Photograph by Adrianna Williams — Getty Images

Uber plays hardball with early shareholders

Updated: Jun 20, 2014 3:08 PM UTC

Two months ago, an early Uber employee thought that he had found a buyer for his vested stock, at $200 per share. But when his agent tried to seal the deal, Uber refused to sign off on the transfer. Instead, it offered to buy back the shares for around $135 a piece, which is within the same price range that Google Ventures and TPG Capital had paid to invest in Uber the previous July. Take it or hold it.

The employee also learned that Uber had amended its bylaws more than a year earlier, in order to restrict unapproved secondary sales. It was unclear if the bylaw change actually applied to shareholders who had not been party to the vote -- lawyers seem to disagree on this point of Delaware law -- but Uber threatened litigation if he tried to proceed. So he held. The financial and reputational hassles of a lawsuit would have just been too much, even if he had won.

"We believe all shareholders are bound to transfer restrictions and will pursue legal means if necessary in order for those restrictions to be respected," explains Uber spokeswoman Nairi Hourdajian, without addressing any specific situations.

Fortune has learned some early Uber shareholders did sell stock back to the company earlier this year, including at least one at around the aforementioned $135 per share price (which works out to a valuation just south of $4 billion).

"The company basically told them that it isn't planning to go public anytime soon, so this would be their only real way to sell," explains one Uber investor who has not sold any shares. "They also asked sellers to... [agree] to lock up the remainder of their stock, which kind of is de facto acknowledgment that the shares weren't really locked up. I know a couple of parties who sold [back to the company] because they decided liquidity at an artificially low price was better than no liquidity at all."

To be sure, Uber is not the only high-flying Silicon Valley tech company to restrict the sale of its shares on the secondary market. Both Airbnb and Dropbox, for example, are known to keep tight leashes that go beyond traditional rights of first refusal (ROFRs) -- largely in reaction to Facebook's (fb) chaotic pre-IPO free-for-all. But Uber is arguably more aggressive.

At the same time that it was preventing the aforementioned employee from selling, Uber also was preparing to raise new outside funding that ultimately would value the company at more than $18 billion. What this means is that Uber's share buyback program effectively doubled as an anti-dilution program. Buy shares from early angels and employees, and then rework/resell them to hedge funds at a much higher price with fewer protections. Even if Uber had not yet gotten term sheets for the $18 billion valuation, it certainly knew that the next financing would be at a significant step-up.

"It's nothing more than greed," says one of Uber's angel investors. "And they can get away with it because no other popular startup is going to take your money if you're known as the guy who sued another popular startup. It's a no-win situation."

[This fear of being viewed as a startup enemy also is why none of the early Uber investors we spoke with would allow us to publish their names.]

To be sure, it's extremely hard to feel bad for anyone holding Uber stock, particularly those who have been in since 2009 or 2010. Thousand of dollars into Uber at the outset are now worth millions of dollars. It's a fantastic deal, even if only on paper.

Moreover, there certainly is a good case for why privately-held companies like Uber want to control their cap table, and even restrict financial reporting so as to prevent leaks that could harm competitive positioning. Or, as one Uber ally explained to me, "It's in everyone's best interest for shares not to trade." Another backer added: "If Travis ever feels that the share program is causing employee morale problems, he'll rectify it somehow... his employees are very important to him."

But it seems to me that Uber still could strike a better balance, in order to better reward those whose early investments and efforts helped a nascent startup grow into a household name worth more than Hertz (htz). Particularly for those who originally bought in before the bylaws were changed. Consider it mid-surge pricing.

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