Loans Could Burn Start-Up Workers in Downturn

SAN FRANCISCO — Last year, Bolt Financial, a payments start-up, began a new program for its employees. They owned stock options in the company, some worth millions of dollars on paper, but couldn’t touch that money until Bolt sold or went public. So Bolt began providing them with loans — some reaching hundreds of thousands of dollars — against the value of their stock.

In May, Bolt laid off 200 workers. That set off a 90-day period for those who had taken out the loans to pay the money back. The company tried to help them figure out options for repayment, said a 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 loans for workers at privately held tech start-ups. In recent years, companies such as Quid and Secfi have sprung up to offer loans or other forms of financing to start-up employees, using the value of their private company shares as a sort of collateral. These providers estimate that start-up employees around the world hold at least $1 trillion in equity to lend against.

But as the start-up economy now deflates, buffeted by economic uncertainty, soaring inflation and rising interest rates, Bolt’s situation serves as a warning about the precariousness of these loans. While most of them are structured to be forgiven if a start-up fails, employees could still face a tax bill because the loan forgiveness is treated as taxable income. And in situations like Bolt’s, the loans may be difficult to repay on short notice.

“No one’s been thinking about what happens when things go down,” said Rick Heitzmann, an investor at FirstMark Capital. “Everyone’s only thinking about the upside.”

The proliferation of these loans has ignited a debate in Silicon Valley. Proponents said the loans were necessary for employees to participate in tech’s wealth-creation engine. But critics said the loans created needless risk in an already-risky industry and were reminiscent of the dot-com era in the early 2000s, when many tech workers were badly burned by loans related to their stock options.

Ted Wang, a former start-up lawyer and an investor at Cowboy Ventures, was so alarmed by the loans that he published a blog post in 2014, “Playing With Fire,” advising against them for most people. Mr. Wang said he got a fresh round of calls about the loans anytime the market overheated and always felt obligated to explain the risks.

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

Start-up loans stem from the way workers are typically paid. As part of their compensation, most employees at privately held tech companies receive stock options. The options must eventually be exercised, or bought at a set price, to own the stock. Once someone owns the shares, he or she cannot usually cash them out until the start-up goes public or sells.

That’s where loans and other financing options come in. Start-up stock is used as a form of collateral for these cash advances. The loans vary in structure, but most providers charge interest and take a percentage of the worker’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 “nonrecourse” loans, meaning employees are not on the hook to repay them if their stock loses its value.

This lending industry has boomed in recent years. Many of the providers were created in the mid-2010s as hot start-ups like Uber and Airbnb put off initial public offerings of stock as long as they could, hitting private market valuations in the tens of billions of dollars.

That meant many of their workers were bound by “golden handcuffs,” unable to leave their jobs because their stock options had become so valuable that they could not afford to pay the taxes, based on the current market value, on exercising them. Others became tired of sitting on the options while they waited for their companies to go public.

The loans have given start-up employees cash to use in the meantime, including money to cover the costs of buying their stock options. Even so, many tech workers do not always understand the intricacies of equity compensation.

“We work with supersmart Stanford computer science A.I. graduates, but no one explains it to them,” said Oren Barzilai, chief executive of Equitybee, a site that helps start-up workers find investors for their stock.

Secfi, a provider of financing and other services, has now issued $700 million of cash financing to start-up workers since it opened in 2017. Quid has issued hundreds of millions’ worth of loans and other financing to hundreds of people since 2016. Its latest $320 million fund is backed by institutions, including Oaktree Capital Management, and it charges those who take out loans the origination fees and interest.

So far, less than 2 percent of Quid’s loans have been underwater, meaning the market value of the stock has fallen below that of the loan, said Josh Berman, a founder of the company. Secfi said that 35 percent of its loans and financing had been fully paid back, and that its loss rate was 2 to 3 percent.

But Frederik Mijnhardt, Secfi’s chief executive, predicted that the next six to 12 months could be difficult for tech workers if their stock options decline in value in a downturn but they had taken out loans at a higher value.

“Employees could be facing a reckoning,” he said.

Such loans have become more popular in recent years, said J.T. Forbus, an accountant at Bogdan & Frasco who works with start-up employees. A big reason is that traditional banks won’t lend against start-up equity. “There’s too much risk,” he said.

Start-up employees pay $60 billion a year to exercise their stock options, Equitybee estimated. For various reasons, including an inability to afford them, more than half the options issued are never exercised, meaning the workers abandon part of their compensation.

Mr. Forbus said he’d had to carefully explain the terms of such deals to his clients. “The contracts are very difficult to understand, and they don’t really play out the math,” he said.

Some start-up workers regret taking the loans. Grant Lee, 39, spent five years working at Optimizely, a software start-up, accumulating stock options worth millions. When he left the company in 2018, he had a choice to buy his options or forfeit them. He decided to exercise them, taking out a $400,000 loan to help with the cost and taxes.

In 2020, Optimizely was acquired by Episerver, a Swedish software company, for a price that was lower than its last private valuation of $1.1 billion. That meant the stock options held by employees at the higher valuation were worth less. For Mr. Lee, the value of his Optimizely stock fell below that of the loan he had taken out. While his loan was forgiven, he still owed around $15,000 in taxes since loan forgiveness counts as taxable income.

“I got nothing, and on top of that, I had to pay taxes for getting nothing,” he said.

Other companies use the loans to give their workers more flexibility. In May, Envoy, a San Francisco start-up that makes workplace software, used Quid to offer nonrecourse loans to dozens of its employees so they could get cash then. Envoy, which was recently valued at $1.4 billion, did not encourage or discourage people from taking the loans, said Larry Gadea, the chief executive.

“If people believe in the company and want to double down on it and see how much better they can do, this is a great option,” he said.

In a downturn, loan terms may become more onerous. The I.P.O. market is frozen, pushing potential payoffs further into the future, and the depressed stock market means private start-up shares are probably worth less than they were during boom times, especially in the last two years.

Quid is adding more underwriters to help find the proper value for the start-up stock it lends against. “We’re being more conservative than we have in the past,” Mr. Berman said.

Bolt appears to be a rarity in that it offered high-risk personal recourse loans to all its employees. Ryan Breslow, Bolt’s founder, announced the program with a congratulatory flourish on Twitter in February, writing that it showed “we simply CARE more about our employees than most.”

The company’s program was meant to help employees afford exercising their shares and cut down on taxes, he said.

Bolt declined to comment on how many laid-off employees had been affected by the loan paybacks. It offered employees the choice of giving their start-up shares back to the company to repay their loans. Business Insider reported earlier on the offer.

Mr. Breslow, who stepped down as Bolt’s chief executive 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 nonrecourse loans for start-up equity. In pitch materials sent to investors that were viewed by The New York Times, Prysm, which did not respond to a request for comment, advertised Mr. Breslow as its first customer. Borrowing against the value of his stock in Bolt, the presentation said, Mr. Breslow took a loan for $100 million.