These loans were made cashlessly as part of an early option exercise. That is steeped deeply in the internal revenue code. The forgiven principal would be at the very least income. Then the tax benefits from the early exercise would retroactively apply with penalties and interest. All of this assuming the IRS doesn't view the move as a heads I win (if the company does well, a cashless loan produces early exercise tax benefits) tails you lose (if the company does badly, the loan is forgiven and there is no downside to the dodge).
I'm somewhat blown away by this whole thing. Leverage to finance an already-leveraged derivatives position on illiquid stock. From the issuer of said stock. Who is also the borrower's employee. That's both risky and dodgy! Bolt positions the "below $200,000" sum as a win. I don't see it that way. That's below the lower bound of the accredited investor income test. The people taking out these loans by legal definition couldn't afford the risk. Yet Bolt doubled down and gave them leverage?
IIUC, Evergrande strongly "encouraged" execs to take loans (secured against their income - which was considerable) to buy Evergrande "investment products".
Obviously, this was just a way to pay employees with their loan. If things blew up - the employee is completely screwed. If things don't blow up (which seems unlikely when an employer has reached this level of desperation) - then it's still not clear it was worth the risk premium to the employee.
This literally feels like something from a dystopian novel - where you take out loans to get your salary - and you only actually make money if your company grows 10x in one year - and even in that case your benefit is slim - while the VCs and founders walk off with 85% of the gains.
Hardly anyone understands finance - and most people underestimate how greedy some people can be. I feel like there would be no end to suckers who would fall for this trap.
Better: the VCs own stock with liquidation preference over the common stock they loaned you money to buy. If there's venture debt, they are also part of the estate that will be paid by those loans if the company goes bankrupt.
This all smells. Especially given, to my knowledge, Bolt didn't let even its employees take liquidity in their shares through traditional channels.
Bolt offered, with multiple conflicts of interest, what are essentially margin loans to potentially unsophisticated borrowers. The $300 credit for a financial advisor the CEO tweeted about should, alone, be presumptive.
To be clear, I don't think anyone did anything intentionally wrong. (Also, I learned about this yesterday, so there’s that.) But wanton incompetence bordering on--perhaps crossing into--negligence, enabled by a Board that absolutely should have known better, can and should create liability.
This was an incredibly risky program, and I don't understand how Bolt was valued last year. But engineers were potentially sitting on a life changing amount of money. Not exercising could have cost engineers hundreds of thousands in additional taxes if Bolt had a great IPO. They needed to get financial advice from an independent advisor.
Unfortunately, they'll probably never be able to sell their shares for even a fraction of that amount anyway.
The first 5 engineers would be incredibly lucky if they got 0.1% - who knows how many of them fully vested and still have shares. I'm guessing less than half. There's MAYBE one person who was looking at close to $11M.
Engineers after that would be incredibly lucky to even get 0.01% of the company. That's $1.1M. Again - I'd be surprised if there's even 5 fully vested that still have shares.
And even if they still have the shares, they'll be lucky to sell them at a $2B valuation - let alone $11B. So cut those numbers by 1/5th (or more).
Bolt would've been a SCREAMING success for a startup. Unless you were engineer #1-5 - you'd be better off as an L4 at FAANG.
The company tried to do something beneficial for its employees, although perhaps it was misguided. They gained nothing here except the marketing benefit of trying to be employee friendly.
Margin loans are risky because you can get liquidated and lose your other principal. This was a cashless loan, that was only 50% recourse, so the only risk is that you may have to pay back half of what you bought the stock at if it ends up worthless.
I don’t think there was any incompetence or negligence here, and even if there was some incompetence, that’s not a theory of liability.
Issuer is the lender is the employer. This is a mess of conflicts.
> company tried to do something beneficial for its employees, although perhaps it was misguided
I agree. (Though it ignores the stupidly simple, entirely common alternative: cut the loan crap and just give them the money.)
> was a cashless loan, that was only 50% recourse, so the only risk is that you may have to pay back half of what you bought the stock at if it ends up worthless
For that 50%, it’s identical to a margin loan. We regulate those because lending against magic numbers that go up is a consistent failure mode in capital markets.
FYI, this is irrelevant with respect to the SEC's jurisdiction [1].
[1] https://www.sec.gov/oiea/investor-alerts-bulletins/ib_privat...
The SEC created a safe harbor for registration. The Securities Act of 1933 regulates all securities [1]. This is why private companies issuing shares have to hire securities lawyers.
This feels like a more complex, insidious version of company scrip. At the end of the day, you’re getting paid in fake company money that’s worthless if they go belly up.
The whole point is you're in debt (against worthless equity). It's negative worth!
It's risky, but not necessarily dodgy. Many employers do not even permit early exercise and I wish more did as I could have substantially reduced my tax burden in some situations. Taking loans for early exercise is risky, but ultimately, we're adults who are responsible for our own decisions. Certainly it would be bad if Bolt misled employees into thinking it was a risk-less proposition, but I've not heard anyone claiming that.
>>Bolt positions the "below $200,000" sum as a win. I don't see it that way. That's below the lower bound of the accredited investor income test. The people taking out these loans by legal definition couldn't afford the risk. Yet Bolt doubled down and gave them leverage?<<
If the aggregate loan amount to laid-off employees was $200k, that says nothing about whether they qualified as accredited investors. Further, the accredited investor designation is an arbitrary one. It's perfectly possible to not be an accredited investor and still be able to afford the risk of early option exercise.
My guess is overall Bolt was actually being nice to their employees and allowing them to get in early on the action (i might be wrong but i've been in similar situations and usually the intent is good)
But I'm not sure how Bolt significantly benefit financially from this program. And $200k is not a ton of money for a unicorn. If you're an early employee at a unicorn you can work with 3rd parties to make more aggressive financial decisions.
I guess then the solution would be some form of redundancy payment, sufficient after taxes to cover the loan. The ex-employee could at their discretion use the payment to cover the loan. Or not. This way you’d avoid IRS penalties.
But some of them would incur a tax liability at option exercising (the IRS values the "gain" at "stock price - option exercise price" and I believe now causes mark to market at the exercise time?) which would need to be paid also.
Bolt offered to loan people money to exercise their options (and pay the tax?). But if Bolt forgives the loan, the IRS will consider it as income to the loan recipient.
But even then, I'd much rather have a (income tax marginal rate * loan amount) debt to pay than a (loan amount) one.
I understand why the employees would want a loan - they need money to buy the shares required to exercise the loan - and I guess they can't do it through a normal broker?
If the employees Exercise-to-sell-to-cover or Exercise-to-sell they should be fine right because they would have closed the loan? This would explain why so many took the loan but so few of the layoffs were affected.
Is the only issue the ones that didn't Exercise-to-sell? I understand that tax will need to be paid but I'm not sure what benefit they'd have would be?
Unless, its because the capital gains + loan rate < income tax?
You have to pay to exercise, pay taxes, and pray for a sale option some future date.
Private shares are actively traded. Bolt chose to restrict its employees from being able to sell.
Assuming you're an employee with a relatively small number of shares (in terms of company control) - what's the point of shares if you can't sell them? Just _in case_ you can sell them later? Some type of dividend/profit sharing (which seems unlikely for a startup)?
This is why it is incredibly stupid that the IRS makes you pay taxes when you get them.
If you don't exercise and just sell short term capital gains tax applies.
If you exercise ISOs and hold long enough you pay AMT, which can be refundable, and LTCG when you sell the shares.
Depends on your ability to pay. In some cases a large debt to a corporation is far preferable to a small debt with the IRS.
Mainly to avoid taxes if stock price goes up.
If the price is $1 today and you exercise the option to buy stock, you pay taxes on $1.
If the price goes up to $20, you pay taxes on $20.
If the company fails before you can sell, you loose moeny in both cases. However, if you wait, you payed a lot more taxes on stock that is worthless.
People can easily pay hundreds of thousands in taxes on stock that they can never sell. Also, sometimes the stock goes up so much that employees cant afford the tax bill to exercise the option, because the stock cannot be sold until IPO.
https://secfi.com/learn/exercise-stock-options-tax-implicati...
Or it's last year, and an employee wants to lock in the FMV for AMT before the next round/IPO.
It's definitely an aggressive move, but I can understand why someone would exercise.
But some amount of the remaining 83% had student loans and paid them off. Comments on HN and Reddit notwithstanding, a non-trivial fraction of those will be put off by a decision to forgive current student loans.
Some other amount of people, probably a majority, never went to college to begin with. From their perspective, you just gave free money to a minority of people who were already privileged to begin with, by even being able to go to college at any price.
This is not how you win elections, and politicians primarily exist to win elections. It is entirely possible that forgiving student loans would result in a net-negative change in votes in the next election, and maybe for a while after that.
At the very least they need to fix the underlying problem before creating such a moral hazard, or the next round will be much bigger. If they really want to buy votes this way, it would probably be more effective to just give yet another stimulus -- a nice, big one -- to every voter in the country.
I agree when it's 10s of thousands or more the optionality isn't worth it for almost anyone. And it's hard to imagine borrowing to exercise could ever be worth it.
I've never encouraged or discouraged any employee from making an exercise decision (I don't want to get the liability of giving tax or investment advice). I don't even encourage them to file 83(b) except that when I explain why it's a pain for the company if they don't do so, everyone has figured it out immediately :-).
If the amount was less than $200k, which is about the salary for a single employee these days, Bolt should just have annulled them entirely. The PR alone would be worth more than the $200k.