Given Uber IPOed on Friday, May 10, 2019, there’s been a lot of coverage about how some early employees and investors made massive returns. Here is the story on how Uber employees failed to get rich off the Uber IPO.
The reality is, most employees who joined the company after 2015 aren’t getting very rich at all. On June 15, 2020, Uber’s stock was still about 30% below its IPO price as the coronavirus pandemic has reduced travel tremendously. As of May 28, 2021, Uber’s stock is trading around $50/share, which is 25% above the IPO price.
Let me share a more common example of how one employee I personally know lost money by moving to Uber instead of staying at his existing firm. Let’s call this person Fred.
How An Uber Employee Became Poor After The Uber IPO
In 2015, 40-year-old Fred was sick of working at his Big Law job. He was making a $350,000 base salary and a $50,000 – $100,000 bonus. Fred wanted to go in-house to hopefully work better hours and feel less stressed.
Fred got his undergraduate degree in Economics from Northwestern University in 2000 and then received his JD from USC in 2003. His post high school education literally cost him over $300,000 in tuition alone.
Uber successfully recruited Fred to join them for a $185,000 base salary and a $400,000 equity packaged that vested over four years.
Fred took the drastic pay cut because Uber was a hot startup to work for in 2015, and surely his $400,000 in equity would be worth multi-millions at the rate they were growing.
Today, Fred’s salary is $250,000 and Uber gave him some extra shares after the initial grant that are now worth $500,000 total based on 2015 valuations.
How did Fred do with his Uber stocks?
If Fred stayed at his Big Law job he would have made $400,000 X 4 = $1.6 million. Let’s add $100,000 given he would have gotten raises and potentially higher bonuses as well.
Earning $1.7 million over four years for being miserable isn’t so bad. I’m sure many people in the world would subject themselves to working 70-80 hours a week for this long to earn so much.
Instead of making $1.7 million at Big Law, here’s how much Fred made instead at Uber.
In salary, he has made $185,000 + $195,000 + $215,000 + $250,000 = $845,000. His $500,000 in equity was granted to him when Uber was valued at $51 billion.
At $37/share on May 13, 2019, Uber is worth $62 billion, or 21.5% higher. Therefore, his equity is worth about $607,000 without accounting for any dilution. $845,000 in salary + $607,000 in equity = $1,452,000.
Wait, what? $1,452,000 is less than the $1,700,000 he would have made if he had stayed in Big Law! Granted, his long term equity will be taxed at less than his Big Law income. But still, making $248,000 less after four years is not the result Fred was expecting.
And it’s gotten worse. As of October 1, 2019, Uber’s share price is now at ~$29.32, valuing the company at $49.84 billion, or 2% below what his initial share grant was worth in 2015! Fred’s total compensation is therefore $845,000 + $500,000 = $1,345,000, or $355,000 less than what he would have made staying at Big Law. Further, the share price still might go lower until he can sell in November 2019 once the lockup expires.
Although working at Uber was exciting, Fred also worked like a dog. There were many nights where he didn’t come home until 10pm. Further, he was always working weekends. Fred simply traded his 70-80 hours a week working for one firm to working 70-80 hours a week working for Uber.
Fred can’t wait to get the hell out of Uber and do something else. He also can’t wait to sell his shares when the lockup period expires in November 2019. Having so much of his net worth tied to one security doesn’t feel good.
Bottom line: Any investor or employee who invested in or joined Uber after July 2015 is not making money. Employees are hurting more than investors because they had to take salary base cuts to join.
Here’s Who’s Getting Rich Off The Uber IPO
If employees and investors who joined after July 2015 aren’t getting rich, then who is? Here’s a top 10 list of who will make the most money from Uber’s IPO. Most are institutional investors.
The post-IPO stake is based off a ~$70 billion valuation. The valuation will obviously change from day to day.
Investment firm BlackRock first backed Uber in 2014, when the ride-hailing company was valued at $17 billion.
Post-IPO stake: $424 million
Post-IPO ownership: 0.55 percent
9. Blissful Thousand
This is an affiliate of Cheng Wei, the co-founder and CEO of ride-hailing company Didi Chuxing, which acquired Uber’s Chinese operations in 2016.
Post-IPO stake: $887 million
Post-IPO ownership: 1.2 percent
8. Ryan Graves
He was Uber’s first employee and, for a brief period in 2010, also its CEO. Graves served as Uber’s SVP of global operations until 2017 and currently sits on its board. He’s the luckiest guy of them all!
Post-IPO stake: $1.4 billion
Post-IPO ownership: 1.9 percent
7. TPG Capital
This private equity firm was one of Uber’s earliest investors, putting in around $90 million at a $3.5 billion valuation in 2013.
Post-IPO stake: $1.4 billion
Post-IPO ownership: 1.9 percent
6. First Round Capital
First Round invested in Uber in 2010, back when it was called UberCab.
Post-IPO stake: $1.7 billion
Post-IPO ownership: 2.2 percent
5. Lowercase Capital
Founder Chris Sacca invested roughly $300,000 in Uber’s angel round in 2009.
Post-IPO stake: $1.9 billion
Post-IPO ownership: 2.5 percent
4. Garrett Camp
The Uber co-founder’s shares are listed under his non-traditional VC firm, Expa, an early investment firm with more of a hands-on approach than traditional VC outlets.
Post-IPO stake: $3.5 billion
Post-IPO ownership: 4.6 percent
3. Travis Kalanick
The former Uber CEO has already sold about $1 billion worth of shares to SoftBank. He started another company in real estate. Not sure what he’s up to now.
Post-IPO stake: $5.1 billion
Post-IPO ownership: 6.7 percent
2. Benchmark Capital
The VC firm was another one of Uber’s earliest investors. Partner Matt Cohler sits on Uber’s board.
Post-IPO stake: $6.5 billion
Post-IPO ownership: 8.5 percent
The Japanese investing conglomerate claims it has already made more than $3.8 billion from its Uber investment. But its shares have gone down post the Uber-IPO given the poor performance.
Post-IPO stake: $9.8 billion
Post-IPO ownership: 12.8 percent
SoftBank has proven to be one of the worst VC investors on the planet. It has lost billions due to investments in Uber and in WeWork. SoftBank got lucky when its founder invested in Alibaba vey early on. He hasn’t been able to recreate his luck.
What Should Uber Employees Do Now?
As we’ve learned on Financial Samurai, diversifying your net worth across multiple asset classes to live life to the fullest and sleep better at night is better for most people long-term.
Fred’s real life example explains that there is no free lunch when working for a money-losing startup. Startups love to entice employees with lottery ticket riches so they can get people to accept below market salaries. If you’re joining a startup, please sleep with one eye open.
The founders and early employees are likely to gain almost all the spoils. You don’t want to take excess risk and be left holding the bag.
Uber employees have several options on their hands, depending on when they joined and how much they enjoy working at the firm.
What To Do Post Uber IPO
1) They can can keep on grinding away for below market pay in hopes that their equity rebounds. Facebook and Google had a similarly difficult time out of the starting gate, but have seen performed very well.
2) They should ask for salary raises since the stock is so far languishing. After all, Uber raised some $8 billion in their IPO and have plenty more money to pay their employees.
3) They can try and negotiate a severance to keep their RSUs, and work for another company with better pay and/or with more promising returns. Despite the poor culture, sexual harassment lawsuits, and poor performing public share price, there still is some brand value left to get a new job.
Buy Real Estate In The SF Bay Area
Even if Uber’s share price continues to underperform, there will still be a positive wealth effect in the San Francisco Bay Area. Going from absurdly high valuations to simply absurd valuations is still a net positive for the real estate market, luxury goods market, and service industry.
The key positive is that an Uber IPO happened. The lockup period for when employees and investors can sell stock is sometime in November 2019. I expect the majority of shareholders will be selling to diversify their assets into something more tangible such as real estate.
Never forget that there’s always an opportunity cost when making a choice. Sometimes life is better when you have no choice at all. Good luck everyone.
If I was an Uber employee in 2021, I would sell some stock and buy San Francisco real estate. Mortgage rates are low and real estate is an attractive and more stable asset class.
The housing market should be strong for years to come. Buy a real asset. Stocks have come back strong, but are expensive. If you want less volatility, owning real estate long-term is the way to go.