For decades, companies large and small have issued shares of stock to early employees. This practice gives workers partial ownership in the company and the potential for high returns, while the companies are able to preserve cash assets as their businesses grow. From Microsoft to UPS, and Facebook to Chobani yogurt, hundreds of companies and thousands of workers have benefited from stock-based compensation. Online platform companies, though, have not had the option to issue stock to those who earn income through their platforms without going through a lengthy reporting process mandated by the Securities and Exchange Commission (SEC). Signaling a potential change in rules, several major platform companies including Airbnb, Uber, and Postmates, have asked the SEC for the ability to offer stock to platform earners in recent weeks. Though potentially allowing those earning income through platforms to benefit from these companies’ success, stock-based compensation cannot replace cash earnings, and would need to be accompanied by education and information for new investors.
Currently, SEC Rule 701 allows companies to issue stock to employees, consultants, and advisors as compensation without having to submit detailed financial records. Many gig companies, though, rely on independent contractors to provide goods and services through their platforms–an arrangement that does not fit into the current exemption. In July, the SEC called for comment on possible ways to expand Rule 701 given the changing nature of work relationships and the advent of platform technology. Airbnb was the first company to offer comment, and the only one to do so before the September 24th deadline. Uber and Postmates both submitted letters in mid-October. These requests come in advance of the first public sale of stock in these companies, or their Initial Public Offerings (IPOs), anticipated in 2019.
A few gig companies have experimented with issuing stocks to their participants. Etsy reserved stocks for sellers and small investors to purchase before its IPO in 2015. Rideshare company Juno offered its independent contractor drivers shares in the company when it started in 2015. The legality of this move was unclear, though, and when the company was bought by another rideshare company in 2017, drivers received only pennies per share and sued Juno. Managed by Q, a platform-based cleaning service that hires its workers as employees instead of contractors, began an equity program in July. Uber, Airbnb, and Postmates are much larger companies, and an SEC exemption for stock-based compensation could translate into big gains or big risks for thousands earning income on these platforms.
Issuing stock to platform earners represents a form of worker ownership, allowing those who use the platforms for income to benefit from these companies’ potential growth and financial success alongside traditional employees. Uber’s letter to the SEC argues that a rule change could bring drivers “greater economic security,” and Airbnb’s asserts it could “democratize share ownership and wealth.” In an era when workers face stagnant wages, and the returns to capital have outpaced labor compensation, stock-based pay offers the potential to distribute the benefits of economic growth more broadly. Allowing platform companies to issue compensatory stock could represent a step toward sharing the revenues of these companies, better aligning the interests of platform earners with companies.
By receiving equity, platform earners could gain from companies’ growth and success–but they would also be absorbing corporate financial risk. If a company fails, or even if it is acquired, platform shareholders could lose out on earnings. And if stock was given in place of cash income, these participants may in effect not be compensated for their work. According to a recent survey by Charles Schwab, only a quarter of employees with stock-based compensation ever cashed in their shares. Therefore, equity compensation should not be seen as a substitute for cash compensation, especially for low-wage workers. In addition, those receiving stock–especially categories of workers who may be less fluent in investment strategies and financial markets–would benefit from education on the benefits and risks of investing, and ways of effectively managing investments.
An expansion of Rule 701 also relates to the ongoing discussion about the legal classification of some gig economy workers. While companies tend to assert that platform workers exercise considerable freedom over when and how they work, and are therefore independent contractors, others, including some worker advocates, express concern that these platform earners are in fact employees, and due the benefits and protections that come with that status. Although an SEC rule change would not speak directly to this debate, the creation of an exception specifically for platform workers could set a precedent for a third classification somewhere in between employees and independent contractors.
Looking forward, there are several definitional questions to address in determining if and how to issue stock to platform earners. The universe of online platforms is diverse, with each having different models and different participant profiles. Some, for example, allow earners to set their own prices, while others do not. Some tend to be used by higher income earners, and others by lower income earners. Some users rely on platform income as their primary source of income, while many others use it to supplement other income sources. An expansion of Rule 701 could limit stock options to certain types of platforms or types of earners. The letters offered by companies suggest some potential limitations. Airbnb, for example, proposed that platforms must allow earners to control the marketplace, by being able to remove customers or set prices, in order to receive stock.
Updating policy in a continually evolving labor market is challenging yet necessary. The questions around expanding compensatory stock for platform earners need to be addressed with attention to the potential for shared prosperity and mediated risk. If Rule 701 is expanded to include platform earners, the SEC should consider the relationship between cash and stock-based compensation, and whether companies are providing sufficient information and education to those taking on the risk of stock ownership.