I will be joining as a senior developer on a startup and I will be working 20 hours a week remotely. I have a day job which pays my bills now.
The company is not funded yet so we will not be given any cash now. I've been given two choices. Get stock options or Convertible notes:
Could you help me choosing the best for me based on the details given below:
1- There are lots of chances that the company will be funded in 2-3 months and I will be paid some cash after that.
2- There are chances that the application starts generating in 12-14 months.
Could you give me the differences between stock options and convertible notes and in my situation which choice will get me the max money if the company is a success? Thank you.
Let's start from definitions:
(1) Beware of tax issues. If the company gives you something, including a convertible note, as compensation for your services, and that thing has an ascertainable value, you will be taxed on it. Not really what you want -- nothing like getting a $20K convertible note that you can't sell, and then having to pay $5,600 in taxes on it. (Also check into problems with section 409A of the tax code, which imposes a significant penalty for messing up deferred compensation arrangements.)
(2) You should consider getting restricted stock, subject to vesting. This has the advantage of starting the clock for capital gains treatment (assuming you file an 83(b) election within the right timeframe.) If the per-share value is minimal, you won't incur much in the way of immediate tax when the shares are awarded. Options do not generate tax immediately, but can get worse tax treatment when you exercise them and promptly sell the shares.
(3) In answer to your question, it depends on the number of options and the value of the notes. When the notes convert, they will do so for fewer shares than you'd get if you spent the same amount on stock today.
A convertible note suggests that the company will consider your deferred compensation as a debt the company owes you. You would be in the same position as an investor who contributed cash to the company in exchange for a convertible note. Typically, a holder of debt is considered to be in a more favorable position than a holder of equity, because a creditor has a right to be paid before any equity holder. Debt is an obligation that cannot be escaped except thorough bankruptcy. Equity is not an obligation of the company; it's value is determined by the market. Without more information, I think you might break down your choice to look something like this (suppose the amount due is $100): (i) A $100 note you can cash in at a later date for $100 cash; (ii) A $100 note you can convert to equity of the company at a later date (and presumably at the then-current valuation); (iii) The right to buy $100 in equity of the company at a future date, at today's valuation (stock options). Contrary to what is stated above, a note may or may not pay interest on the principal owed.