According to the latest information coming out of the negotiation room between Uber and Softbank's, a large portion, 90% to be exact of the $10 billion deal will go to buy share options from Uber employees. This means, that if the deal goes through, a lot of Uber employees will become millionaires.
Photo: Shizuo Kambayashi, Associated Press
When you consider how $9 billion will be spread amongst 12,000 Uber employees that hold stock options as well as institutional investors preparing to cash out of their shares in Uber, it makes the mind boggle at how company performance is not an issue in large finance, just perception, and expectation of future income matter.
Rohit Kulkarni, MD of SF SharesPost Financial, a company that connects between investors and company employees with shares in private venture companies stated; "This is a tremendous wealth-creation moment for all the employees at Uber," In the recent Uber-Softbank deal, approximately 50% of the stock held by Uber employees will be allowed to be transacted, until the deal employees were barred from selling their stock. Kulkarni went on to say that the deal will have a very positive impact on the economy of San Francisco.
Apart from the employees getting richer, the city coffers of San Francisco will also grow fatter, since stock sales are taxable as payroll tax, and the payroll tax rate is around 0.711%. This means that for every $1 billion the city adds $711,000 to its coffers. However, as San Francisco's chief economist, Ted Egan stated, the income from the payroll tax is not as important as the income generated by the new spending power these thousands of employees will now have. Such spending power will change life real estate, retail, and other incomes.
While the City of San Francisco has been enjoying massive payroll taxes, such as $352 million during 2016-2017 which adds up to 6% of its general revenue, the actual tax rate income has been declining since they introduced a new gross receipts tax in 2014.
Another important fact is that Uber placed its headquarters in the Twitter Tax-Free Zone, which is in the mid-market area. This zone was set up to keep Twitter from leaving SF for other tax incentive cities, and as such the payroll tax is exempt.
VP of Alain Pinel Realtor's San Francisco Office, Rick Turley stated that the impact would be more of a nuance in locations rather than a direct impact on overall prices. In his opinion, it would create a better balance between the supply and demand of properties all over the city. He continued to state that the real estate markets inventory levels are historically low at the moment, and once homeowners realize that there is a large influx of capital to be traded, they will start to sell off investment properties.
On the tax side of the equation, any Uber employee that trades their stock options for cash will have to contend with a 20% capital gains tax, but this is really a moot point, what we call problems for the rich. The Founder of the National Center for Employee Ownership in Oakland, Corey Rosen stated that the state's budget is dependent on people trading in private equity since strong stock boom creates capital gains taxes, so they will always applaud such activates and promote such deals.
One Uber investor, Bradley Tusk, intends to sell his holdings and cash out. Tusk stated that a lot of Uber's employees have worked for a long time, pulling in startup salaries and they might be rich on paper, but in reality, they were denied liquidity. Now, this deal has come along and will give a lot of them the chance to cash out and either stay in the company, with a boost to their energy levels or semi-retire.
It's important to remember that Uber has had a really bad year with a lot of turmoil inside and outside. With the new CEO and the potential IPO in 2019, this deal will bring much sought-after relief, both financially and psychologically. Under the new CEO, corporate guidance has taken a new route and the new policies being churned out on a monthly basis will have to continue for a while until Uber has totally changed its entire culture and business model.
Another fact is that the deal will only affect the employees with stock options, the hundreds of thousands of Uber drivers will not be a part of the UberFest. This is one of those policies that Uber will stick to and not change, maintain its drivers as independent contractors are in fact the cornerstone of the concept, and what makes ridesharing so viable.
Kulkarni added that everyone is sitting on the edge of their pants since the Softbank deal has not yet been sealed, and the ball remains in the Japanese firm's half as they discuss and negotiate a price that will entice the investors to sell over 14% of Uber stock. The deal is being pushed by everyone since all want it has to be completed within 30 days to beat the 2017 deadline before the new Tax Codes undergo changes next year.
Softbank will invest $1 billion based on a value of $68.5 billion, but the money it will trade for the investor's stock will be set at $50 billion. This delta is not unusual since many private ventures are managed on different levels dependent with whom he deals is being negotiated, in fact, it is possible that there will be one price for Uber employees and another for institutional investors.
Founding partner of Lead Edge Capital and Uber investor, Mitchell green stated that no one yet knows the tender prices and he intends to keep his stock until the expected IPO in 2019. He stated that Softbank's invested in many companies globally and as such, once Uber joins their ranks they will be able to negotiate better international cooperation on all levels.
Kulkarni concluded that when large IPO's are on the horizon, and large influxes of cash start to hit the market, it Is not just the real estate market that improves. A lot of employees with venture capital idea now has the resources to finance a new venture, and this starts the ball rolling again. It improves the local economy, and a deal this size will have a very large impact on San Francisco.