High-risk assets come at a discount. Unless the asset is Uber, in which case the laws of physics are suspended and risk appears to command a premium. These risks were on full display Wednesday, as court documents revealed a California Labour Commissioner had ruled Uber drivers to be employees, not contractors. While this only applies to one driver for now, other similar lawsuits are underway, including a class action lawsuit. A broad, unfavourable ruling could cut Uber’s business model off at the knees. As contractors, Uber’s drivers provide their own cars, as well as paying for gas and insurance. Employees, by contrast, would be entitled to health insurance, overtime and reimbursement for expenses.

This is far from the only risk that could threaten Uber’s business. Insurance is murky, particularly during the time between when a driver opens the app and when they pick up a passenger (at which point Uber’s commercial insurance kicks in). Costs will go up: gas prices, which are borne by drivers, will rise, prompting price increases. Uber is also taking on a huge geopolitical risk with its plans to invest more than $1bn in China, a market that has not traditionally been kind to foreign competition and already has a strong domestic competitor.

Uber is not unattractive, but the risks are not priced in. The company is fundraising at a $50bn valuation; its revenue forecast for this year is reportedly $2bn, four times higher than last year. When Google had a similar valuation, its revenues were three times higher and still doubling. Uber’s valuation has been fuelled by a world awash in capital, and by investors (both venture and institutional) who are ever more desperate for growth. In Silicon Valley, late-stage fundraisings like Uber’s have all but replaced the traditional public offering. A key function of the traditional IPO is to accurately describe a business and its risks to potential investors. Uber’s potential investors might be less excited if they could see its risk factors laid out in a prospectus in black and white.

Email the Lex team at lex@ft.com

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