Technology is typically associated with progress. The era of PC, mobile, and the internet made information sharing and communication much easier than it was twenty or thirty years ago. But did technology make us more affluent? Or did it reduce the inequality inherent in the economy?
Some claim now that technology might actually exacerbate inequality. In their book iDisrupred, Michael Baxter and John Straw highlight two factors as agents for inequality created by tech: The first one is the way in which patents laws ensure that large corporations will enjoy the majority of wealth created by innovation, at the expense of smaller ones.
The second is the market of free internet services, such as email, search engine, digital map, and calendar. According to Baxter and Straw, the trend of free services, dictated by Google and Facebook, means that everybody else will have to play by their rules, launching free products and adopting advertising business model. The problem, they say, is that the digital advertising market is already governed by Facebook and Google with very little space left for smaller, more innovative companies.
Moreover, a 2016 World Bank report claimed that the economics of the internet favor natural monopolies. According to the report, monopolies’ shareholders, as well as their employees will accumulate the majority of profits created by tech innovation: “Not surprisingly, the better educated, well connected, and more capable have received most of the benefits- circumscribing the gains from the digital revolution.”
But inequality lies in companies’ structure as well, between employees and shareholders, and founders. According to Harvard Business Review, big tech companies outsourced their low-income workers, focusing instead on core competencies such as engineering, marketing, and sales, creating two strata of people: those working for tech giants and “all the rest,” such as janitors or cafeteria workers.
Perhaps the biggest sign of inequality in tech takes place in the allocation of stock options, once considered a perk – today, maybe, more of a hunchback. More and more employees are getting stock option agreements containing harsh terms that restrict and even prevent their ability to ever liquidate them. The chances of these employees to financially benefit from these options are low, because the company is late to go public if at all and these option may expire before and because management control the process at least until the IPO. Even when companies do go public, the financial benefit to the employees may be smaller, since by the time that their shares are free for trading, the price already took a huge hit against its price on the IPO. This was the case in most of the tech IPOs of recent years, in which the stock prices took a dive from their price on the first day of trading (as in Snap, Blue Apron, Apptio, Okta).
Take Snap as an example. 80% of stock options issued to employees in the years preceding to the IPO were restricted stock units, shares that become liquid after a certain date is reached, or a certain mile stone has been met even after an IPO. In comparison to regular stock options, restricted options are also heavily taxed (39% at the federal level) in addition to applicable state taxes.
While the majority of Snap’s employees will have to wait for the end of the lock-up period, and then wait more until Snap’s stock will reach a higher price, the founders and a small group of shareholders, have already cashed out big time on the day of IPO. Given the IPO price of $17 a share, co-founders Evan Spiegel and Bobby Murphy sold shares for $272 million each. Other shareholders who made millions on the day of IPO include Mitchell Lasky, GP at Benchmark, a VC firm that has invested in Snap; VP of engineering Timothy Sehn; Snap’s chairman Michael Lynton; and VC firms such as Benchmark, Lightspeed, and General Catalyst.
Employees in tech companies are not just restricted by the type of stock options or their amount, but also restricted by harsh limitations on their ability to sell these shares. A growing number of Uber employees have recently been seeking to sell their shares in the company but found out it is more complicated than they had thought in the beginning. The management forced some severe restrictions on shares selling, keeping a tight grip on transactions. Uber’s management has a right-of-first-refusal policy that allows it to repurchase employees’ stocks at a price set in its latest round, rather than to allow it to be sold at a higher price and at market value, via exchanges.
Other companies are restricting options to time limits, so that they can’t be exercised in the distant future, or can’t be exercised in the event that the employee leaves the company. Sometimes companies are going through a buy back process, in which the company buys back a stake of the company’s options and shares from employees, but this process as well is fully controlled by the company’s management, which picks its favored terms and prices and sometimes sets further limitations on the remaining shares and options that the employees remain with. Airbnb and Pinterest also restricted employees from selling their shares in the secondary market, after a buy back process. Houzz and SpaceX have restricted any kind of transaction in stock options, even without the benefit of a buy back.
Trading in private company shares in the secondary market is perhaps employees’ last resort, but here too, it is traditionally conditioned by management’s consent.
The-Elephant, a new peer-to-peer platform active in the secondary is the first platform that allows senior employees or former employees to sell their stocks in private tech and pre-IPO companies directly to accredited investors, without the need to go through corporate management. Active in Europe and Israel, it allows more employees to enjoy an earlier exit, resulting in helping democratize the tech industry, allowing more people to enjoy the wealth created by it.
Selling employees and co-founders’s stocks and options through such a platform benefits not only the employees, but also the company. Contrary to a buy back, it is a financial benefit given to employees not at the expense of the company’s cash resources. In addition, as usually few investors buy stocks from groups of employees or former employees, the company enjoys the fact that its shares are now being held by fewer hands, those of professional, accredited investors.
The-Elephant allows accredited investors in Europe and Israel for the first time to buy private tech companies’ shares in smaller portions, as the market has previously limited the access only to institutional or large-scale investors. With The-Elephant, smaller accredited investors of $100,000 per investment and above will have the ability to diversify their investments further and get access to equity in pre-IPO tech companies by associating them under a limited partnership. It enables them to manage the risk accompanied by an investment in a tech company while employees will be able to benefit financially from their options and retain some of their stocks while waiting for the big “Exit”.
Written by The Elephant Research with the assistance of Zirra Analysts