It's a good idea to align the interests of your employees with those of your investors. If that happens and the company does well, the employees and investors are better off. Many startups give employees stock options that convert into common shares that go up in value if the startup has a successful initial public offering (IPO).

But what if a company has mostly contractors instead of employees? And what if you offer those contractors a shot at the IPO right before you sell shares to the public? That's what Uber and Lyft--with 68.5 percent and 28.9 percent of the ride hailing market, respectively--are planning to offer some of their drivers (who are contractors), according to the Wall Street Journal.

Lyft -- which published its IPO prospectus on March 1 without revealing the per-share offering price -- plans to give cash to drivers that they can keep or use to purchase shares in Lyft's IPO (the number of shares they can buy will become known once Lyft discloses that price).

If they've driven 10,000 rides on the platform, they'll get $1,000. Drivers who've logged 20,000 rides will receive $10,000, according to the Journal.

The companies are doing this to motivate their most valuable drivers and that should boost their per driver revenues.

Let's say you're lucky enough to be one of those drivers. What should you do?

There's a lot to consider--but ultimately, you should take the shares.

One big difference between offering stock options to startup employees and giving contractors a chance to buy in at the IPO price is the different risks and returns available to each. Options for startup employees expire worthless if the company fails or end up being worth a life-changing amount if the company succeeds.

For example, some early employees of Uber received options when it was valued at $4 million in its 2010 seed round, according to Business Insider. Now, the company is reportedly worth $120 billion--30,000 times more than it was worth nine years ago.

If Uber's first five years post-IPO are successful, its share prices could go up another 289 percent. That's what happened to Facebook shares in the five years after its May 2012 IPO.

On the other hand, contractors who opt to take their cash and buy shares of Uber or Lyft at the IPO have more risk and far less potential reward. Making this decision can't be easy.

The good news for the contractors is that the Uber and Lyft IPOs are likely to enjoy substantial first day increases--the shares could double on the first day of trading since these companies are so well known by the public.

The bad news is that the shares could go down after the first day pop. That's because both companies have violated one of the key principles in my new book, Scaling Your Startup: Mastering the Four Stages From Idea to $10 Billion: You can't skip a stage and expect a company to last.

Here are the four stages: 

  1. Winning the first customers.
  2. Building a scalable business model--e.g., one that gets more efficient as the company grows.
  3. Sprinting to liquidity--investing to get big enough to IPO.
  4. Running the marathon--sustaining rapid growth after the IPO.

Both Uber and Lyft skipped the second stage and are now in stage three. How so? They are losing bundles of money and lack a clear path to profitability.

According to Bloomberg, Uber revenue rose 38 percent to $2.95 billion in third quarter of 2018 while losing about $1.1 billion. Lyft's 2018 revenues soared 104 percent to $2.16 billion while its net loss rose 32 percent to $911 million, according to the prospectus.

Skipping the second stage of scaling can hurt public company investors. Consider Snap--its shares have lost 64 percent of their value since their peak on the day of their 2017 IPO. Meanwhile, the company posted $1.18 billion in 2018 revenue on which it lost $1.24 billion, according to Yahoo Finance.

Despite those caveats, there are three reasons why eligible drivers should invest in the shares:

1. The stock will likely pop on the first day.

Investment banks who run the IPO process let their best clients buy shares at the price before the shares begin trading. If the company is popular--as Uber and Lyft are--the shares end the day with a big pop, garnering headlines and making the lucky insiders feel great.

2. Owning shares will give you another reason to carry more passengers.

That sugar high will not be worth much unless the company does better after the IPO. If you're a driver-owner, you'll have extra incentive to carry more passengers--thus boosting the company's revenues and value to potential investors.

3. If the company grows faster than expected, the stock will keep rising.

To keep the stock rising upwards, the company must grow faster than analysts expect it will every quarter--which is management's responsibility--not the driver's. But the drivers can help.

If you can spare the $1,000, chances are pretty good that it will be well-invested in Uber or Lyft stock.

Published on: Mar 1, 2019
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.