Airbnb asked the SEC for permission to offer equity to its hosts. If Airbnb gets approval, should your company follow? The answer is different for every company, but six factors can help you make up your mind.
Airbnb arranges for people to rent your house or apartment. Guests pay Airbnb when they book a stay, get the keys to the house or apartment, and are supposed to follow the rules set by the host -- including returning the keys when they depart.
Hosts who are not Airbnb employees and receive no employee benefits interact with consumers before, during, and after their stay; keep the place stocked with the basics and clean up before the next guests arrive. 24 hours after a guest checks in, Airbnb releases the payment keeping a three percent host service fee.
The SEC currently allows investors and employees to own equity or get access to stock options under its Rule 701 -- allowing private companies to issue up to $10 million in equity to employees, without extensive disclosures.
Airbnb has petitioned the SEC to extend those eligible for equity to include its hosts.
If the SEC approved Airbnb's request, any gig economy operator -- such as Uber or food delivery service GrubHub -- would likely to eligible to offer equity or stock options to its gig contractors. Here are seven factors to evaluate in deciding whether to follow Airbnb.
1. Does your company operate in the gig economy?
The well-known gig economy players have shifted the idea of what constitutes a workforce so they can grow with lower their fixed costs.
But even if your company does not have a workforce that largely consists of gig contractors, what Airbnb is trying to do could be worth considering for your company. After all, if you hire contractors -- many companies hire them to perform projects (such as building apps), then paying contractors with stock options could be relevant to your company.
2. Would your contractors be willing to accept stock options instead of some cash?
I've contracted out my services for decades and the two times I've accepted stock options in lieu of cash have been a great deal for the company -- because I ended up working for free.
If your company has a private market valuation in the billions of dollars, contractors might view stock options as having some potential value. But contractors who need the money from their gigs to pay living expenses won't accept stock options in lieu of cash.
If you think adding stock options to their cash compensation would make them work longer hours and accelerate your revenue growth, it might be a good move.
3. Would you be willing to file quarterly financial statements if giving equity to contractors gave your company at least 500 unaccredited investors?
But offering stock options could add to your fixed costs. That's because if you offered such options to contractors -- and hundreds of them accepted, you could end up being required to issue quarterly financial reports as if you were operating a public company.
That's because unless the SEC or Congress revises Section 12(g) of the Exchange Act, which currently requires companies with more than 2,000 shareholders or more than 500 unaccredited investors -- those with a net worth less than $1 million, your company would have to produce those quarterly reports.
Since Airbnb has more than five million listings, it would not take too many hosts to accept Airbnb's stock options offer before Airbnb topped the 500 unaccredited shareholder limit, according to TechCrunch.
4. How much tax would you have to pay when issuing stock options?
I have no tax expertise and would consult one for estimating the tax implications of offering stock options. Based on what I have read, the tax calculations are complex and it is better to know how they work before embarking on such a program.
5. Would it be less costly to pay traditional benefits to contractors than to issue stock options?
Another factor worth considering is whether it would motivate contractors more effectively to offer them employee benefits like health care, retirement plans, and training instead of offering them stock options. I think this is a calculation worth doing -- though my guess is that the stock options would consume less of the company's cash.
6. If you operate overseas, are you willing to overcome regulatory issues to offer stock options to non-U.S. contractors?
If you operate around the world, the costs of offering stock options to contractors outside the U.S. might exceed the benefits.
Offering stock options to contractors is a complex business decision. Considering these factors will help you reach a conclusion.