How to financially become a part of a start-up company?


1

I am doing contract work for a start-up company and the founder is thinking of hiring me as an employee (actually as the first employee). I am also willing to work for this start-up company, however the details of such employment are very important.

For me, the most important thing is mentally becoming part of the start-up. That means, there should be a strong correlation between the company's success and my success.

My question is, how can this mental motivation be reflected at the financial side of things? After reading various questions here, the option seems to be having equity in the company. I will probably ask for a combination of certain percentage of equity (less than %15 most probably) and some yearly salary. Regarding the equity:

  • Does having equity mean that I will share the profits of the company (let's say on a yearly basis)? Or, does equity only help me in case the start-up is acquired by another company? I would really prefer sharing the profit because that really aligns company's goals with mine. [Logically, if the profit is shared, shouldn't the costs be shared as well? But, that sounds like a partner relationship to me; it is not very clear to me the difference between partners & having equity.]
  • If I leave the company, do I also lose the equity? Or, is this something that is negotiable? Assuming that I don't lose the equity and equity means profit sharing, it means that I would have some stable income from this company even though I start working somewhere else. This sounds too good to be true though.

Any general guidance on becoming a part of start-up company is high appreciated as well.

Equity

asked Nov 18 '11 at 21:05
Blank
You Never Know
8 points

1 Answer


1

In short: you and the founder need to work something out - and write it down!

You can agree to something now, and if necessary change the agreement later as the business grows and more people get involved. The 'divorce' clause is also a good idea: it doesn't mean you intend to leave, but will give peace of mind to you and the founder that a plan is in place should something happen. People leave for all sorts of reasons, not just seeking better employment.


Does having equity mean that I will share the profits of the company? No. You will need to agree on dividend payouts. Just like in public companies you can have equity, but no dividends are paid (profits are reinvested in the company). You might also have payouts that aren't in the same proportion of equity holdings (eg you hold X% of the shareholding but receive Y% of the dividends... Y can be more, less, or the same as X)


If I leave the company, do I also lose the equity? No, but don't expect to be granted any kind of income if you bailed before building the company up to a successful ongoing venture.

If you are listed on the company records as a shareholder then you won't automatically lose shareholding if you leave - unless that is something agreed to. Just because you have shares it doesn't stop the remaining shareholders for voting on a restructure of the shares issued.

For example they could issue thousands more shares and dilute your ownership. A special meeting would need to be held to approve, but you are going to have a hard time objecting to that if you have a minority shareholding and don't have any involvement in the company, no voting rights, not on the board, etc.

Another example is that if you left the founder could simply stop issuing dividends. If he wanted he could even start a new company and move all of the assets in to it, leaving you with a shareholding of no value!

answered Nov 18 '11 at 21:51
Blank
Paul Filmer
790 points
  • Just a comment - it is not that hard to object to a dilution. Issuing additional shares has to bering in moneey or you have to isue them pro rata, not changing ownership. Giving 2 owners, one having 900 shares, the other 100, the 900 sahre owner can jsut issue himself another 10000 shares out of thin air - there is a word for that and that is fraud. Criminal. He has to bring moeny in, which maitnains book value or do another investment. Minority shareholders have legal rights, too. Moving assets ifs the same thing - he is effectively stealing from you which is criminal and can get him to jail. – Net Tecture 9 years ago
  • Fair point. Different countries will have different laws - and I am not familiar with US laws. – Paul Filmer 9 years ago
  • Y3s, but NO law ever allows shareholders to JUST steal from a minority shareholder - would totally make any shareholdin totally useless. The exact details vary, but the general principle never allows "justs diluting" without additional circumstances. – Net Tecture 9 years ago

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