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Loans Could Burn Start-Up Workers in Downturn

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San Francisco — Last year, payments startup Bolt Financial launched a new program for its employees. They owned stock options in the company and the paper was worth millions of dollars, but they couldn’t touch the money until Bolt was sold or published. So Bolt began offering them loans for the value of their stock — some reaching hundreds of thousands of dollars.

In May, Bolt fired 200 workers. It started a 90-day period for loaners to repay their money. Those who knew the situation where they spoke anonymously because they were not allowed to speak publicly said the company tried to help them find repayment options.

Bolt’s program was the most extreme example of a fast-growing ecosystem of loans for workers in private tech start-ups. In recent years, companies such as Quid and Secfi have begun to provide loans and other forms of financing to start-up employees, using the value of private company stock as a form of collateral. These providers estimate that start-ups around the world hold at least $ 1 trillion in stake for lending.

But as emerging economies decline, plagued by economic uncertainty, rising inflation, and rising interest rates, Bolt’s situation serves as a warning about the instability of these loans. Most of them are configured to be exempt if the startup fails, but the loan exemption is treated as taxable income, so employees may still face tax bills. And in situations like Bolt, loans can be difficult to repay with a sudden notice.

Rick Heightsman, an investor at FirstMark Capital, said: “Everyone is just thinking about the good side.”

The surge in these loans has ignited debate in Silicon Valley. The proponent said the loan is needed for employees to participate in the engine that creates wealth in technology. But critics say loans already create unnecessary risk in dangerous industries, reminiscent of the dot-com era in the early 2000s, when many tech workers were severely burned by stock option-related loans. Stated.

Former startup lawyer and Cowboy Ventures investor Ted Wang was so wary of loans that he published a blog post in 2014.Playing with fire, ”Advice to them for most people. Mr Wang said he received a new call about the loan whenever he felt the market was overheated and he was always obliged to explain the risks.

“I’ve seen this go wrong,” he wrote in a blog post.

Startup loans come from the way workers are usually paid. As part of the compensation, most employees of private tech companies receive stock options. To own a stake, you must finally exercise the option or buy it at a set price. When someone owns shares, they usually cannot monetize them until the startup is published or sold.

That’s where loans and other financing options come in. Startup stocks are used as collateral for these cashing. Loans have different structures, but most providers charge interest and acquire a portion of a worker’s stake when the company sells or goes public. Some consist of contracts or investments. Unlike the loans offered by Bolt, most are known as “non-recourse” loans. That is, employees cannot repay if the value of the stock is lost.

The lending industry has been booming in recent years. Many of the providers were founded in the mid-2010s as start-ups like Uber and Airbnb postponed initial public offerings as much as possible, damaging the valuation of the tens of billions of dollars in the private market.

This means that many workers are tied to “golden handcuffs” and can’t quit their jobs because stock options have become so valuable that they can’t afford to pay taxes when exercising based on their current market value. was. Others were tired of sitting on the options while waiting for the company to go public.

The loan provided startup employees with cash to spend in the meantime, including money to cover the cost of purchasing stock options. Still, many technicians do not always understand the complexity of stock-based compensation.

“We work with super-smart Stanford Computer Science AI graduates, but no one explains it,” said Oren Barzilai, CEO of. Equitybee is a site that helps start-up workers find investors in their stocks.

Financing and other services provider Secfi has issued $ 700 million in cash loans to startup workers since its opening in 2017. Quid has issued hundreds of millions of dollars worth of loans and other loans to hundreds of millions since 2016.latest $ 320 million in funding It is backed by institutions, including Oaktree Capital Management, which charges the person taking the loan an origination fee and interest.

So far, less than 2% of Quid’s loans are underwater, which means that the market value of stocks is below the market value of loans, according to the company’s founder, Josh Berman. Secfi said 35% of its loans and financing have been fully repaid and the loss rate is 2-3%.

However, Secfi CEO Frederik Mijnhardt predicted that tech workers could find it difficult for the next 6-12 months if stock options decline in value due to slumping stock prices. , They were taking out a loan at a higher value.

“Employees may be facing calculations,” he said.

Such loans have become more popular in recent years, said JT Forbus, an accountant at Bogdan & Frasco, who works with start-up employees. The main reason is that traditional banks do not lend to startup equity. “There is too much risk,” he said.

Equitybee estimates that start-up employees pay $ 60 billion annually to exercise stock options. More than half of the options issued are never exercised for a variety of reasons, including not being able to afford them. That is, workers give up some of their rewards.

Mr. Forbus said he had to carefully explain the terms of such transactions to his clients. “Contracts are very difficult to understand and don’t really do math,” he said.

Some start-ups regret having taken out a loan. Grant Lee, 39, has worked for software startup Optimizely for five years, accumulating millions of stock options. When he left the company in 2018, he had the option of buying options or confiscating them. He decided to exercise them and took out a $ 400,000 loan to support costs and taxes.

In 2020, Optimizely was acquired by Swedish software company Episerver at a price lower than its previous personal rating of $ 1.1 billion. In other words, the value of stock options held by employees at a higher rating has decreased. For Lee, the value of Optimizely’s stock was less than the value of the loan he made. His loan was granted, but he still bears a tax of about $ 15,000 because the loan forgiveness counts as taxable income.

“I didn’t get anything, and in addition I had to pay taxes to get nothing,” he said.

Other companies use loans to give their workers more flexibility. In May, San Francisco startup Envoy created workplace software and used Quid to provide dozens of employees with non-recourse loans and earn cash. The recently valued $ 1.4 billion envoy did not encourage or discourage people from getting loans, said CEO Larry Gadea.

“If people believe in a company and want to double it and see how good they can be, this is a great option,” he said.

Loan terms can be more annoying in a recession. The IPO market has been frozen, further boosting potential rewards for the future. The stock market downturn probably means that private start-ups are probably less valuable than during the boom of the last two years.

Quid is adding underwriters to find the right value for the startup stock it rents. “We are more conservative than before,” Berman said.

Bolt seems unusual in that it offers high-risk personal recourse loans to all employees. Bolt founder Ryan Breslow Congratulations on Twitter In February, he wrote that he showed that “we just care about our employees more than others.”

He said the company’s program was aimed at helping employees afford to exercise their shares and cut taxes.

Bolt refused to comment on how many of the dismissed employees were affected by the repayment of the loan. It offered employees the option to return their startup stock to the company to repay their loan.Business insider Previously reported To offer.

Breslow, who resigned as Bolt’s CEO in February, did not respond to requests for comment on layoffs and loans.

For the past few months, he has helped establish Prysm, a non-recourse loan provider for startup equity. In a pitch document sent to investors viewed by the New York Times, Prysm, who did not respond to a request for comment, advertised Breslow as his first customer. According to the presentation, Mr. Breslow received a $ 100 million loan, borrowing against the value of Bolt’s stock.

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