“What are stock options?” Lyft driver Sherzod Sabinov hadn’t known he might be eligible for shares ahead of Lyft’s expected IPO this year, until I asked him about it on a crosstown ride. Sabinov, who hails from Uzbekistan and lives in Brooklyn with his wife and three children, has been driving for the company since 2014.
Independent contractors and freelancers like Sabinov are now allowed to be offered stock options before companies go public, thanks to a Securities and Exchange Commission rule change. But no one had told Sabinov.
The very thought of stock options — which he could trade in for cash, or hold and see them rise in value — excited him. “It would be wonderful if I was eligible.” His daily income has been slashed since New York City tacked a $2.75 surcharge onto every app-based trip (and $2.50 onto a yellow cab ride). Sabinov said he’s been working 70 to 75 hours a week to make ends meet, and he comes home after his kids have gone to sleep. Being awarded stock options could ease his burden, he said.
In July 2018 the SEC changed the rules on stock ownership for IPOs, opening it up to freelancers and independent contractors in response to the growing gig economy. Previously, only employees issued W-2 forms had been eligible. Advisers, consultants, and contractors now can also get in on public listings.
But Sabinov shouldn’t get his hopes up.
Juno, a ride-sharing service, offered many of its drivers restricted stock options. When competitor Gett acquired Juno in 2017, those stock options proved virtually worthless. The morale booster backfired, frustrating the drivers it had meant to engage.
The options granted to gig workers have severe limitations. Though Uber’s IPO valuation has been estimated at $120 billion and Lyft’s at $15 billion, the SEC permits companies to issue only $10 million of the securities per 12-month period, explains lawyer Elliot Lutzker, formerly with the SEC and now a securities specialist at Davidoff, Hutcher & Citron.
The cap had been $5 million, until last year. Regulators doubled the allowance to encourage smaller companies — not behemoths like Uber and Airbnb — to go public, according to Joel Seligman, co-author of Fundamentals of Securities Regulation.
With only $10 million to distribute, high-flying IPOs like Airbnb and Uber “can’t give it to everybody,” Lutzker points out. Only a select few will get stock options, on a very restricted basis. Companies often distribute such benefits based on longevity, rewarding those with the longest tenures. Some might consider the share pool an insulting drop in the bucket for low-income gig workers. Others see it as at least a step in the right direction.
Allowing gig workers pre-IPO shares, Seligman says, is “basically an employee morale device that maintains the enthusiasm of employees, to give them the benefit of stock issuances, just like officers and directors get. It makes people feel good.”
Lutzker concurs. “It helps for retention. If you own a few shares of Uber, you might be less inclined to jump to Lyft.” In contrast, many a yellow cab driver in New York City invested a million dollars or more to buy a taxi medallion, which has plummeted in value.
But Len Rosenthal, a finance professor at Bentley University in Massachusetts, doesn’t see these stock options helping start-ups retain workers. “It depends on the culture of the company. If you’re a poor employer and treat employees poorly, it won’t make much of a difference.”
He also points out that the rule change affects white-collar contractors, too. If attorneys or consultants opted for stock instead of cash compensation, they’d be at risk of becoming “biased” in favor of the company, warns Rosenthal. “If you’re a lawyer or accountant writing a report, you might put more of a positive spin on it.”
Were these experts paid in cash rather than future stock options, there’d be no incentive to exaggerate the positives, he explains.
Uber, Lyft, and Airbnb are in mandated quiet periods ahead of their listings, and opted not to respond to questions. But they lobbied for the change.
“We applaud the commission’s recognition of the importance of the sharing economy and the emergence of new types of contractual relationships between companies and the individuals who work with them that have emerged as a result,” Airbnb general counsel Rob Chestnut wrote to the SEC last September. The rule change enables “more ordinary Americans who participate in the sharing economy the opportunity to experience stock ownership.”
The greatest benefit for gig workers would be an early-stage company’s stock options, issued years before the company goes public, according to Lutzker. “They could be very valuable. That was the case with the initial investors in all successful start-ups.”
Some critics have noted that the impetus for Rule 701 is striving to address income disparity, where executives make millions on an IPO and employees are ignored, but say the overall effect of the change will be severely limited. One way it can have a lasting impact, Lutzker says, is if an employee holds on to the designated shares of Uber or Lyft for ten years and the stock rises in value by five to ten times.
Outside of that long-term scenario, “it won’t have much impact on inequality,” Lutzker says. Securities expert Seligman likewise calls the rule an “incremental change. The biggest change was moving the cap to $10 million, but in the overall framework of things, it’s pretty small.”
Allowing gig workers to become owners is part of SEC chairman Jay Clayton’s campaign to encourage more companies to go public. When they stay private, individual investors can’t share in their growth, Clayton noted in a speech. He’ll have to keep pushing, experts say.
“The evidence is that Rule 701 hasn’t helped a lot,” Rosenthal says. “We haven’t seen more companies go public. And no one has come up with a good reason why.”