Some ex-employees didn't expect to receive a W-2 form at all, not understanding that their restricted stock units would trigger taxable income even if they didn't sell a share.

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Nelson Chai, CFO of Uber, on the floor of the New York Stock Exchange

Uber IPO fallout: Why some early employees are stunned by tax bills

Startup stock is central to the Silicon Valley ethos, yet the details can still catch people off guard.

As tax season begins, some of Uber's earliest employees are realizing they had little idea how their stock grants worked — and are now grappling with the fallout on their tax bills after last May's disappointing IPO. Meanwhile, a fateful decision by Uber that could have delighted these people is only aggravating them more.

Though non-cash compensation is central to Silicon Valley's ethos, some ex-employees didn't expect to receive a W-2 form at all, not understanding that their restricted stock units (RSUs) would trigger taxable income even if they didn't sell a share. Many are surprised to owe thousands in taxes, due soon, according to several former employees Protocol spoke to and complaints Protocol reviewed.

The confusion of Uber's early employees, some of whom stand to gain millions when they sell their RSUs, is a reflection of just how complex startup stock plans are to a lot of workers, even at tech powerhouses. Many join companies ignoring or not understanding how the stock grants will affect their finances, and as a result they are often caught off guard about their tax obligation.

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"Word started dripping out to say, 'Hey, I actually owe quite a bit of money to the government,'" said one former employee, who had seen a tax adviser but still ended up owing an extra $15,000. "There was a bit of panic and a lot of anxiety."

Only adding to the irritation is a decision Uber made four days before its IPO that, in hindsight, turned out to be a tough call for early employees. The company, which was optimistic that its stock price would jump, chose to accelerate the settlement date (when the shares are issued) of some RSUs to the date of the IPO. That move recorded the shares as employee income at the listing price of $45.

If the stock had gone up after the IPO, early employees and the company would have saved money on taxes in the long run. But the stock dropped.

"We're all underwater, so we all got screwed," another former employee said. "It didn't turn out like any of us thought it would."

Both former Uber employees agreed to discuss their personal finances under the condition of anonymity.

While companies are generally responsible for withholding taxes, they are often capped below an individual's tax obligations, said Pam Chernoff, co-author of "The Stock Options Book" and curriculum coordinator at Santa Clara University's Certified Equity Professional Institute. "Part of the issue here I suspect is that they owe more in taxes than [Uber] withheld," she said.

The promise of getting rich off pre-IPO shares in the next Facebook or Google has long underpinned the startup economy. Yet the mechanics of how that actually plays out when a company is acquired or goes public is often misunderstood, particularly when it comes to RSUs.

RSUs were already popular at publicly traded companies, but they've more recently come into favor at late-stage private tech giants, said Parkworth Wealth Management principal Bruce Barton. And the RSUs these firms have been doling out are an especially complex version. They use what Barton calls a "double-trigger" approach to vesting: They don't fully vest until some period of time has passed (often over a period of years) and until the company has made the shares liquid (usually by going public).

Facebook was one of the first companies to use the approach, and now others like Lyft, Pinterest, Dropbox and Uber have copied the tactic, according to Barton's research.

"We're talking about large private companies that got very large, very fast and had to adopt this nontypical way to compensate employees," he said. "They're still experimenting."

Some of Uber's RSUs had an additional wrinkle: Instead of having the shares vest and settle simultaneously, Uber originally set up the settlement date to be six months after the IPO, meaning that the price for tax purposes would be around the time the lockup expired and employees could sell shares on the open market.

Four days before the IPO, though, the company changed course and accelerated the settlement date to match the day it went public, according to a May 6, 2019, letter obtained by Protocol. Uber declined to comment.

It was a strategic choice. First, it stopped the prospect of more shares flooding the market after the lockup ended, which would have put pressure on Uber's price. It was also meant to "mitigate the risk that the company could be responsible for paying a significantly higher amount in taxes if the stock price increases meaningfully after the IPO," according to the May 6 letter.

Barbara Baksa, director of the National Association of Stock Plan Professionals, said, "If you think that you're going to IPO and the stock price is going to continue to accelerate and in six months that stock is going to be worth a lot more, then it would definitely be to the employees' advantage to have the tax withholding done at the IPO because it would reduce their tax liability and start their capital gains earlier." Capital gains are taxed at a lower rate than general income.

However, Uber's stock fell from its IPO price of $45 on May 10, dropping as low as $25.58 around the end of the original lockup period in November. (It trades around $40 today.) While the Uber employees can sell shares to help pay their taxes, they're dealing with another complexity: how to account for capital losses for a stock that hasn't recovered its price.

"In hindsight now, it doesn't look like such a good deal for the employees," Baksa said. "But there was no way for Uber to know that."

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