market sites still running. Otherwise, you're cold calling investors. I tried to sell my shares in a startup to cover my six figure tax bill and couldn't find a buyer even with the company's CFO helping me.

[bogomipz]

The OP I was responding to was clearly talking about a publicly traded company - "the stock was at $50/share" and "Took years for the stock to recover." They could sell them to anyone who wanted to buy them and clearly people did if it was going up.

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.

[dominotw]

All those markets are currently dead. Been searching high and low on all those sites for my options but all the sites went completely quite last 3 months.

[pfarrell]

In this case, the company had gone public, so they could have sold. Bolt is a wholly different story. I think the employees back in 2000 had one window where they could sell where the stock was at a high value. Many of them passed it up, expecting it to go to 70.

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.

[adrr]

It's all luck and timing. The company I couldn't sell the shares to cover my tax bill was acquired for nine figures a year later and I had all my stock because I couldn't sell it.

[pfarrell]

Short answer: greed. They didn’t want to give up any shares. To pay for the tax they owed between strike price and current market value, they should done a cashless transfer and sold off a portion to cover the taxes and then held the remaining for a year to get capital gains tax treatment. I think ultimately they didn’t think the party would end. I had some coworkers there who had sold stock when they could and were thought of as leaving money on the table because the stock can only go up. Those ended up being the smart ones. But hindsight is 20/20

[yardstick]

> Short answer: greed. They didn’t want to give up any shares. To pay for the tax they owed between strike price and current market value

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.

[zszugyi]

I'd guess they wanted to hold the stock for 1 year after exercise to qualify for long term capital gains, but this would likely trigger AMT. Not sure if this has been the case back in the day though.

[maxerickson]

They wanted to keep the rocket ship stock...

[scarface74]

More like Monopoly money.

[gruez]

>HOLY CRAP. How is this even legal???

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.

[nrmitchi]

It’s kind of different when that decision is saying to your boss “Naww, I don’t think I’m going to take the offer that the CEO was bragging about on Twitter. I guess I just don’t believe in the company enough.”

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.

[hamburglar]

That’s quite a stretch. They set up a plan you’d have to opt into. They don’t stand around waiting for a rationale from everyone who didn’t take them up on it. You still have your options so you’re not telegraphing a lack of faith in the company. It’s absurd to think management is going, “gee, Joe didn’t take this potentially risky option after the consultation. He’s not a team player.”

[tekknik]

That is not at all a stretch and is slightly offensive that you used the word “stretch” here given what that word is supposed to mean. This is a perfectly valid concern where many people will be pressured into complying.

[hamburglar]

Except if you don’t take the loan, you are still betting big on the company by staying around for stock options. There is zero reason to think this shows lack of faith in the company. This is on the level of thinking you’re going to get fired if you don’t buy a red BMW because all the execs have red BMWs and got a local dealer to offer a good deal to all the employees.

[cbm-vic-20]

Hopefully their $300 financial advisor said "this is a bad idea".

[snotrockets]

$300 won't cover the cost for a qualified advisor. Even if you'd get a tax professional to make the math for you for that money (the one I use charges $350 for a phone call, ymmv), getting a lawyer to go over the terms of the loan would be $1000 at minimum.

[ta988]

That's when you start an informal union with your colleagues, pool the $300 and get a real advice.

[snotrockets]

Better yet, start a formal union, and hold managment accountable for such sh*t.

[rrix2]

i guess they probably doled it out as "file an expense report" stipend rather than cash or some voucher, that could lead to some awkward conversations w/ management...

[nr2x]

Hey now, you can get somebody to do anything for $300 on Craigslist. You just need a fairly flexible definition of “qualified”.

[berberous]

It was an option, not a requirement. There are pros/cons to doing it, but it was ultimately the employee’s decision. I’m sure the risks were well disclosed. The issue is >50% of employees don’t understand any of it, no matter how well explained and disclosed.

[wly_cdgr]

It is not enough to disclose the risks. You can not allow your employees to do this unless at the minimum you can demonstrate that they actually and fully understand those risks and you give them access to ALL the numbers you have

[berberous]

I would bet money Bolt disclosed financial statements and all material information as part of this offer.

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.

[nilsbunger]

With the preference stack it could take much more than a $20 price to break even.

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.

[rlt]

Honestly the dude seems a little unstable to me.

[rconti]

I did the same thing once; early exercising my options in a couple batches as I had the money to do so, and filing an 89b election. Ultimately I had to borrow some money on a personal loan in order to exercise the last of my options as the value was starting to ramp fast leading up to the IPO.

[hackernewds]

legal? yes. ethical? no

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