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When To Consider Taking Shares In an IT Company?
pgpark writes "I've been working as a key resource for a small IT consulting firm in the US. While the job has been interesting and the company's growth quite impressive over the last few years, it's been almost half a dozen years now and being ready for something new, I was ready to quit for consulting. It looks like the CEO would prefer to see me stay, as she is offering me ten percent of shares in the company in exchange for five additional years of my services. So the big question for me now is 'should I stay or should I go now?' Have you guys on Slashdot ever been dealing with such a situation? What points would you consider in order to make your choice?"
If you already tried to resign, accepting counter offers is a pretty bad idea. Sure you could work there for another 6 months or a year, but they will always be trying to replace you.
I've had enough abrasive sigs. Kittens are cute and fuzzy.
I'd say that an equity stake should only be considered for such a long-term commitment if you'll also have some kind of control of the strategic direction of the company. 10% of a sinking ship is just a lot of water with debris in it.
500GB of disk, 5TB of transfer, $5.95/mo
I wouldn't commit to staying somewhere five years unless I was darn sure I love the place and the type of job, and have no possibility to want to leave the area or try something different. I get antsy after two or three, and being contracted to stay for five would make me stir crazy. Now, I could end up staying at a place longer than that, but I try to minimize the situations where my departure would result in significant losses other than them no longer paying my salary.
I don't know if it could be part of your agreement, but I would much prefer to have an arrangement where I'm given 1% share in the company every 6 months for the next five years, or something along those lines. It's more psychological than anything for me... I'd much rather feel that I have incentive to stay at a company than obligation.
-- I prefer the term "karma escort."
Make sure that they can't just issue another 10,000,000 shares subsequently, and dilute your holding to almost nothing.
It happened to friends of mine the day after they signed a deal for an equity stake.
Great Windows SFTP Server!
Make sure that your shares are not dilutable. That is if you get say 100 out of 1000 shares, don't sign a contract that would allow them to issue another 5000 shares. Also make sure that they can't fire you in 4.9 years. Make sure that you don't have any restrictions as to who you can sell them to. Lastly make sure that the shares instantly are yours if there is any significant change in the company such as it selling, merging, or whatever. Oh and is this company profitable? If not, I doubt it will be around in 5 years.
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It's a lot more complicated than most posts here are making it out to be. I run a company that specializes in incubating start-ups, and employ numerous securities and transaction lawyers. I have to deal with this on a daily basis. What I say IS NOT legal advise, but experience.
1) Programmers have an attitude that they rule the world and no task is too great. BUT they are not securities lawyers, and generally do not understand securities laws (reading the comments here is a good indication or that and a good laugh). DO NOT do this yourself. HIRE A SECURITIES OR TRANSACTION LAWYER. The 1 hour @ $550 it will cost you will yield great dividends.
2) There are a lot of issues to consider and information you need to collect. I am going to list most of it here. Collect and answer all these questions before contacting a lawyer to make the most of their time.
3) What type of company is this? S corp, LLC, C Corp? This deeply affects your tax status.
4) What is the share structure? Preferred vs. Common, Outstanding Shares, Options, Fully Diluted Equity?
5) What is the instrument of the proposed transaction? Option? Warrant? Convertible Note? Tax Issue.
6) If it is an Option, what type? Non-Qualified or ISO? Tax issue.
7) What is the valuation of the company and method of valuation? Fair Market Value, Cash Value? Tax issue.
8) What do the P&L and Balance Sheet look like? They may actually be insolvent, etc.
9) What is the vesting period if an option?
10) What rights do you have? Get the By-Laws if they exist, Charter, Shareholders Agreement, etc.
Finally some thoughts: 10% is a ridiculously high amount of the company to give away! Generally I would give a high value CEO 10% vested over 2 years at fair market value. So unless you are the sole reason the company is making money, I don't see how they can be giving you that much.
At t=0:
Money in bank = $0.
Cost of case = $50,000
Balance = -$50,000
At t=some years in the future:
Money in bank = -$50,000
Revenue = $1,900,000
Balance = +$1,850,000
That several years of negative balance is show stopper to anyone who isn't already rich. That's what you are missing.
There could be tax liabilities involved. I wouldn't just talk to a lawyer, I'd talk to a tax specialist. They might end up counting as income that you can't do squat with and worse - you might end up having to come up with cash to pay the taxes on them.
Also, when do you get the shares? All at once up front or only after the five years? Are they given so much each year and what, if any restrictions are there on what you do with them.
Maybe options would be a better way to go than outright shares. That way, you don't commit anything until you know they are worth something - if they ever are.
I went to work at a company that gave me 20,000 shares of options at $8+ per share. There were tons of restrictions on what I could do with them, when, and they were eeked out slow until I had been there some number of years.
Turns out that none of that mattered, though. When I left the company, they had been delisted and the share price was $0.09.
Actual value of all those stock options? Zero. Zip. Nada.
...un.
Don't walk.
You're not happy at the job and are looking to move on to new challenges. It doesn't sound like these challenges you're looking for include owner part of an IT company--especially you since you wouldn't be getting, you know, any of the benefits of ownership. You wouldn't get an additional revenue stream. You wouldn't get any say over the direction the company takes. You wouldn't get to boss people around.
On top of continuing in a job you are ready to leave, every one around you would know you are ready to leave. You really think you're going to figure into your boss's long term plans when he knows mentally you're already gone?
And offices gossip. Expect this to get out. Maybe not exact figures, but certainly the generalities. Any chance the loyal employee who has been busting his hump for this little engine since day 1 might feel a little bitter finding out the traitor who was ready to leave gets rewarded for betraying the company?
You'll still be in a job you don't like. You won't be making any more money. Your career advancement will halt. Your coworkers will resent you.
All for the long shot chance that at some point in some unknown future you might reap some unspecified benefit.
Oh, btw, where is this 10% coming from? Is the owner with 60% ownership giving you 10% of his stake, leaving him with 50%?
I'm guessing they're pulling this 10% out of thin air, devaluing all the other owners. The 100% they had will now only be worth 90%.
And I'm guessing the next hot shot who tries to bolt will get the same offer. And his 10% will come out of your share, which will be worth only 9%.
Don't burn bridges. Say "thank you for the generous offer."
And then run and do not look back.