Airbnb, others set terms for employees to cash out

Published 12:00 am Sunday, August 14, 2016

SAN FRANCISCO — Technology startups have long wrestled with a conundrum of how to reward their employees. Many of their workers are compensated with lucrative piles of a startup’s stock, but they cannot cash it in because the shares do not trade publicly.

So private companies such as Pinterest and SpaceX are increasingly arriving at the same solution: They are giving employees some controlled opportunities to sell their startup shares — but in return, workers now must agree to more explicit restrictions on what they can and cannot do with their remaining stock.

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This type of bargain was recently struck at Airbnb, the online room rental startup. In July, the San Francisco-based company offered employees an opportunity to sell a percentage of their Airbnb stock as part of a deal that let investors buy those shares, according to two people who spoke on the condition of anonymity.

In exchange, Airbnb employees had to agree to prohibitions on their remaining stock, including more categorical language that they could not trade or sell the shares, these people said. While Airbnb has long had a blanket restriction preventing workers from selling or transferring shares, it recently detailed these rules point-by-point, these people said.

The move illustrates how Silicon Valley startups are honing their approaches to employee shares. The young companies often give out stock to attract workers, who see the shares as a potentially rich payday when the startup eventually goes public or gets sold. But as more Silicon Valley startups have delayed an initial public offering or sale, the companies have felt increasing pressure to return cash to employees.

Some tech workers have found ways to sidestep rules against selling their private company shares because plenty of third parties, who are desperate to own stock of high-valued startups like Uber and Airbnb, will buy the shares in transactions on the side. But the startups typically loathe such sales because the deals can create a dispersed and jumbled shareholder base, which can lead to liabilities.

All of this has led to highly valued tech startups reaching a compromise by letting employees cash out with restrictions.

“These deals will hopefully help employees get liquidity while giving companies some control over the Wild West market that has developed for employee shares,” said Rich Wong, a venture capitalist at Accel Partners, who has followed the issue.

Airbnb declined to comment on its employee share sale. The company’s latest fundraising values it at about $30 billion, triple its valuation two years ago.

Other startups have created company-approved programs for employees to sell their shares. In the first half of this year, Nasdaq Private Market, a firm that facilitates private share transactions, helped 11 closely held companies offer employees opportunities to sell their stock, up nearly 20 percent from the first half of 2015.

Over that period, a total of $544 million of private company stock was sold, more than double that from a year earlier, according to Nasdaq Private Market.

“We’ve seen more clarification of what’s prohibited,” Bill Siegel, head of Nasdaq Private Market, said of tech startups and employee share sales.

More detailed restrictions on future employee stock sales began to appear in the last few years. In 2015, Pinterest, the online scrapbooking company based in San Francisco, gave its workers a chance to cash out some of their stock — if they agreed to more explicit restrictions on selling, lending or giving others the option to buy the stock, according to documents reviewed by The New York Times.

Such prohibitions do not appear in an older document that outlines Pinterest rules around employees selling their stock. That document said Pinterest employees had to agree not to transfer or sell their shares without written consent of the company, and they had to agree that the company had the right of first refusal to buy back the shares.

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