Slashdot Mirror
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 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.
Would you be happy staying there for another 5 years?
Would you be happier doing something else?
Could the company go out of business in the next 5 years?
Is it likely to be sold in that time?
Do the shares have any value otherwise?
Is the value of the shares (5 years from now) worth more than you might get in additional satisfaction and compensation elsewhere?
If you are low on toilet paper. Other than that, never.
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!
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.)
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.
I've been in the biz for 15 years now. Been at 5 different startups, had juice in 4 of them. Of these, here are some sobering numbers:
* One was acquired, and the share value increased. However, I had 1000 shares and I was 24 at the time (this was in '94, before the great Equity Craze of the DotCom bust), and decided to let those shares go. Loss: about $35,000
* One went IPO before I joined, my vesting price was at $15. During my time there, the stock sank continually to $8 (this in the late 90s, so you can imagine my frustration) Loss: None, other than my time.
* One burned through $35 million of VC and kept hyping the "inevitable" acquisition. I bought 33% of my vested shares. The company went belly up on Aug 17, 2001, three months after I bought. Loss: $3,000
* One is still in existence, but because I was a contractor and forced out by management who wanted "engineers they brought in", I had to purchase my shares to stay in the game. Current loss: $1,900. Likelihood of gain: Probably 10-25%.
Bottom line: Unless you think there is a significant chance they will be acquired or go IPO, shares are WORTHLESS. And they generate huge headaches for you and your coworkers (think of the time you waste talking about share value or stock prices of comparable companies).
Only one thing matters about your job: Your paycheck. If they want to give you a cool title, wicked shares, or some new responsibility...it's all fluff unless they want to pony up cold, hard cash to back it up.
Of course, in this economy, it's good to be employed too so take it all with a grain of salt. :)
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
It would be entirely reasonable, even admirable, for you to chart a middle course. I'll assume that the offer is being made in good faith because you're regarded as a key individual. Fantastic. Trying to see this from management's point of view, there is high value in the continuity of keeping you on board.
But nobody expects such a situation to prevail forever. So there would be equal, possibly even greater, value in having your help in making a smooth transfer of knowledge to another resource. Competent management knows that it has to embrace this sort of change, because such changes are a normal part of business over the long term. Every transition is an opportunity to get better at it, and thus become more agile.
So I'm thinking, why not propose some sort of middle ground where you participate for a year (or whatever seems appropriate) in finding and training a replacement? Everybody wins. And because you took the initiative in suggesting it, you gain some advantage in negotiating the terms. I'd take 5% in shares in addition to salary for the period. And I'd really excel at making it work too. After all, I now have a stake in the company's success long term.
Parity: What to do when the weekend comes.
If they're offering 10%, take it. It will certainly have a vesting schedule attached to it. Don't feel guilty about leaving in three months if things aren't working out; they won't feel guilty about firing you in three months if business goes south.
Ask for an immediate vesting clause in the case of termination (other than for cause), or sale of the company. You don't want to accept their offer, then get fired three months from now when they find someone new (because you threatened to leave), or when the company gets sold.
Ask for the latest financial statements. Your perception of the money being made by the company, and the finance guy's perception may be totally different. If they're offering options to keep you, you need to be able to value the offer.
If there is a board of directors, insist on a seat. With a 10% stake, you would be entitled to it. Its the best way to find out where the company is, and where its going.
Ask the CEO for his exit strategy - is he planning on running the company forever, is he planning on a private sale, is he planning on going public? Each of these has a different risk/reward tradeoff that you have to make.
Being handcuffed with vesting options, but having no visibility into the viability of the company, is like being harnessed to a wagon with a closed box on top, being told "You'll get what's inside after we make it over the mountain". Especially when you don't know if the wagonmaster is dipping into the box on the trip.
And the worms ate into his brain.
You're not going to last 5 years at any place that makes you dissatisfied enough to want to leave now.
This sounds like nothing more complicated than an option grant. Option grants almost always wait for a year or two after the grant before they start to vest, then grant a big lump of shares and accrue at monthly to yearly intervals thereafter.
As others have pointed out, your shares are pretty much worthless until the company is sold or goes public.
Give a man a fish and you have fed him for today. Teach a man to fish, and he'll say "WHERE'S MY FISH, YOU IDIOT?"
Is this common stock or preferred stock? Is the company contractually obligated to pay out profit or a portion of profit as dividends to its shareholders? For that matter, what is the structure of this company? How will this five year period be enforced?
If you can't immediately answer these questions, you need to speak to an attorney. Period. There has been quite a bit of development in the last 10-15 years in terms of small business structure and practices, and I highly doubt that you have enough experience in how this company is legally structured to be able to make an educated decision. At this point, your question is like asking /. which server you should use at your business. We have absolutely no idea about any of the criteria or facts that would explain that situation.
Note that this is entirely separate from the equally good advice that others have been throwing around: if you were ready to leave, why are you now ready to stay for a fairly lengthy period of time? If it's just the money, then it's doubly important to get to a lawyer and have this situation analyzed carefully.
I have actually just recently taken an offer with a substantial pay increase of around 20K. I start in a week. I asked myself similar questions that the posters are suggesting the past few months. I have been at the current job for around 3 years. We get good benefits, the environment is nice, and profit sharing (compared to shares since the company is privately held). Each year you get 20% more vested into what ever profit sharing has been put into your 401K account. The past 10 months though we have been on a 10% salary cut (which wasn't the end of the world at first, but now there seems to be no end in sight), and now having had multiple job offers the past 10 months I have decided to leave. It's uncertain times, and I chose new beginnings over somewhat unstable comfort.
-- Brought to you by Carl's JR
Head for the law library and look through O'Neal's Oppression of Minority Shareholders. You have to work hard to protect yourself, and there's a lot to protect against.
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.
I'm certain I'm not alone in this forum as a holder of thousands of dot-bomb shares that aren't worth the paper they're printed on.
My advice? Take shares + cash. Make it a blended investment. That way, no matter what happens to the shares, you've got something to show for it.
Frankly most small professional services type companies are virtually worthless on an asset value basis. The only concrete assets they generally own are nothing more than office equipment, some IT infrastructure, and possibly some licenses and distribution agreements.
With a small company the intangible assets amount to basically customer good will and name recognition. Customers often are more attached to the partners than they are to the business itself. If it is a business that has been a going concern for many years then the intangible value MAY be substantial, but it is difficult to measure.
Thus the REAL value of your 10% ownership is on paper at least very close to zero in most cases. It is even worse if you are a really key player in the business because it is likely to collapse if one of the really key people leaves. Maybe in your case that isn't the situation, but you never know when the VP of marketing will decide to take off with all the customers either.
Technically an equity stake entitles you to dividends, but that may not amount to anything at all. The principals in the company can just as easily take their profits in salary and you'd really have little or nothing to say about that, being a minority owner. You can also be pretty easily diluted, the board can issue more shares, etc.
Thus owning 10% may be worth exactly zip.
On the other hand, not all business owners are that cutthroat, you have to judge how much you trust them. If they are really making an offer to have you onboard as a co-owner and thats what they really want and they are honest people, then maybe its worth something. You could make some (or a lot perhaps) of extra money.
Consider though. If they are offering you equity, then that probably means the equity is cheaper than what they think they might have to pay you to convince you to stay otherwise. Even if the offer is in good faith and all it either means you're worth a LOT to them, or they are just broke and can't pay more but need you enough to give up some (possibly worthless) equity.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
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"
http://en.wikipedia.org/wiki/Hollywood_Accounting
The film industry made it famous, but they asren;t the only ones to do it.
So there's the term that applies to the method.
I listen to both RIAA and non-RIAA stuff if I like the music, tangential business/politics nonwithstanding.
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.
The fact that you are considering leaving the fold makes you unreliable. By staying under the promise of more compensation you are reinforcing the idea that you are not to be trusted.
All that you are going to achieve is making it easier to your boss to find your replacement and have you train him/her. You will be out of a job in less than one year. There is a reason why you are leaving after 6 years, just move on and don't look back.
Pedro
----
The Insomniac Coder
Has anyone else noticed that this thread has an extremely high ratio of replies marked "informative" or "insightful". At least, it's got the highest ratio I've ever seen.
OK, mod me "off-topic" now. /frank
And the worms ate into his brain.
> 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.
When To Consider Taking Shares In an IT Company ?
March 9, 2000. You missed it.
Shares in a consulting group are bull. Consultants have no assets, make no products, and have little in the way of intellectual property. In other words, the stock is WORTHLESS. Consultants do work to benefit someone else's bottom line. This company will not be selling. EVER. So you will never see any windfall from this deal. If you were to get shares, your only hope would be to work there long enough to dupe some schmuck into buying his way in as a partner. Then, you leave. Remember this if you stick around.
Insist on profit sharing. That is tangible, and performance oriented. Refuse any time limits.
~Sticky
I think you misunderstood the parent. Programmers generally have a personality that is characterized by their belief that because they can write code and others can't (e.g. a securities lawyer) they can do any other job function as well or better than that person. This is just an observation after dealing with programmers for most of my career. There are always acceptions, but most often than not, they fit in a spectrum of this personality.
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.
...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.
The number one question you must ask yourself whenever making an investment decision is ... what's your exit strategy?
So, you own these shares in the company... so what? Do they plan on becoming publicly traded one day, and is that just a dream, or can it actually happen? When you take the shares what terms are you taking the shares under? Do you have a right to sell to whoever you want once they are yours, or do you have to sell to insiders at a set price before you can sell to outsiders. Having an asset that is worth money, but has no market (as stock does when not publicaly traded on an exchange), is not a great thing, because there's no way out. If you question this, just ask the banks holding mortgages which are technically worth $0 right now... even though they're receiving income every month by virtue of possessing the asset. Put simply, you need to ask yourself... who exactly is going to want to buy this stock one day?
Also very important... Do you know how to read a financial statement? If so, look at the balance sheet of the company. The balance sheet shows the assets of the company... for illustration, if the company has a total of 1000 shares, and $1000 in the bank, and you get 10%, you essentially own $100 after you receive the shares. If they have no real assets or cash, then take that into account. One thing to note: there is a line-item on balance sheets called "goodwill", if you've got a lot of that, it is not a good thing, because goodwill has no real tangible value and is basically BS fluff 99.99% of the time. Look it up for more details.
If you can read this... 01110101 01110010 00100000 01100001 00100000 01100111 01100101 01100101 01101011
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.