Here's why Waymo should really have gotten a bigger stake in Uber for its $245 million 'win'

Dara Khosrowshahi smile

Uber settled its lawsuit with Waymo on Friday on what look to be extremely favorable terms.
As part of the deal, Uber won't have to pay out any of its dwindling supply of cash, or end its self-driving car development.
Meanwhile, the shares Uber is giving Waymo to settle the suit are almost certainly worth much less than Waymo says.

The folks at Uber have got to be smiling pretty wide — and probably even chuckling to themselves.

The company on Friday settled its lawsuit with Google spinoff Waymo on what look to be extremely favorable terms. Uber was able to exit a suit that posed a potentially existential threat to its business without having to pay out any of its dwindling supply of cash, and without having to stop its push into self-driving cars.

What's more, the monetary value of the settlement was almost certainly worth significantly less than the two sides suggested. And the move helps clear the path for the app-based taxi company's long-awaited initial public offering.

"It's clear that Uber is the winner in this," said Robert Bartlett, a professor of law at the University of California-Berkeley School of Law.

I'd go further. Uber didn't just win; from where I'm sitting, it looks like Uber trounced Waymo, long considered the leader in self-driving cars.

In part that's because this case could have been fatal to Uber, and this settlement is far from that.

The case could have effectively ended Uber's self-driving car efforts

The case focused on self-driving car technology and Waymo's allegations that Uber stole its intellectual property to jump-start its own autonomous vehicle effort. Uber sees autonomous vehicles as essential to its future.

While the company depends on human drivers today, it believes that self-driving cars will upend the taxi market, offering cheaper, safer, more reliable rides than humans can offer. Indeed, Travis Kalanick, Uber's co-founder and former CEO, has described such technology as being so essential to the company's future, that Uber would "no longer [be] a thing" if it doesn't become the first to roll out a network of self-driving cars.

In the case, Uber faced the potential threat of being essentially barred from continuing its development of self-driving cars — or, at least, prevented from using Lidar technology, the range-finding laser systems that are widely seen as necessary components for autonomous vehicles.

But instead of having to forfeit its research into self-driving cars or Lidar, Uber only agreed to make sure it wasn't using Waymo's technology — something it was obligated to do anyway, under the law. That seems like a slap on the wrist at worst.

"The commitment to not use Waymo's technology isn't going to meaningfully constrain Uber," said Bartlett.

Uber could have been forced to fork over some of its precious cash

But that's not the only way Uber got off easy. The company faced the prospect of taking a substantial hit to its shrinking cash stock.

As recently as last fall, Waymo was seeking $1.86 billion in damages in the case and was reportedly demanding $1 billion to settle it. Even as recently as this week, Waymo was looking for $500 million in a settlement.

Uber is coming out of this with both the ability to escape years of litigation that weighed on its IPO and a payment that's trivial relative to what Waymo was seeking

Even that smaller figure could have hit Uber hard. The company reportedly had about $6.6 billion in cash at the end of June last year. But Uber's been losing $1 billion or more a quarter. Even with a $1.25 billion cash infusion from SoftBank last month, it likely has $5 billion or less in the bank, and any substantial payout could have dramatically constricted the time it had left before it ran out.

That's no longer a danger, thanks to the settlement. As part of that agreement, it will pay out just $245 million. And that's in stock, not cash. So, Uber will get to hold on to more of its precious funds. And the deal helps to clear the path to an IPO for Uber — and the infusion of new cash — by removing one of the big obstacles standing in the way of it.

"Uber is coming out of this with both the ability to escape years of litigation that weighed on its IPO and a payment that's trivial relative to what Waymo was seeking," said Bartlett.

The settlement amount was determined using "funny money"

And even that understates just how great a deal Uber got, because the settlement terms likely overstate the value Waymo will actually realize.

That settlement figure is based on the nominal terms of the companies' deal. Uber agreed to give Waymo a 0.34% stake in it. As part of the agreement, Waymo agreed to value Uber at $72 billion total. If you multiply Waymo's stake by the total valuation you get the nearly quarter of a billion dollar figure.

But that's almost certainly a bogus figure. Uber's a private company, so its precise value at any one time isn't publicly known or determined in public markets.

"It's all funny money when you're talking about private company stock," said Eric Goldman, a professor of law at Santa Clara University's School of Law.

However, in this case, we actually have a pretty good idea of what Uber is actually worth, because just last month a group of investors led by SoftBank bought shares from existing stockholders. As part of that deal, those parties agreed to value Uber at $48 billion.

Taking that figure and multiplying it by Waymo's new 0.34% stake gives you a value of the settlement of around $163 million. That's nothing to sniff at, mind you, but it's chump change compared to what Waymo was demanding only a few months ago.

Another way of looking at it is that if Waymo wanted $245 million worth of value from Uber, it should have gotten a considerably bigger stake in the company as part of the settlement. After all, on a per-share basis, SoftBank just got a lot more of Uber for its money.

If you figure Uber is really worth $48 billion, Waymo should have gotten a stake equivalent to about 0.5% of the company. In other words, a bigger slice of Uber’s pie than it actually got.

But the dispute was still damaging to Uber

Travis Kalanick Anthony Levandowski That Uber would get out of this mess so lightly was not how many expected this trial to turn out. Almost since the day Waymo filed suit against Uber, this case looked extremely dangerous for the ride-hailing company.

Of course, even if the settlement terms are favorable, Uber didn't emerge unscathed. It fired the engineer it had hired to lead its self-driving car effort after he allegedly wouldn't cooperate with its defense.

And while Uber may have escaped with its financials mostly intact, the limited testimony we did see from Kalanick and other Uber execs gave the world a peek into the sometimes-unsavory moves that the startup has undertaken to maintain its position as the world’s most valuable private company.

Besides, Waymo seemed to be having trouble at trial proving its contention that Uber had stolen and used its technology, said Goldman. When taking such factors into account, it's not as clear who won the dispute, he said.

"Who got a good deal here — it's really hard to game it," Goldman said.

Still, things could have been much, much worse for Uber. And you better believe there were lots of happy folks at its headquarters on Friday.

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