Why the "Silicon Valley mob" is right on startup stock loans
What's old is new again. Even if it shouldn't be.
Driving the news: Bolt Financial, led by "Silicon Valley mob" foe Ryan Breslow, has begun offering loans to employees who want to buy their vested stock options.
- The laudable goal is to start the capital gains tax clock, so that employees can keep more cash after a liquidity event.
- The problem is that it could end up financially maiming the same people that Bolt is seeking to help.
Key is the price at which employees can ultimately sell their shares.
- Bolt was most recently valued by venture capitalists at $14 billion, but employee stock options are priced lower.
- If the company gets acquired at a higher per-share price than what employees paid, then they're in the clear and everyone smiles. Same if Bolt goes public and the share price is higher once lockups expire.
- But if the per share price is lower, then employees owe the company money. Possibly a lot of money. And, in a worst case scenario, they owe that money to unsympathetic creditors instead of to Bolt.
- It's the sort of thing that could get worked out when it only applies to a handful of C-suiters, but becomes extraordinarily troublesome at scale.
It's been tried before, most notably during the dotcom boom. Several VCs who were around during that era, including as operators, have tweeted at Breslow, asking him to reconsider.
- Some have linked to this 2014 Medium post by Ted Wang, a onetime startup lawyer who's now a partner with Cowboy Ventures.
- One VC tells me: "It comes up one or two times per year and is usually quickly killed by experienced board members, investors, CFOs and legal counsel who understand the consequences."
- Also worth noting that Sarbanes-Oxley banned such loans by publicly-traded companies.
There are other ways for startups to help employees keep more of what they've earned. Offer the option of cash bonuses, RSUs or straight stock grants. And extend the option exercise window out 10 years (seriously, do this right now... no excuses). Or launch a non-recourse loan option.
- Those don't resolve the capital gains issue — presuming there's still a capital gains differential in the future — but they also don't make employees literally indebted to their employer.
Breslow tweets that Bolt provided a financial advice stipend for employees considering this option, and that over half of employees still took the loans.
- I don't usually root for or against startups, but I'm rooting for Bolt; because failure could crush these folks.
The bottom line: Sometimes the mob is right.