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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?"
Some points to consider: 10% is worth nothing because until the company gets acquired, shares have no cash value. For a small IT shop, it's unlikely that it ever will be acquired, it will probably fold once all the key consultants or the owner are burned out.
What would be meaningful is a 10% revenue share of the annual profits. Check out FairSoftware for a good example of how to mix equity and revenue sharing (disclaimer: I came up with that). It doesn't apply directly to your situation because your company is already mature, but it's a useful guide to everyone considering starting a software business today.
Another curious point: how does the owner intend to force you to stick around for another 5 years? Are you talking about stock options vesting over that period of time? Five years is a very long time. Think of it this way: if you had been offered stock options from the beginning, you'd already be fully vested, since you say you have already been working there for 6 years. Ask for some credit for time served :-)
Bottom line: the fact that you are getting this offer is a strong sign that you are in a good negotiating position. But my advice is that the offer is weak. You can do better. Congratulations and good luck! Ownership is cool.
If your gut is telling you that it is time to go after six years, trust me, you will hate it after eleven. I took a strong counter-offer after trying to quit a job once, in exchange for my promise to stay on for a long period - and I badly regretted it. I ended up leaving early, with a great deal of bad blood and recriminations for breaking my word.
Eleven years at a company is a long time these days. it can lead to stagnation and absence of career growth. You need new challenges, you need to be around new people. Don't get lured by this false hope they are dangling in front of you. Move on, don't look back, and in the long run you'll be glad you made the right decision.
(BTW when I tried to leave that company? The company I almost switched to got acquired by a huge internet firm the next year (during the dot com boom) and all of the employees ended up retiring early, taking trips around the world, and generally living it up. You probably won't be so lucky, but it was salt in the wound for me, grinding away at a dead-end job I'd foolishly trapped myself into.)
1) Is that in lieu of any raises?
2) What is the companies project worth?
3) Is the 10% yours now, or at the end of 5 years?
If they sell in 3 years are you out of luck?
The cynic tells me that maybe she doesn't want to lose you now becasue she is looking at buyers.
I've been burned hard in the past, so I'm always a little suspicious.
4) If you sit down and think about it without any emotional ties, do YOU believe the company will be here in 5 years?
5) IF the company's profits sky rocket, and then bottom out in 4 years, can you live with yourself knowing you could ahve been rich a year earlier?
Somethign I personally had a hard time coming to terms with. I went from Worse case: Walk away with 5 million, and possible end up with tens of millions, to getting nothing becasue management made some bad decisions. It was a hard year for me after that.
6) If I was to give you advice based on the limited information, I would say go for it.
WTH, you end up working a job you know and worse case your looking for work in a few years instead of now.
The Kruger Dunning explains most post on
A close friend of mine was allocated 10% of her employer if she would stay there two years. After 5 years the company had grown substantially and was offered $20 million to be acquired. My friend made a comment to the founder of the company along the lines of her $2 million (10% of $20 mil) payout and the founder said there was no way she was getting that much money. Days later he offered her a check for $100,000 if she would resign and not claim her 10% ownership. At that point she went to attorneys who said it would have been better if they could have been involved from the beginning because they could have prevented a later fight. While the lawyers agreed she had a valid claim, she would be looking at $50,000 in legal fees and a nasty fight. End the end she took the $100,000 and resigned, and nobody was very happy. See some attorneys up front, even if just for a brief consultation to see what could options are available.
Run and catch, run and catch, the lamb is caught in the blackberry patch.
This is why some people make money with shares and others loose money with shares...
Right now is THE TIME to buy shares. Gold? Oh yeah whatever. Notice how gold just can't get steam? Want to know why? Because people are producing like crazy, and central banks are selling.
If you think we are heading towards deflationary times then cash is the thing to hold. Deflation means cash is worth more, and thus T-Bills are the thing.
What people don't realize is that because there is a deleveraging going on there is less cash.
When you are leveraged you are creating money due to the velocity of money increasing. To put it in perspective. If have a 100 USD, and I lend 90 then that person with 90 can lend it out again, say 80. Thus at this time outstanding in the entire system are loans of 190 USD, even though there are only 100 USD's. This is leverage and velocity of money.
The past leverage ratio was about 40 to 1. That means for every 1 dollar that the government prints there are about 40 forty floating around. With deleveraging to say a normal 13 to 1, 27 dollars are being taken out of the system. CREDIT CRUNCH!!!!
So what does the Fed do? Print money. They are reflating the system, even though it is contracting and deflating...
"You can't make a race horse of a pig"
"No," said Samuel, "but you can make very fast pig"
One gotcha, for example: can the current owners sell their shares to an acquirer and leave you un-cashed out? They can unless you've got an agreement requiring your shares to be included in a liquidity event. Even then I've seen someone try to violate such an agreement.
This happened when a company I worked for was acquired. The executive team had unvested options that vested immediately, while the rest of us had to keep waiting for our options to vest. Naturally, this was to keep the employees from leaving, but felt a bit like the execs cashed out when they had the chance.
Fortunately, it was a publicly traded company, so I could got my money later.
I can't speak to consulting, but being granted equity is fairly common in tech. Some initial points:
* Four years is much more common than five.
* Make sure you understand the vesting schedule. You could suggest a 1 year cliff, followed by monthly after that. If they push to yearly, compromise at quarterly.
Next, as it's a consulting business, ask what happens to profits. Are they distributed to the owners? (I.e., you?) If so, how often & are the books validated by an outside firm? How would the payout of unvested equity work? E.g., say they make $1,000 profit in the first year. Do you get $100 (10%), $25 (10% / 4 year vesting), or $0 (nothing was vested).
Then you need some sense of what that equity is worth. This is where understanding the above will be key, along with looking at past performance and some forecasting of future profit.
If it looks like your salary + the equity would be significantly above what you would make as a salaryman elsewhere, you should consider.
One thing to keep in mind, is that once you sign the deal, they may be less welling to increase your base compensation (e.g., annual salary), thinking that the equity may be golden handcuffs of a sort.
Either way, good luck with your decision! As stressful as it is, this is a Good Problem to have. :)
-Bill
SlashSig Karma: Excellent (mostly affected by moderatio
> 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
Your boss doesn't sound very bright. She's offering you a 10% share, in perpetuity, for just five years service? I have a friend who had a company who made a similar offer to keep a "valued employee", and when he eventually left to tour the world he expected the founders to bust their ass so he could collect dividend payments. He was a drain on the company. Another case: Anita Roddick, when she wanted to open the second body shop store, rather than borrow from the bank took a small capital-only injection from a friend; 44,000 pounds. She was saddled that for the entire existence of the company, and when she eventually sold that investment was worth something like 250,000,000 pounds. Great return for him, but in hindsight she should have borrowed.
Businesses should be very careful handing out shares, and that your boss is willing to go to such lengths to keep you doesn't reflect well on her. No employee is that important to a business. Yeah, I know you think you're hot, and maybe you are, but there are many, many hot people out there and rather than keep you an increasingly expensive employee, she should shake your hand, wish you well and find someone new.
Personal advice: Don't take it. If you stay, it'll be for money. That's not a bad thing given the current economic crisis, but you'll be in prison for five years and regret your decision. It's not a bad chance to take a chunk of your boss' business of course, but be warned: What my friend did with his leach shareholder? He shut down the company and started a new one, and advised me after that never to give away equity.
Find out what kind of shares these are: common shares, or preferred? In other words, do you get some kind of voting rights? And if they do, does it matter? It doesn't, if the CEO (or any single person/entity) owns more than 50% of the voting stock.
Are you really getting shares? It sounds like there might be a 5-year vesting schedule, so really you're getting restricted stock units: no voting rights at all until they vest. So you'd have nothing for at least a year.
More importantly, though: you say you're ready for something new. This sounds like you're getting 5 more years of the same thing. If you didn't explain yourself to your CEO, shame on you, but if you did, this means your CEO isn't listening to what you're saying, and you've been there almost 6 years. That's a good reason to get out just by itself.
I was given stock options for a company several years back that vested over a period of time. I never bought them but when they decided to sell most of the stock to another company (With a vested interest in how it was run) they chose to do so by buying back our options (half of them, anyway) at the current estimated stock value. Basically they took the current stock estimated values, subtracted the value at the time of the stock options offer, and made a pay out bi-anually for whatever had been vested until that point. While I didn't get much more than a few grand, it was free money. This isn't a very likely scenario either, and the payout I did get was taxed as additional income. Still, stock doesn't necessarily have to be worth nothing...
No, I am not an English major. My posts are subject to typos and incorrect grammar. Do not expect perfection.
I was part of an Internet startup, me and another guy. He was the idea man, I was the coder. I got 10% of the company. Later on, that 10% changed to 1% since I had never gotten it in writing. But I finally got a paycheck and went to work full time. Later on, that 1% was worthless as the vision guy and somebody else couldn't maintain a vision for more than 10 seconds and the company went under with no product anyone wanted to buy.
...
... negotiate the salary you want. Take a stake in the company if you can get it, but don't live your life expecting it to ever be worth anything.
Second example
I was part of an Internet startup, but this time there were actual investors and a true vision. I was given options and a paycheck this time from day one. Worked for three years and learned a lot of stuff about private companies and investors and boards and stock options in a non-public company and building systems from scratch. After three years and $50M, the company went bankrupt, one of the investors scooped it up for the debt, the options became worthless, and I moved on. The product is still being used today, but I didn't get anything other than a paycheck.
So
I rarely read replies, it's my opinion and if you thought about your opinion a little more, I'm OK with that.
You would think people would be this smart but they aren't.
I know a person who spent 6 years taking care of her aunt in her own home as she was suffering from some disease and they decided not to stuff her into a nursing home seeing how there was only one other relative besides her alive still. She had around 3-5 million in rental property and probably another 2 million in other assets like stocks, bank accounts, jewelry and so on.
So after the aunts death, the will was read with the two surviving family members present. She ended up leaving everything to her attorney (who also made out the will). Not one dime went to anything else except her funeral and final medical bills.
I suggested that she fight the will and take some of the money, if nothing else, attempt to get additional money for taking care of her for the last 6 years. She decided against it because every lawyer she spoke with wanted 30 or 35% of the judgment and her aunts lawyer could spend some of the funds in defending the will. She would have needed no money at all and the lawyers would only be paid if they won and they were confident they could have the will invalidated. I told her she was stupid because 60% of 5-7 million dollars is a hell of a lot more then her $35,000 a year income. Her boyfriend, the restaurant manager who work his way up from a dishwasher convinced here that it wasn't worth it.
By my calculations, she should have still gotten around 60% which should be between 3 and 4 million to be split between two people. But somehow she was convinced that a lawyer taking over 1.75 million was just too much so she let it go to another lawyer without a fight. It's been about 5-6 years and not to long ago, she told me she finally realized how much money she let slip by.
People are stupid about these types of things even when otherwise intelligent. I don't know if it is fear or the uncertainty but it's easy for someone not directly connected to it to see the mistakes as they are happening.