Early Uber Investors Unload as Much Stock as They Can

This could be the best news coming from Uber in a very long time – for everybody concerned! Travis Kalanick’s influence on the company has just officially been diminished – by about 30%.

You may remember that Softbank deal we were all talking about a few months ago.  Well, it finally came through.  But let me explain a little about how that deal worked.

When an large investor like Softbank wants to invest in a huge startup like Uber that has not yet gone public – they can’t simply purchase shares on the stock market because as a private company there aren’t any shares on the stock market.

The news stories last year trumpeted the fact that Softbank was going to “put more than $1 billion into Uber”.  The media made it sound like Uber, the company, was going to receive $1 billion free and clear.  But that’s not the way it works with private companies.

When the media talked of “putting money into Uber” they never explained how Softbank was actually going to “put their money in”.

When a company like Uber is first incorporated they list in their certificate of incorporation the maximum number of “authorized shares” that can be issued.  This number is usually in the millions.  When venture capitalists and other investors want to invest in the company, they do so by purchasing some of these shares.

As of 2014, Uber had 293 million shares that were owned by a person or entity.  That was out of an original authorization that allowed them to issue a total of 753 million shares.  That left 460 million shares not owned by an investor or employee as of 2014.  Companies always keep some shares on hand to be used as future grants to employees and investors.

Since Uber is still a privately held company, they don’t have to make any of this information public but some of it is known anyway.

Without getting too complicated, the fact is, Softbank’s investment came mostly in the form of buying out the shares that earlier investors owned.  So, they weren’t actually putting much new money directly into the company’s coffers.  Most of it is going to buy out early investors.

Softbank had already come up with the numbers that would dictate how much money they would spend on these share buyouts.  If only a few shareholders wanted to sell, Softbank was willing to purchase up to 50% of each shareholder’s shares. But if a lot of them wanted to sell, then buying 50% from every shareholder would go over the amount they were willing to spend and they would lower the number of shares they would purchase from each shareholder.

As it turned out, so many shareholders wanted to sell 50% of their holdings that Softbank had to cut the percentage down to 29%.

Travis Kalanick unloads as much Uber stock as he can.

Travis Kalanick was one of those who wanted to sell half of his shares.  So, the question is, why did Uber’s infamous founder want to bail on half his shares?  And if he had the choice to sell more, would he have?

Some financial analysts have said, it’s just smart investing.  You sell what you can at this point and if the company’s value goes down later, you will have gotten at least half your shares out at a decent price.  If it goes up, then it’s a win-win.

We think these analysts are just putting a happy spin on the story.  Maybe their companies own a piece of Uber.

The fact is, far more Uber shareholders wanted to bail out on up to half their stock holdings in the company.  Even Kalanick wanted to dump half his shares!

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It seems reasonable to conclude that these investor insiders, who are the people who know more about where Uber is headed than anyone else – just sent a strong signal that they have lost confidence in the future of the company. 

Oh, and while all these early investors were rushing the exits they were willing to dump their stock at a price that is 30% less than it was valued at a few short months ago.  So, no one was thinking, ‘let’s hold onto it for a while, it will surely go back up!’  No, it seems like they must have been thinking, ‘let’s dump this junk while we still can!’

According to Bloomberg:

“Kalanick stands to reap about $1.4 billion from the transaction with SoftBank Group Corp. and a consortium of investors who have agreed to buy equity valuing Uber at $48 billion, said the people, who asked not to be identified discussing private negotiations.

Kalanick, who owns 10% of the company, had offered to sell as much as half of his stake — the maximum board members were allowed to tender.

He had to pare back the amount because of limits outlined in the agreement between Uber and Softbank, the people said.

“One of the wealthiest people in the world on paper, Kalanick would become an actual billionaire for the first time as a result of the sale. Kalanick was pressured to resign last year after the company became mired in legal woes and a raft of government investigations into how it does business. He also clashed with Benchmark, one of the company’s earliest and biggest investors.”

According to TheInformation, Uber’s stock was worth $62.05 per share in 2014.  However, as of late 2017, after the Softbank deal came into view, the Washington Post estimated the current share price at $47.20 – which represents a 24% drop.

Normally, investors are most enthusiastic about selling when the stock price is skyrocketing or projected to skyrocket.  You don’t normally see this kind of enthusiasm while the stock price is falling – unless the investors have a sense that things aren’t going to get better.

Even at a 30% discount over what the price would have been several months ago though, all of these early investors have done very well – in case you were worried about that!

Drivers, we may think this is great, Uber is getting punished for all their bad behavior, but the reality is it’s not good for anybody. What Uber really needs is a huge cash infusion.

Their history shows that whenever they’ve gotten large cash infusions it always resulted in much more generous bonuses, boosts and incentives for drivers.

It also resulted in better referral fees for referring new riders and drivers.  And it resulted in more discounts for riders, which kept all of us a lot busier!

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