What are reasonable precautions to protect my equity?


3

I'm taking part in a startup where I'll be developing and maintaining the web site and my two other partners are handling the business aspects. I was brought into the startup at a later point, so I'm getting 10% equity and they're each getting 45%. When the company starts making money, the profits will be split equally three ways.

I was offered a stock purchase agreement that has a 1 year cliff for vesting, and then monthly vesting after that up to 4 years, but there's a clause that allows the company to terminate me without cause at any time and buy back any unvested stock. To me this is obviously a problem, but the partner that produced the agreement is telling me this is the standard agreement that investors will expect to see. My question is, what protections can I ask for that will still not scare away investors? I'm thinking earlier vesting and not being able to be fired without cause. Any advice would be appreciated, since I'm completely new to this.

Thanks

Equity

asked Dec 5 '11 at 04:18
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Brian Robinson
16 points

2 Answers


2

I claim to be an expert at this. The deal you are offered is clean, except for one thing: there should not be a one-year cliff if you are not getting any cash. Make the cliff one month at most (think of it as a trial period).

But vesting in general is normal and a good thing. Also, what you said about sharing the profits can't be accurate. That's just not how a corporation works. It would be true if the company issued dividends only, but that's not how high-tech startups operate. Think salary, and no profits and no dividends.

answered Dec 5 '11 at 05:42
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Alain Raynaud
10,927 points
  • I forgot to mention that we're all also getting salaries once we get investors. As far as profits, does the company revenue after operating costs just go back to the company? It doesn't pass to the shareholders? – Brian Robinson 8 years ago
  • And thanks for the response! – Brian Robinson 8 years ago
  • "salaries after funding" - sure, of course. But plan for the case where funding never happens. So I'll ignore it for now (when it happens, expect that everything could be renegotiated). If this is a C corp (and it should be, if you have real equity), then profits stay with the company to be re-invested. If it's an S-corp or LLC, then it's a different story. – Alain Raynaud 8 years ago

0

When the company starts making money, the profits will be split equally three ways.

So what is your 10% good for if you get 33% o the equity? Such deals are bad in case you get investory on board later. A share should be a share.

but the partner that produced the agreement is telling me this is the standard agreement that
investors will expect to see

Sure. How much are theey paying for (a) the priviledge and (b) for execution? If they buy back at 5 times estimated vvalue - good.
answered Dec 5 '11 at 04:47
Blank
Net Tecture
11 points
  • The 10% is just for if the company is sold. – Brian Robinson 8 years ago
  • Sorry, I'm not sure what your second question means, in regards to privilege and execution. Privilege and execution of buying stock shares? – Brian Robinson 8 years ago
  • And thank you too. – Brian Robinson 8 years ago

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