There is another less discussed downside to Vision Fund’s reckless spending and overvaluation of startups.
While Travis & Adam make their billions, the employees at Uber and WeWork are granted overvalued options and stock that subsequently crashes.
The Uber stock is still below where it was 5 years ago and may never recover. The WeWork stock will likely never recover.
As an employee, I would avoid working for a company that is taking funny money from VF. Its a big warning sign to see a company raise from VF given what has come to light.
Every time I see these shenanigans it validates my position of turning options into cash if I’m above water ASAP, and getting as much of my raises into base salary as possible.
I completely agree. I recommend selling along the way. You may lose some upside, but you definitely lose some downside.
Unfortunately, WeWork employees aren’t given that choice. They are getting fired with underwater options while Adam makes billions. I wonder how he can rationalize this to himself.
I can think of many counter examples too. Say, Netflix, Arista Networks, Google, Facebooks, and etc. I guess the key is to pick a good company instead of avoiding options. And of course, leave a company immediately if it shows fundamentally bad signs.
The key at this point is to pick a good public company (except Beyond Meat that is highly overvalued compared to half year ago). In that case it doesn't matter that much if you're getting options or cash.
I don't see any reason for working for overvalued options at a not-early-stage private company. Also I view being an early stage employee too risky to worth it.
It wasn't necessarily the right move. He/she likely had asymmetric information about where Google was going and how likely it was to continue succeeding.
If they couldn't sufficiently exploit that, then that's on them (assuming they had access to all the relevant metrics).
It's great to diversify, but blindly selling isn't some sort of virtue to optimize for...
If you can't leverage the asymmetric information about your company to make a competent buy/hold/sell decision then yes by all means diversify it all.
I just want to make sure the point about asymmetric information is clear though. And it's more relevant in private companies than public ones.
If you're not willing to buy and hold private company equity even after having access to asymmetric information about the firm, then you should consider leaving the company entirely. If you don't then that defeats the entire purpose of taking a chance on a private company and being compensated in equity which can't be acquired through traditional means. You're accepting the equity presumably because you think it's worth a lot more based on the asymmetric information and market opportunity.
You shouldn’t. You need to sell some of the options of the company you work for to diversify. If you think you are smart enough to know the future of stock prices than you should trade stock for a living.
I remember at the start of my career selling portions of my GOOG grants like all the personal finance guides told me to do, and how shocked I was that when my coworkers would tell me they held onto all of theirs...
OTOH, it just as easily could've gone the other way, I suppose? Google truly is sui generis, and it's hard to fault me for not knowing that at 21
having $300K in GOOG and not selling it, is no different than having $300K in cash and using it all to buy GOOG.
If you wouldn't do the latter, you shouldn't do the former (but yes, if you would have invested all your cash into google, more power to you to keep all your google stock as google stock)
I have asked this here before, but did not get a good answer.
When a startup takes money from an investor with significant preferences and ratchets, why is the 409a valuation for common stock the same as those the investors got? At the startup I worked, during the initial rounds the common and investor class were priced significantly differently. But in later rounds they converged almost to the same price. What is the rationale for doing this?
By the price of common and investor class of shares converging, the implication is that the economic value of the preferences and other arrangements investors get is $0. That does not sound right to me.
Given that softbank is a public company, surprised there is not more shareholder outcry over the strategy of visionfund. In a way it is public money which is bailing out WeWork. Not to mention some of the questionable investments in Indian market (OYO, PayTM, Snapdeal) that seems to follow hyper valuation growth without seeing hyper value of growth of any of these companies.
This is from Great Gatsby and not meant to be literal. It is how Jordan tells Nick that he is also to blame for their sad break up, as I recall. Typical HN to vote it down-- what a bunch of nerds! Just kidding.
This is a problem with the modern age. If someone is too clueless, arrogant, or deluded for us to prove they had criminal intent, is it really a crime?
In my ideal world, yes. But under the US justice system, perhaps not. Both political and business leaders have gotten away with amazing amounts of what I'd say is at best criminal negligence because they say, "I didn't know" or "I thought it was fine" or "I believe in my vision".
Yet any early employees who signed on with compensation in the form of stock grants/options/RSUs have lost out on years of compensation.
Claiming that it's a risk/reward tradeoff is nonsense, as ICs don't have any meaningful say on the path to exercising their "income", and there are huge incentives for founders and VCs to arrange deals like this.
I really hope that people start realizing that this is a core behavior in business and stop letting themselves be screwed by people who aren't actually taking on meaningful risk.
I've been saying for years that stock grants/options/RSUs are like playing the lotto, and salary/benefits are more important. They're also a tool to keep people in roles they no longer want, because of a promise of a great payoff someday.
How are RSUs like playing the lotto if you work for one of the big 5 (GAFAM)? I work for one and my RSUs vest monthly and they are autosold so i get a USD based direct deposit each month. While it does very slightly, I wouldn't consider it the lotto.
You were awarded them 1-4 years ago though. That's when the value mattered.
To add to that, it's not like when you join a low-performing company you can just leave because you think you can get better value somewhere else. The cost of switching as an employee is very high.
Obviously it's a bit less of a gamble than the lotto, but it's not like decisions that were made 30 days ago are being played now, it's much longer term than that.
Especially for companies that aren’t public yet so there’s no guarantee that you’ll be able to exercise ever, even if it does become profitable and worth real money.
What prevents you from exercising options in the success case?
You might not be able to sell the shares you receive, but you should be able to exercise and hold them.
You might do this to manage tax exposure (to get the clock started on long term capital gains treatment and to make further gains capital rather than earned income).
It's certainly possible. It's a complicated topic. There's a lot to consider and much of it relates to your personal risk appetite and financial position.
There can be very serious tax consequences if the spread between your strike price and the FMV is large enough. The IRS doesn't care that you can't sell shares to pay the taxes. They're still due that year.
That said, you can probably do the math to stay outside AMT by limiting the number of shares you exercise. It's so hard to know whether or not to do that. I imagine a lot of employees felt pretty good about their WeWork options at the beginning of this year. I imagine. I don't know anyone there.
Nothing prevents you, but keep in mind options are an option to buy at a strike price that is generally non-trivial. By exercising early you're basically doubling down.
Grants and RSUs are just income. Especially at the big players where they vest predictably and you can immediately sell them. And, sure, I walked away from half a million in Amazon shares when I left, but it's not like any role I took wouldn't immediately set me up with the same or better pay scale.
there are also a lot of stories of early wework employees who were essentially told "we will give you options soon in the future, but sign your employment contracts now and trust that we'll get it done" and then didn't get it done. Really shady all around.
I've always seen it worded as "The Company will grant you X shares subject to approval by the Board." I've never had the board not approve what was promised in the employment letter, but that wording sure makes it seem like it could happen.
The problem is when each funding round devalues and dilutes individual shares but delays actually granting you stock, so you get the same X shares your contract stipulates but after they’ve all been devalued.
Softbank is trying, rather clumsily, to avoid "losing face". Looks like they came to the conclusion that should they let wework follow the natural course of things, it would taint the image of all their other investments.
The thing is, this is not going to work. Public market investors are wary and are not ready to buy over-valued assets without some really good reason. The party is over, and it doesn't mean we are entering into the apocalypse, but rather that the time of irrational dreams is over, and that we need to think things based not on irrational ideas, but by paying more attention to the fundamentals.
Money can still be made, but the whole VC world needs to stop thinking that every business is going to generate the absurd returns facebook and google gave. Those are black-swan events. Not every startup will give 6000% returns. Those were anomalies, it is not going to happen every day.
But, the thing is, even a 200% return over 5 years is a great investment. Most of time it would beat DOW or NASDAQ indexes even reinvesting dividends.
So, maybe excessive greed is breeding irrealistic expectations, which in turn is feeding terribly bad decisions.
'Too Big to Fail' means that the government steps in to bail out a company because its failure would be a threat to the economy. Private companies have been saving each-other from liquidity crises for centuries, because bankruptcy destroys a lot of value.
That's really the goal of modern business, isn't it? Pump a business full of cash and grow at massively unsustainable rates. If your company collapses then you take down a bunch of other businesses and industries which relies on the investor-subsidized stuff you bring to the market, making your company too big to fail.
With the sheer amount of venture capital at your beck and call, you can also force out challengers trying to enter the market easily by dropping prices even further (and who cares, you're already non-profitable!) or just straight up buying them out.
Profitability doesn't even matter as long as your business is considered valuable! Even better if you can get tax payers on the hook for saving your asses.
I don't think they have many assets on their books, relatively speaking. They lease most, if not all, their property. Neumann took personal loans to buy properties, keep them off balance sheet, and leased it back to wework.
This news came out well before the s1. It's a miracle it took the s1 to get investors to give a damn when there were so many governance issues and conflicts of interest out in the open well before.
they're one of (if not the) largest lessees in NYC (and other cities around the world), with long-term leases. A lot of landlords would have a conniption if these guys went out of business. Would rock the commercial RE market.
I find it hard to believe they are the largest lesee in NYC. They aren't even the largest co-working space rental company (it's Regus, by a landslide).
Not really. WeWork had $12.8B in funding. Now they're valued at $8B. They'll be valued at a lot less if they go bankrupt, so if Softbank can stabilize the company, they can cap their losses. Risk is also baked into that valuation, so if Softbank fixes things, they'll come out ahead.
Another perspective would be he got probably one of the 10 or 20 biggest pay days in history for giving We an 80% haircut. And that was directly on him. All he had to do was stop being a jerk and they probably would have slid through.
So how do we help people like me (independent, small shops) monetize their work effectively to try to inject a smidgen of sanity into the world to counterbalance such lunacy?
Honest answer: a beautiful thing about capital markets is that if you understand some piece of info which isn't being priced you have the ability to make lots of money.
And being rich is a pretty good starting place for large scale change. You essentially get to take money from something you disagree with and reallocate it whatever way you see just.
So basically go beat them at their own game. It seems like there are chances to do that.
I have to ask when are the investors in softbank or the vision fund going to question this bail out? I’d be furious if it were my money being flushed down the toilet this way.
I read somewhere that softbank is a huge benefactor in japan central bank QE. So basically vision fund is for people with more money then they know what to do with and didn’t really earn it the hard way.
There is a hell of a lot of money that doesn’t have a safe home. If you’re wealthy in 2019, it may cost you money just to stash it somewhere low risk. Now extend that to sovereign funds, etc., and you can start to see why these obvious shenanigans are tolerated. A zero percent “return” is a net gain over holding in savings or bonds in a lot of places.
Granted, if you're a Russian Oligarch or similar, this might not meet your definition of "a safe home". Otherwise, they're about as low risk as possible.
I agree with your take on sovereign funds etc. The whole world can't just park its excess cash in T-bills.
But unless you're talking about the dumbest of this money, it should be very broadly diversified: worldwide stock markets, bonds, real estate, natural resources, and smaller amounts to things like venture capital.
Maybe? I mean, for the baristas and whatnot, sure, I feel bad for them. But for educated professionals? Especially the kinds of people who can extract significant compensation in equity? I struggle to feel particularly bad.
Everybody involved knew (or should have known) that the recent round of money-losing IPOs were high-risk ventures. And I would hope anybody thinking about taking options instead of cash would learn enough about pricing options to be pretty clear on the risks involved.
Also, if the con had gone on long enough for the "rank and file" to cash out after the lockup expired, how many of them would be giving money back to investors after WeWork's problems were revealed? I'm guessing zero. Let alone the salary they got for building what turned out to be worth way less than what was invested.
Without getting into that, on the bright side of this We does seem to have facilitated a fairly large-scale transfer of wealth from investors and landlords to contractors and people renting short-term office space.
I wonder how capitalism could compare with something like market socialism in cases like this. It seems like it would be easier for employees of companies (and stakeholders outside the company) to have more control over the direction of a business since they would also be shareholders. Adam Neumann types probably wouldn't be able to exist since they are so destructive to corporation and the people depending on the corporation.
Would market socialism have the possibility for massive financial gain by making the company IPO with as high a valuation as possible? In the end, it's that goal which caused all this. Employees had stock options probably and bought into that goal as much as anyone else. Remove the massive potential payout and everything calms down irrespective of economic system.
This isn't a failure of capitalism, its just due to blind optimism and lack of governance with people falling under the spell of a charismatic CEO imho. If it had worked, everyone would be saying this guys a genius.
I looked at WeWork at one stage for an office, the prices seemed crazy, I didn't understand how any one was using it, you've been able to get serviced offices for years for way cheaper. He did OK though, he gets out with a bag of cash and leaves someone else carrying the debt.
You aren't asking "why" enough. It's not just a bad actor... Why was it possible for him to do what he did? Why was he allowed to personally succeed and leave others the debt?
greed, and a lack of oversight? I'm no fan of capitalism, it has many flaws. I'm not upset at VC's losing money though, thats the risk they take, it's a high stakes game, thats why the IPO failed, there are more rules for a listed company. The only alternative I can see is to regulate who can invest their money in what, I can't see that working, unless I'm missing something.
There is a failure for the employees, but everyone knows, or should know they're rolling the dice working for a startup, as others have said shares are lottery tickets, and the system is stacked against you as an employee ever making money.
While Travis & Adam make their billions, the employees at Uber and WeWork are granted overvalued options and stock that subsequently crashes.
The Uber stock is still below where it was 5 years ago and may never recover. The WeWork stock will likely never recover.
As an employee, I would avoid working for a company that is taking funny money from VF. Its a big warning sign to see a company raise from VF given what has come to light.