What's the catch in an offer for share?


6

I'm a software developer and quite illiterate when it comes to business thing.

Recently someone has asked me to join a company and, while the salary is not higher than what i currently earn, he offered me a 12% of share in the company. I have to say that I am pretty excited about this offer because other shareholders are reputable people and quite high profile (one CEO of highly reputable company hold 30.5%).

My question, is there a catch in this kind of offer?
What are the things that I should be aware of before decide anything?

Could it be that, somehow, in the future my share will be reduced out of my control?

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asked Mar 23 '11 at 19:55
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Rudi Adianto
138 points

2 Answers


8

Yes, they could reduce your percentage ownership of the company in the future, but this is normal and would generally happen to the other shareholders at the same time. For example, let's say you own 12%, but then the company raises money by selling 50% of itself to a VC. They'd do this by issuing new shares, doubling the number of shares in circulation, so while the total number of shares you held would stay the same, they would now represent just 6% of the company. Similarly, the CEO you mentioned would see his/her shareholding go down from 30.5% to 15.25%. This is what people are talking about when they refer to "dilution".

The important thing to remember with events like that is that they are -- or at least, should be -- good things. The money that the VC invested would go into the company, so the company's value would increase -- you'd have a smaller portion of a bigger pie. For example, if the company was worth $100,000 before the investment, your shareholding would be worth 12% of that, or $12,000. If the VC invested $150,000 for their 50% of the company, then the company would be worth $100,000 + $150,000 after the investment (just because it would have $150,000 cash in the bank), so your shareholding would be worth 6% of $250,000, which is $15,000. And, assuming the company is well-run, the money will be spent by the company on building a successful product, so it will increase the company's value above and beyond the amount of the investment and wind up making your shares worth even more.

(An aside -- I chose 50% because it's easier to do the maths -- a VC would normally take a smaller percentage.)

The one caveat to this is that shady boards of directors have been known to harm minority shareholders by selling newly-issued shares cheaply to their friends, diluting the other shareholders to benefit themselves. Your best defence against this is if you can trust the directors of the company; it also helps if there are independent (non-board) shareholders with large stakes and expensive lawyers -- one great advantage of having angel investors and VCs!

answered Mar 23 '11 at 21:04
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Giles Thomas
1,540 points
  • an eye opener for me, thanks. – Rudi Adianto 13 years ago

1

Congratulations! What a great testament to your skills and experience.

There is potentially different "types" of shares in the corporation. These different types of shares may have different privileged and rules. Some may be open to dilutions. Other might not. Some might permit voting on corporate issues, other might not.

Critical issues to look at:

  • Dilution (@Giles did a great job on this)
  • Voting Buy/Sell: Who can buy shares, how you can sell yours. You want to make sure that that all have equal access to new or "returning" shares. Impacts dilution, and also if you need to/choose to leave.
  • Vesting: When you get the shares. Are they up front? Does everyone else get them upfront? Or do they earn them over time?

Read the articles of incorporation, by-laws, operating agreement, and subscription agreements for the company. Or better yet -- have a lawyer do it.

It sounds like a great opportunity for you. I hope we get to learn more about it.

answered Mar 24 '11 at 01:29
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Joseph Barisonzi
12,141 points
  • *(Other people can edit and add to this list of things to look for-- that would be awesome.)* – Joseph Barisonzi 13 years ago
  • thanks joseph, both for the answer and the compliment. =) – Rudi Adianto 13 years ago

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