Equity for the Gig Economy?
I am not going to bury the lead. Gig (On-Demand, Entrepreneurial) workers may finally be able to get equity awards like those received by employees.
On October 11, 2018, Uber filed a request (available from Axios) with the SEC to allow these workers to receive pre-IPO equity that is compliant with Rule 701 and allow those equity awards to be registered for post-IPO use and issuance under an S-8 Registration. This would be a fundamental change to equity compensation and change the playing field for companies active in the gig economy.
A couple of decades ago we heard about the growth of the service economy. There were predictions that manufacturing would become an increasingly smaller portion of the workforce and more of us would spend time helping more of the rest of us. Those predictions were right. The service economy did not do wonders for employee retirement savings. It didn’t do much to stave off the increase in healthcare costs. At least most people in the service industry had “jobs” and were “employees” with the associated benefits that come with both.
A 2017 study by Intuit predicts that 43% of US workers will be members of this group by 2020. (That gives all of us only 2 years to get our acts together.) Equity compensation is just one component of the total rewards equation that must be addressed to ensure we don’t devolve into some form of pay chaos as the gig economy grows. I await other writers to address things like market data, retirement, pay equity and so much more.
Back to equity. The SEC has expressed some interest in addressing the needs of the gig economy. With the clout of a company of Uber’s size behind the recent push, we may finally see some real results. This is going to be fantastic, but it won’t all be wine and roses. Some new issues that will need to be addressed:
Companies get a tax deduction for employee compensation related to most forms of equity. This will not happen automatically, or ever, for these non-employee gig workers.
Accounting rules for basic employee equity compensation create a fixed expense for the company. It is unlikely the accounting folks will care if the SEC has allowed gig-workers to get equity. The rules will still put companies with employees at an advantage to those with “workers.”
Pre-IPO securities rules referred to as "Blue Sky" rules, will not change as quickly. Companies in many states will have unequal footing when compared to those in states like California who is sure to match the SEC almost immediately.
Companies who are not paying payroll taxes and other employee benefits may have greater budgets to offer additional equity. Models for this don’t exist and reliable market data will not exist for years.
To recap: Companies may soon be able to offer equity to non-employee workers. This will be great, and bad, and will also create chaos. Sounds like equity compensation in a nutshell!