Loans could burn start-up workers in downturn

SAN FRANCISCO — Payments startup Bolt Financial launched a new program for its employees last year. 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 was sold or made public. So Bolt began giving them loans - some running into the hundreds of thousands of dollars - against the value of their shares.

In May, Bolt laid off 200 workers. This triggered a 90-day period for those who had taken out the loans to repay the money. The company tried to help them find refund options, said a person with knowledge of the situation who spoke anonymously because the person was not authorized to speak in public.

Bolt's program was the most extreme example of a burgeoning ecosystem of worker loans for private 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's shares as a kind of collateral. These providers estimate that start-up employees around the world have at least $1 trillion in equity to lend.

But while the economy of start-up deflating, shaken by economic uncertainty, soaring inflation and rising interest rates, Bolt's situation serves as a warning about the precariousness of these loans. While most are structured to be forgiven if a startup fails, employees could still face a tax bill because loan forgiveness is treated as taxable income. And in situations like Bolt's, loans can be difficult to repay in the short term.

"No one thought about what happens when things go wrong. spoil," said Rick Heitzmann, an investor at FirstMark Capital. "Everyone is only thinking upside."

The proliferation of such loans has sparked a debate in Silicon Valley. Proponents said the loans were necessary for employees to participate in the technology's wealth-building engine. But critics said the loans created unnecessary risk in an already risky industry and brought to mind the dot-com era of the early 2000s, when many tech workers were badly burned by loans tied to their stock- options.

Ted Wang, a former start-up lawyer and investor at Cowboy Ventures, was so alarmed by loans that he blogged in 2014, "Playing With Fire", discouraging them for most people. Wang said he gets a new round of calls about loans every time the market gets overheated and he always feels compelled to explain the risks.

"I saw this go wrong, bad mistake," he wrote in his blog post.

Startup loans stem from how workers are typically paid. As part of their compensation, most employees of private technology companies receive stock options. Options must eventually be exercised, or purchased at a fixed price, to hold Once someone owns the shares, they usually can't cash them out until the startup goes public or is sold.

This is where loans and other financing options come in. -Up stock is used as a form of collateral for these cash advances. The structure of the loans varies, but most providers charge interest and take a percentage of the worker's stock when the business 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 aren't required to repay them if their stock loses value.

This lending industry has exploded in recent years. Many providers were created in the mid-2010s, as hot start-ups like Uber and Airbnb postponed IPOs for as long as they could, reaching private market valuations in the tens of billions of dollars. dollars.