SAN FRANCISCO — Last year, Bolt Financial, a payments startup, launched a new program for its employees. They owned stock options in the company, some of which were worth millions of dollars on paper, but couldn’t touch that money until Bolt sold or went public. So Bolt began lending them — some up to hundreds of thousands of dollars — against the value of their stock.
In May, Bolt laid off 200 employees. That provided a 90-day period for those who took out the loans to repay the money. The company was trying to help them sort out options for reimbursement, said one person with knowledge of the situation who spoke anonymously because the person was not authorized to speak publicly.
Bolt’s program was the most extreme example of a burgeoning ecosystem of employee loans at private tech start-ups. In recent years, companies like Quid and Secfi have sprung up to offer start-up workers loans or other forms of financing, using the value of their own company stock as a kind of collateral. These providers estimate that startup workers around the world have at least $1 trillion in equity to borrow against.
But as the startup economy drains, ravaged by economic uncertainty, rising 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 waived if a start-up fails, employees can still face tax bills because loan forgiveness is treated as taxable income. And in situations like Bolt’s, the loans can be difficult to repay in the short term.
“Nobody has thought about what happens when things go wrong,” said Rick Heitzmann, an investor at FirstMark Capital. “Everyone only thinks of the positive.”
The proliferation of these loans has sparked debate in Silicon Valley. Proponents said the loans were necessary for workers to participate in the wealth-creation engine. But critics said the loans involved unnecessary risk in an already risky industry and were reminiscent of the dotcom era in the early 2000s, when many tech workers were badly burned by loans related to their stock options.
Ted Wang, a former upstart attorney and investor at Cowboy Ventures, was so alarmed by the loans that in 2014 he published a blog post, “Playing With Fire,” in which he advised against them for most people. Mr. Wang said he got another round of calls about the loans whenever the market overheated and always felt obliged to explain the risks.
“I’ve seen this go wrong, very wrong,” he wrote in his blog post.
Start-up loans arise from the way employees are typically paid. As part of their compensation, most employees of private technology companies receive stock options. The options must eventually be exercised or bought at a fixed price in order to own the stock. Once someone owns the shares, he or she usually cannot cash them in until the start-up goes public or is sold.
That’s where loans and other financing options come in. Start-up stock is used as a form of collateral for these advances. The loans vary in structure, but most providers charge interest and take a percentage of the employee’s stock when the company sells or goes public. Some are structured as contracts or investments. Unlike the loans offered by Bolt, most are known as “non-recourse” loans, meaning employees are not inclined to pay them back if their stock loses its value.
This credit sector has exploded in recent years. Many of the providers were established in the mid-2010s when hot start-ups like Uber and Airbnb put off stock IPOs for as long as possible, pushing private market valuations into the tens of billions of dollars.
That meant many of their employees were tied up in “golden handcuffs”, unable to quit their jobs because their stock options had become so valuable that they couldn’t afford to pay the taxes based on the current market value. when exercising it. Others grew tired of sitting on the options while waiting for their company to go public.
The loans have given startup employees money to use in the meantime, including money to cover the cost of buying their stock options. Still, many tech workers don’t always understand the intricacies of stock compensation.
“We work with super-smart Stanford computer science AI graduates, but nobody explains it to them,” said Oren Barzilai, CEO of Equitybee, a site that helps start-ups find investors for their stocks.
Secfi, a provider of financing and other services, has provided $700 million in cash financing to start-up workers since it opened in 2017. Quid has provided hundreds of millions in loans and other financing to hundreds of people since 2016. The latest $320 million fund is backed by institutions, including Oaktree Capital Management, and it charges those taking out loans for formation costs and interest.
So far, less than 2 percent of Quid’s loans have been under water, meaning the market value of the stock has fallen below that of the loan, said Josh Berman, a company founder. Secfi said 35 percent of its loans and financing had been repaid in full and the loss rate was 2 to 3 percent.
But Frederik Mijnhardt, the CEO of Secfi, predicted that the next six to 12 months could be difficult for tech workers if their stock options fall in value in a recession, but they had taken out loans at a higher value.
“Employees can be settled,” he said.
Such loans have become more popular in recent years, says JT Forbus, an accountant at Bogdan & Frasco who works with start-up workers. An important reason is that traditional banks do not lend against seed capital. “There’s too much risk,” he said.
Start-up workers pay $60 billion a year to exercise their stock options, Equitybee estimates. For a variety of reasons, including the inability to pay them, more than half of the options issued are never exercised, meaning the employees give up some of their compensation.
Mr Forbus said he should carefully explain the terms of such deals to his clients. “The contracts are very difficult to understand and they are not really calculable,” he said.
Some start-up workers regret taking the loans. Grant Lee, 39, spent five years at Optimizely, a software start-up that amassed stock options worth millions. When he left the company in 2018, he had a choice to buy or lose his options. He decided to exercise them and took out a $400,000 loan to help with expenses and taxes.
In 2020, Optimizely was acquired by Episerver, a Swedish software company, for a price below the latest private valuation of $1.1 billion. That meant that employee stock options were worth less at the higher valuation. For Mr. Lee, the value of his Optimizely share fell below that of the loan he had taken out. While his loan was forgiven, he still owed about $15,000 in taxes, as loan forgiveness counts as taxable income.
“I got nothing, and on top of that I had to pay taxes because I got nothing,” he said.
Other companies use the loans to give their employees more flexibility. In May, Envoy, a San Francisco start-up that makes workplace software, used Quid to offer non-recourse loans to dozens of its employees so they could get cash. Envoy, which was recently valued at $1.4 billion, did not encourage or discourage people from taking out the loans, said Larry Gadea, its chief executive.
“If people believe in the business and want to double it and see how much better they can do, this is a great option,” he said.
In a recession, loan conditions can become tougher. The IPO market has been frozen, pushing potential payouts further into the future, and the depressed stock market means private startup stocks are likely worth less than they were during the boom, especially in the past two years.
Quid adds more insurers to find the right value for the start-up stocks it lends at. “We are more conservative than in the past,” Mr Berman said.
Bolt appears to be a rarity because it offered all of its employees high-risk personal repayment loans. Ryan Breslow, the founder of Bolt, announced the program with a congratulations bloom on twitter in February, writing that it showed “we just care about our employees more than most”.
The company’s program was designed to help employees afford to exercise their stock and cut taxes, he said.
Bolt declined to comment on how many laid-off workers were affected by the loan repayments. It offered employees the choice to return their starting shares to the company to repay their loans. Business Insider previously reported on the offer.
Mr Breslow, who stepped down as CEO of Bolt in February, did not respond to a request for comment on the layoffs and loans.
In recent months, he has helped found Prysm, a provider of non-recourse seed capital loans. In pitch materials sent to investors and viewed by The New York Times, Prysm, which did not respond to a request for comment, advertised Mr. Breslow as its first client. Borrowing against the value of his shares in Bolt, the presentation said, Mr. Breslow took out a $100 million loan.