Undisclosed equity: advantages and disadvantages
The CEO of a LLC early startup plans to distribute equity among the founders. Each founder will not know how much equity the other founder has.
- What are the advantages and the disadvantages of doing it?
- Is it common practice?
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Are you being told X shares or Y % of shares? If its just X shares then its totally meaningless as X of what? A thousand shares may sound great but if its out of a total of 100 million then thats a different story. – Ryan 12 years ago
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Oh - and are you a founder, or an early stage employee? – Ryan 12 years ago
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@Ryan It's a LLC. There are no shares, nor options. The equity should be granted as a percentage of membership interest. I'm a founder. We don't have employees currently. – Anon User 12 years ago
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Opps - my misunderstanding of a *US* LLC. – Ryan 12 years ago
1 Answer
This is a situation that would make me very uncomfortable for three reasons:
1) How do you know that you are in fact getting what you are being told you are getting if you do not have the right to examine the books and records of the business. There is a funny movie, "The Producers " where the promoters sell lots of people shares totaling far more than 100%. If you are being told you will be getting 10% of the company how do you know that there are not 500 other people also being told they are each getting 10% as well?
2) In a small business it is generally a good idea to know who your "partners" (used loosely, I know this is not a partnership) are. If one of the people is engaged in illegal or terrorist activities do you want to be part of the business? If you do not have the right to know who the shareholders are do you really think that is to your benefit.
3) Openness and transparency are important to protect investors. That is why larger firms have outside auditors and file annual reports that anyone can see. If you are not allowed to see the books and records of the company (which would list who owns what stock), how are you to know it is being run properly?
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Well put. I don't think I'd want to be involved if I didn't know who had how much. Your point #2 almost makes it sound like not only do you not know *how much* equity everyone has, but you don't even know *who* has equity. That's not the way I interpreted the initial question, but if so, I'd be even less inclined to be involved. Nice, thorough answer! +1 – rbwhitaker 12 years ago
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Hi JonnyBoats, thanks for your insightful answer. Some comments: 2) I was introduced to the other team members. I just don't know the equity each one holds. 3) I agree. – Anon User 12 years ago
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It is also quite illegal. Shared companies have legal obligations - informing owners about ownership and the owners making the decisions are aprt of that. In most jurisdictions this would be fraud and in violation of lars to start with. – Net Tecture 12 years ago
