By Carolyn Said
San Francisco could see scores of newly minted millionaires if SoftBank Group’s investment in Uber goes through.
SoftBank plans to invest $1 billion directly in Uber and buy up to $9 billion worth of stock from existing shareholders — namely early investors and Uber employees who were granted stock options. While the lion’s share of the cash will go to institutional investors, many of the company’s 12,000 employees are likely to jump at the chance to cash out some of their stock options. Others could choose to wait until Uber goes public on Wall Street, which the company says could happen in 2019.
“This is a tremendous wealth-creation moment for all the employees at Uber,” said Rohit Kulkarni, managing director of San Francisco’s SharesPost Financial, which runs a marketplace that connects employees of private companies with investors who want to buy their stock. Uber’s stock grants were structured to bar its employees from selling them on secondary markets like SharesPost, and the company is reportedly limiting them to selling half their shares in this offering.
“It creates a very positive near-term impact on the San Francisco economy,” Kulkarni said.
City Hall will feel the impact, as the city’s coffers swell. All salaries and stock options for Uber employees are subject to the city’s payroll tax, which this year is 0.711 percent, according to Ted Egan, San Francisco chief economist. “The city considers any way you pay your employees to be part of that payroll expense,” he said. “If you choose (to grant) stock, that’s taxable.”
Uber’s headquarters office at 1455 Market Street is outside the so-called “Twitter tax break zone,” the Mid-Market area where the city agreed to temporarily exempt companies from some payroll tax. That controversial move, implemented in 2012, was designed to convince Twitter and other tech companies to stay in the city under the premise that they would spur economic growth.
San Francisco brought in $352 million from payroll taxes in fiscal year 2016-17, or 6 percent of its general fund revenue. The tax rate has been declining since 2014 as the city phases in a new gross receipts tax, Egan said.
“This is a significant injection of cash into Uber as well as its employees,” Egan said of the proposed SoftBank deal. “It will give more lift to the real estate market and spending.”
The impact on real estate could actually be nuanced, rather than sending prices skyrocketing, said Rick Turley, vice president and managing broker of Alain Pinel Realtors’ San Francisco office. His hope is that it could result in better balance of supply and demand.
“Inventory remains at historic lows,” he said. “If there were news of a big pool of potential buyers becoming available overnight, I would think some sellers who’ve been waiting on the sidelines would come to market to take advantage of it.”
An Uber cash-out will also boost the state. Employees who exercise their stock options are subject to capital gains tax, which in California is the same as their income-tax percentage. At the federal level, they’ll pay a 20 percent capital-gains tax.
“The state’s budget is significantly dependent on people making money selling shares,” said said Corey Rosen, founder of the National Center for Employee Ownership in Oakland. “When you have a stock-market boom, the treasury is pretty flush. When it busts and there aren’t capital-gains taxes, that’s caused some problems.”
Bradley Tusk, an early investor in Uber — he got stock options in exchange for consulting with the company — plans to cash out some of his holdings.
“A lot of people who worked there a long time, worked very hard, while making startup salaries,” he said. “They were only rich on paper; it’s unreasonable to keep denying them liquidity.” Some may quit after they cash out, he said. But others may stay — and get a morale boost from the payouts.
After a calamitous year during which Uber strugged with a toxic corporate culture and numerous scandals, employees have been through the wringer. A significant material reward could change how many feel about the company.
“Corporate governance is one of the big issues Uber faces,” Kulkarni said. “In the next few months, management will need to implement new policies and will need the employees to feel satisfied and encouraged to follow new guidelines.”
It’s only Uber’s employees, not its drivers, who will benefit from the SoftBank deal or an eventual public offering on Wall Street. Drivers are classified as independent contractors. Uber considers that status a linchpin of its business model and has fiercely fought numerous legal attempts to have drivers reclassified as employees, and has never discussed giving them any equity in the company.
“The vast majority of Uber workers are drivers, not its employees,” Rosen said. “They don’t participate in any of this, although I think they should.”
The SoftBank deal could still fall through. The Japanese company and its consortium of investors must set a price that entices enough investors to sell so that it scores a 14 percent stake in Uber. If that doesn’t happen, SoftBank can walk away. It has 30 days to work on the offer; most experts say everyone involved is motivated to wrap a deal up in 2017, as the tax code is likely to undergo tremendous changes next year.
SoftBank invested the $1 billion at Uber’s current $68.5 billion valuation, but reportedly will buy other shares at a discount to that, perhaps a $50 billion valuation. It is not unusual for private company shares to trade at different prices depending on the terms attached to them. Venture capitalist get preferred shares, with more protections, while employee shares are common stock.
“No one knows the tender price,” said Mitchell Green, founding partner of Lead Edge Capital, an Uber investor. He plans to hold on to his shares. He’s bullish about SoftBank coming in because it will open up more international markets through partnerships or other deals.
“SoftBank’s invested in all these companies around the world; Uber is in these regions too, so hopefully this will lead to international cooperation,” he said.
Besides driving up real estate prices, newly rich Uber employees could take moves that would benefit the economy.
“With every large (initial public offering) we see downstream events, not just on real estate but broader economies,” Kulkarni said. “It can be new companies being formed by employees with now much deeper pockets. That’s how the local economy flourishes.”