The risk of recourse

The news of the day in startup twitter is that Bolt has just conducted a layoff. Some of these employees had taken out loans from the company to exercise their options. I just got done speaking to a few reporters about it today.

First, these loans are inherently risky. I wrote about this many months ago when the CEO announced publicly that the company would offer these loans out. Recourse loans are a good option for some individuals, but the vast majority of startup employees should not be touching recourse loans to exercise their options. They can and have bankrupted individuals.

These loans should not be offered to employees on a broad scale. They should only be available to the individuals who can take on the risk of servicing the debt in the occasion that the worst case happens.

In this situation, the worse case scenario is that you are laid off by the company and your company will demand that you pay back the loan in full. This is unfortunately the situation we see at hand at Bolt. While I do not personally know any employees who took out the loans, I’ve worked with thousands of startup employees who are in this position.

These employees likely took out the loans without having proper education on how stock options work, yet alone the debt instrument. They were very likely blindsided by the layoffs and the corresponding triggers that require repayment. In addition, they likely will have a difficult time servicing the debt now that they no longer have a source of income. Last and not least, once they do pay off debts, they will hold Bolt stock which may not be liquid for years (or ever).

As you can see, this can snowball into a terrible situation very quickly. I’m hoping that is not the case and that Bolt will hopefully help these departing employees.