Loans can make it difficult for startup workers

SAN FRANCISCO – Last year, Bolt Financial, a payments startup, started a new program for its employees. They own stock options in the company, some worth millions of dollars on paper, but can’t touch that money until Bolt sells or lists on the stock exchange. So Bolt started offering them loans – some up to hundreds of thousands of dollars – against the value of their stock.

In May, Bolt laid off 200 workers. That sets a 90-day deadline for those who borrowed to pay back. The company has been trying to help them find repayment options, with one person with knowledge of the situation speaking anonymously because the person is not authorized to speak publicly.

Bolt’s program is the best example of a burgeoning lending ecosystem for employees at privately held tech startups. In recent years, companies like Quid and Secfi have sprung up to offer loans or other forms of funding to new employees, using the value of their private company stock as a type of collateral. These vendors estimate that startup employees around the world hold at least $1 trillion in equity to lend.

But as startup economy is now deflation, given the uncertain economy, soaring inflation and rising interest rates, Bolt’s situation serves as a warning of the precariousness of these loans. While most of them are structured to be forgiven if a startup fails, employees can still face tax bills because the loan being forgiven is considered taxable income. And in situations like Bolt’s, loans can be difficult to repay in the short term.

“Nobody thinks about what happens when things go down,” said Rick Heitzmann, an investor at FirstMark Capital. “Everybody just thinks about the opposite.”

The rise of these loans has sparked a debate in Silicon Valley. Advocates say the loans are necessary for employees to participate in the tech wealth creation engine. But critics say the loans create unnecessary risk in an already risky industry and are reminiscent of the dot-com era of the early 2000s, when many tech workers badly burned by their stock option-related loans.

Ted Wang, a former startup lawyer and an investor at Cowboy Ventures, was so nervous about loans that he published a blog post in 2014,”Play with fire, “Advice against them for most people. Mr. Wang said he received a new call about loans any time the market got too hot and always felt obliged to explain the risks.

“I found this to be so wrong, so terrible,” he wrote in his blog post.

Start-up loans stem from the way workers are paid. As part of their compensation, most employees at private tech companies receive stock options. The options must ultimately be exercised or purchased at a set price in order to own the stock. Once someone owns the stock, they usually cannot cash it out until the startup is listed or sold.

That’s where loans and other funding options come in. The startup’s stock is used as collateral for these cash advances. Loans vary in structure, but most providers charge interest and take a percentage of employees’ shares when the company sells or lists shares. Some are structured as contracts or investments. Unlike the loans offered by Bolt, most are known as “asset-free” loans, meaning employees aren’t willing to repay the loan if their stock depreciates.

The lending industry has exploded in recent years. Many vendors were founded in the mid 2010s as hot startups like Uber and Airbnb have stopped going public for as long as possible, reaching private market valuations in the tens of billions of dollars.

That means many of their workers are tied up by the “golden cuffs,” unable to leave their jobs because their stock options have become so valuable that they cannot pay taxes on the basis of their stock options. current market value at the time of their exercise. Others become tired of sitting on options while they wait for their company to be listed.

The loans gave the startups cash to use in the meantime, including money to cover the cost of buying their stock options. Even so, many tech workers don’t always understand the intricacies of equity compensation.

Oren Barzilai, CEO of Equitybee, a website that helps startups find investors for their stocks.

Secfi, a provider of finance and other services, has now issued $700 million in cash funding for startups since opening in 2017. Quid has issued loans worth cost hundreds of millions of dong and other grants for hundreds of people since 2016. It’s the latest Fund 320 million dollars backed by institutions, including Oaktree Capital Management, and it charges principal and interest to borrowers.

To date, less than 2% of Quid’s loans have been underwater, meaning the stock’s market value has fallen below the lending rate, said Josh Berman, the company’s founder. Secfi says that 35% of its loans and grants have been repaid in full, and its loss rate is 2 to 3%.

However, Frederik Mijnhardt, chief executive officer of Secfi, predicts that the next 6 to 12 months could be difficult for tech workers if their stock options decline in value during a recession, but they gave loan with a higher value.

“Employees may face a reckoning,” he said.

JT Forbus, an accountant at Bogdan & Frasco who works with start-ups, said such loans have become more common in recent years. One big reason is that traditional banks won’t lend to startups based on equity. “There is too much risk,” he said.

According to Equitybee estimates, startups pay $60 billion a year to exercise their stock options. For various reasons, including inability to pay, more than half of the options issued were never exercised, meaning workers forego part of their compensation.

Mr Forbus said he had to carefully explain the terms of such transactions to his customers. “Contracts are confusing and they’re not really mathematical,” he said.

Some start-up workers regret taking out a loan. Grant Lee, 39, spent five years at Optimizely, a software startup, amassing millions of dollars worth of stock options. When he left the company in 2018, he had the choice to buy or abandon them. He decided to implement them, borrowing $400,000 to help with expenses and taxes.

In 2020, Optimizely was acquired by Episerver, a Swedish software company, for less than its most recent private valuation of $1.1 billion. That means stock options held by employees at a higher valuation have a lower value. For Mr. Lee, the value of his Optimizely stock has fallen below the value of the loan he borrowed. While his loan has been written off, he still owes about $15,000 in taxes because the write-off counts as taxable income.

“I got nothing, and on top of that, I had to pay taxes for getting nothing,” he said.

Other companies use loans to give their workers more flexibility. In May, Envoy, a San Francisco startup that makes software for the workplace, used Quid to provide demand loans to dozens of its employees so they could get paid. face afterwards. According to Larry Gadea, chief executive officer, Envoy, which is valued at $1.4 billion, has discouraged or discouraged people from taking out loans.

“If people believe in the company and want to double down and see how much better they can do it, this is a great option,” he said.

During a recession, loan terms can become tougher. The IPO market is freezing, pushing potential returns further into the future, and a stock market downturn means that shares of privately held startups may be worth less than they used to. boom, especially in the past two years.

Quid is adding more underwriters to help find the right value for the startup shares it lends. “We are more conservative than we used to be,” Mr. Berman said.

Bolt seems to rarely offer high-risk personal recourse loans to all of its employees. Ryan Breslow, the founder of Bolt, announced the show with a Happy blooming on Twitter in February, writing that it showed “we simply CARE our employees more than most.”

The company’s program is intended to help employees afford their shares and cut taxes, he said.

Bolt declined to comment on how many furloughed employees have been affected by loan repayments. It gives employees the option of giving back their startup shares to the company to pay off their loans. Business Insider previous report on proposal.

Mr. Breslow, who stepped down as Bolt’s chief executive in February, did not respond to a request for comment on layoffs and loans.

In recent months, he’s helped found Prysm, a provider of non-financial loans for startup equity. In pitch documents sent to investors seen by The New York Times, Prysm, who did not respond to a request for comment, advertised Mr. Breslow as his first client. Breslow borrowed $100 million to borrow against the value of his stock in Bolt, the presentation said.

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