Lyft in Trouble

Originally published on 30 March 2023.

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Disclaimer: I worked at Uber, Lyft's US competitor, between 2016-2020. As always, I aim to remain independent in my analysis: I hold no positions in any of the companies mentioned in this article, and have not been paid to write about any of the companies. See my ethics policy on more details on how I aim to stay fully independent.

Update: 3 weeks after this article was published, on 21 April 2023, the Wall Street Journal broke the news that Lyft plans to cut 30% of its workforce. Subscribe to The Pragmatic Engineer to get the occasional analysis that is ahead of the news in your inbox.

Lyft is a rideshare platform that’s a direct competitor to Uber, operating in the US and Canada. The company was founded by software engineers Logan Green and John Zimmer in 2012 and raised $4.9B in funding before going public in 2019, at a value of $29B. Today, the market cap of the company has collapsed by nearly 90%, to $3.37B at time of publication. This is less than it attracted in fundraising.

The company is bleeding money: in 2022 it brought in $4.1B in revenue, while making a $1.6B net loss, with $1.8B cash (or its equivalent) on hand. At first glance, these numbers look worrying, but the true situation is not nearly as bad. The adjusted net loss – omitting stock-based compensation or payments related to layoffs into account – was $531M.

Still, an adjusted net loss of $531M is still not pretty, knowing that Lyft has $1.8B in cash-like reserves.

It is pretty telling that the company’s revenue was $4B in 2022 but its market cap is a mere $3.3B. A company trading below its annual revenue is unusual. For example, the market cap of Uber is roughly 4x the annual revenue (2022 revenue of $17B, market cap at $61B).

In response, Lyft has taken drastic action, announcing a new CEO on Tuesday, 27 March. David Risher, who was Amazon’s SVP for US Retail between 1997-2002, is assuming the role. Both Lyft’s cofounders are stepping away from management duties.

This change signals its “wartime” at Lyft. There’s plenty of other signs, too:

  • Lyft’s market share has stagnated versus Uber’s, with 28% of the US ridesharing market, compared to Uber at about 72%, as per Bloomberg Second Measure. Over the past 5 years, its market share has been static: at the end of 2017, Uber held 71% of the US ridesharing market.
  • Stock is down by close to 80% in 12 months - and 90% from the IPO price
  • Founders who put company culture first seem to be withdrawing

We covered more on the difference between “peacetime” and “wartime” at tech companies.

What can employees expect will happen? Major changes could well be coming, given the financial situation of the company. The most obvious step is to halt everything that doesn’t contribute to revenue and to cut costs aggressively.

It’s likely the company will eliminate positions it doesn’t need, and organize teams to do more with fewer people. Cost centers will likely see no additional investment, and I wonder if the new CEO will support investing in Lyft’s extensive open source projects, including Envoy – a cloud-native proxy – or Clutch, an infrastructure platform management platform. We touched on Clutch in the deep-dive on Backstage, when discussing alternative developer portals. This is additional work Lyft does for free for the community; will it remain a priority?

Lyft’s innovative stock-based compensation approach is now a big problem. In 2020, Lyft’s stock price was on a downward slope, and the company changed how it awarded stock to employees. Instead of issuing a stock package that converts into stock units when issued and vests over 4 years, with a 1-year cliff, the company now issues a dollar amount of stock every year, which converts to stock units upon vesting.

Basically, Lyft removed all the risk in stock price movements for employees. Back in 2020, this change boosted confidence among new joiners who knew exactly what compensation they were getting, even if the stock price dropped. On the downside, if the stock went up, employees wouldn’t gain.

However, today Lyft faces two additional, related problems:

  • The stock price is at an all-time low and still trending down
  • The company is issuing ~20% of its current market cap as stock-based compensation, which leads to sell pressure, pushing the stock even lower

Here’s Lyft’s stock price changes since their 2019 IPO:

Lyft’s stock price - and thus market cap - is down about 90% since their IPO, and 80% in the past 12 months.
Lyft’s stock price - and thus market cap - is down about 90% since their IPO, and 80% in the past 12 months.

One factor that’s hard to ignore is just how much Lyft’s stock compensation is dragging the stock down. In 2022, the company spent on stock-based compensation $767M for employees. It’s safe to assume employees sell the majority of stock that vests:

  1. Lyft issues stock akin to cash, with no downside if the stock price goes down. So employees likely treat it as cash, selling on vesting.
  2. It is sensible to sell stock when the stock price is trending down: sell it and diversify the investments.

Day to day, about $150-200M worth of Lyft stock is traded; around 20M units on average. This means the stock Lyft issues comprises several days’ worth of day trading volume, and issuing this much stock can impact the price by creating sell pressure.

If Lyft’s market cap was 10x what it is today, or the daily traded volume was 10x higher, these stock sales would have much less impact. But if the company continues its stock compensation approach, it could deepen the downward spiral, wherein:

  1. Lyft keeps issuing a larger percentage of its market cap in stock
  2. Employees sell the vested stock
  3. This pushes the stock price lower
  4. The company needs to issue more stock for the same equity refresh dollar value

Stock compensation is going to be reduced across the company. The problem for Lyft is that the lower the stock price goes, the more stock it needs to issue relative to the market cap. In 2022, Lyft had to issue $767M of stock, 23% of the current $3.3B market cap!

On one end, Big Tech employees could be jealous of people at Lyft; at many companies, stock prices fell and so did total compensation packages. But there’s a downside to Lyft paying so much in stock compensation when its market cap is shrinking drastically: leadership could look to cut stock compensation. In February, Lyft’s CFO stated the company aims to cut stock-based compensation in half by next year, saying:

“We are looking for opportunities to significantly cut costs and drive efficiencies. As one example, let me speak to stock-based compensation expense. Our current plans are to reduce this expense to approximately $400 million in fiscal year 2024, through measures such as our previously announced headcount reduction and shifting more of our employee base to international locations. We expect stock-based compensation will vary, but generally come down quarter-to-quarter as we progress towards this target.”

So Lyft plans to hire in cheaper markets. However, this doesn’t explain how it can cut stock-based compensation by half. In 2020, Lyft already spent $565M on stock-based compensation with 2,700 employees, an average of $207K per employee. In 2022, the company spent $769M on stock-based compensation among 4,400 employees, an average of $174K per employee.

To achieve the CFO’s stated $400M stock-based compensation spend, Lyt needs to:

  • reduce stock paid by ~50%, to an average of ~$90K/employee, if no change in headcount:
  • reduce headcount by ~50% if no change in stock compensation:

Both are extreme and I expect Lyft to drastically cut stock and issue less per year, than ever before. If not, the CFO won’t be able to hit the $400M/year stock expense target.

This is all a complicated way of predicting that Lyft will likely start paying less in total compensation. And I won’t be surprised if the CFO is asked during future quarterly earnings calls, how Lyft is doing at reducing stock-based compensation.

Would shareholders have replaced Lyft’s CEO earlier, if they’d had the power? In an important detail, the cofounders must have jumped, rather than being pushed out of their jobs. When Lyft went public, it put a special dual-class share structure in place where the cofounders held 49% of voting power, while only holding 5% of the stock, and could retain this control for 50-60 years. At the time of the IPO, Harvard Law School students Lucian Bebchuk and Kobi Kastiel analyzed the risks of this structure and concluded:

“[The problems with the cofounders holding absolute control and retaining this control for 50-60 years] are expected to decrease the economic value of the low-voting shares that public investors hold (and thus the price at which such shares are expected to trade). Each of the effects that we analyzed can be expected to significantly decrease the economic value of Lyft’s low-voting shares that public investors will hold – and should be fully recognized by these investors.”

The analysis turned out to be correct, and the value of Lyft’s shares could have also affected by investors having no say in how the company is run.

And don’t forget: the founders still have 49% control of the company. The strategy of dual-class shares that can work well when a company is thriving, and when founders do not need to please investors all the time, can actually hurt the company’s stock price, as investors know that even a large investment does not buy them a voice.

Lyft raised a total of $7.2B in capital yet is worth half of this today. The company raised $4.9B during venture funding rounds and $2.3B during its IPO, and, still, the company is worth $3.3B at time of publication. Even worse, it’s making a loss and unable to gain market share versus Uber, which leave few options but to aggressively cut costs and eventually turn a profit as the #2 ridesharing business in the US.

The cofounders abruptly stepping down and bringing in a former Amazon executive to attempt to turn the ship around, can be seen as a sensible business decision. It could also be an act of surrender by them and throwing in the towel, unable or unwilling to make the tough changes that are surely ahead for the company.

Could we be seeing a reckoning for VC-funded companies that struggle to build a profitable business? I think this is what is happening at Lyft, and similar other cases will surely play out. It was only in 2020 that Lyft was paying top of the market entry-level software engineers than any other company in the US. But with the company being in a financially difficult situation, it’s valid to ask: does Lyft have the business model to compete with Big Tech compensation packages, and also turn a profit?

The era of cheap money and no expectation of making a profit, seems to be over as interest rates keep rising. This means loss-making businesses like Lyft either need to figure out how to turn a profit, like Uber is successfully doing, or risk eventually running out of money.

This was one out of the five topics covered in this week’s The Scoop. A lot of what I share in The Scoop is exclusive to this publication, meaning it’s not been covered in any other media outlet before and you’re the first to read about it.

The full The Scoop edition additionally covers:

  • A trend of more works councils at tech companies. Tech companies in Europe have not been big on Works Councils – bodies which represent employees – but this seems to be changing fast. Councils are now present in almost a dozen tech companies in Germany and the Netherlands. I share details on why this is happening now.  Exclusive.
  • Why did GitHub fire its engineering team in India? In a somewhat unexpected move, GitHub has let go all of its software engineers in India. Why, and what will this mean for its products? I’ve talked with affected devs for details. Exclusive.
  • Twitter’s disappointing equity refreshers. Software engineers who stayed at Twitter despite its increasingly hostile workplace were promised equity awards, based on performance. But employees I’ve talked with are disappointed with what they got. What could these lackluster awards mean for Twitter’s future? Exclusive.
  • A thriving bootstrapped company. Challenges at Big Tech companies and venture-funded startups dominate the news. For a change, I contacted the founder of HR Partner, a small, bootstrapped company whose founder wrote its Ruby / JavaScript application for the first 4 years. After a slow start, the company has nearly doubled its team the past few months. Why don’t we hear more stories like this? Exclusive.

Read the full The Scoop.

Update on 31 March: updated the wording on how the company did not issue $769M worth of stock in 2022, but spent this much on stock-based compensation.

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