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Tech Unicorns Engaging in Stock Buybacks has Some Securities Law Experts Worried

According to analysts, private “tech unicorns” (tech companies with a valuation over $1 billion) have been recently engaging in unusual stock buyback activity in the private markets. For example, Uber Technologies Inc., in a recent announcement, said “those who work at the San Francisco company for at least four years can sell as much as 10 percent of their shares.” This sale highlights two emerging themes in the securities market: (1) multinational companies are able to raise billions in the private markets from both institutional and retail investors without the need to go public; and (2) the function of going public for these companies that have raised capital in private offerings is primarily to return money to shareholders who bought stock in private offerings.

For many tech companies, a significant portion of employee pay is in the form of preferred stock, varying from 5% – 30% of overall compensation. As industry analysts note, Uber’s private stock buyback program will help them retain talent, as employees anxious for the company to go public so as to liquidate stock options will be able to realize some of their compensation more immediately. However, some experts are worried, because Uber appears to be profiting off of this buyback, due to differing liquidity expectations of the buyers and sellers, and the subsequent wide spread between the bid and ask of these private stock offerings.

Consequently, Uber can purchase common stock from employees for 25% – 30% less than what it has sold the stock for in recent funding rounds. Given that Uber is not publicly traded, employees who want to unload their stock have few options due to the limited liquidity, and can sell primarily only to Uber. Investors who want to purchase shares in Uber, which is a private company whose stock offerings are scarce, are willing to pay a premium because it is difficult to access the stock. In this scenario, Uber is profiting off the bid-ask spread between what employees are willing to sell the stock for, and what investors are willing to pay for it.

Some analysts believe these transactions could be considered equity financed stock buybacks—issuing stock to buy back existing stock. However, in this instance it is occurring in reverse in that Uber is buying back employee stock, so as to issue it at a premium to investors. This trend may increase in the tech sphere, given the number of tech unicorn companies that are not publicly traded, however have employees eager to liquidate stock options. Future employee lawsuits could arise due to the significant premiums companies such as Uber are reaping from the “spread,” rather than allowing employees to sell the stock directly to investors for the private market rate. Whether or not these tech unicorns go public, and to what extent employees sustain damages due to limited ability to exercise their stock options at what is considered a “fair” market price, will determine whether tech employee claims begin to arise out of these unusual stock buybacks.

The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud.  If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.