Lyft's Risk Factors Are the Stuff of Bad IPO Dreams

(Bloomberg) -- The risk-factors section of an IPO prospectus is a bit like a transcript of a chief financial officer’s worst nightmares.

For Lyft Inc., which filed publicly for an initial public offering Friday, the long-and-short of it is that it’s a new business that doesn’t know what the future will hold or whether it will turn a profit, ever. The economy could collapse! The brand could deteriorate!

Worrying about never making money might seem a bit obvious for a money-losing company, especially one seeking a market value of as much as $25 billion. In Lyft’s case, though, losing $911 million in 2018 despite revenue doubling to $2.2 billion from the previous year requires underscoring.

Regulatory and legal risks stand out in Lyft’s S-1 filing Friday, particularly challenges to its treatment of drivers. Uber Technologies Inc., Lyft and a raft of food delivery businesses have built their businesses by classifying workers as contractors rather than employees, meaning they aren’t guaranteed a minimum wage and don’t get health insurance.

Lyft acknowledges as much and warns that government regulators or a court determination that drivers are employees “could harm our business, financial condition and results of operations.” Lyft says it’s involved in “several thousand” individual legal claims, “including those brought in arbitration or compelled pursuant to our terms of service to arbitration, challenging the classification of drivers on our platform as independent contractors.”

Not Settled

Attorney Shannon Liss-Riordan, who has sued ride-hailing companies on behalf of drivers, said her firm has more than a thousand cases in private arbitration with technology startups.

“This is not a settled issue. This issue is continuing to be litigated,” she said. “These companies think they have side-stepped enforcement of the wage laws for their drivers by implementing arbitration agreements that just make it more difficult for drivers to pursue claims against them.”

Lawmakers in California, home to both Uber and Lyft, have been reassessing the state’s independent contractor laws. Last year, the state Supreme Court issued a landmark ruling expanding the types of workers who are entitled to employee status. The implications of that decision are just starting to become clear.

In short: While Lyft has been operating on the same business model since 2012, court proceedings may be just warming up.

Data Dangers

Uber and Lyft are going public at a challenging time for technology companies. In addition to legal, regulatory and political challenges to their business models, they face mounting interest in their handling of user data.

“They grew out of Silicon Valley and they symbolize Silicon Valley and they’re twinned with the other Silicon Valley tech companies that are inviting greater scrutiny," said Alex Rosenblat, author of the book “Uberland: How Algorithms Are Rewriting the Rules of Work.”

The Lyft filing also details the risks arising from hypothetical future data breaches, data protection violations, payment processing glitches, unauthorized text messages and even problems with third-party background check providers.

And if that’s not enough to lose sleep over, here are a few more details to focus on:

• COMPETITION: Lyft is small potatoes compared with Uber. “Certain of our competitors have greater financial, technical, marketing, research and development, manufacturing and other resources, greater name recognition, longer operating histories or a larger user base than we do,” Lyft said in its filing.
• PROFITABILITY: OR LACK THEREOF: Financial results fluctuate from quarter to quarter and based on the weather, making them difficult to predict.
• MORE LAWSUITS: In addition to regulators and drivers taking it to court, Lyft faces a lawsuit alleging discrimination against disabled passengers and another by a limousine service accusing it of unfair business practices.
• MANAGEMENT CONTROL: Co-founders John Zimmer and Logan Green, the chief executive officer, will control close to half of the voting rights at the company through shares that count for 20 ordinary shares. Investors will have little choice but to trust their decision making.

--With assistance from Peter Blumberg.

To contact the reporters on this story: Eric Newcomer in San Francisco at enewcomer@bloomberg.net;Olivia Zaleski in San Francisco at ozaleski@bloomberg.net

To contact the editors responsible for this story: Mark Milian at mmilian@bloomberg.net, ;Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha, Anne VanderMey

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