Key Post Offered 'Equity' in company, need advice

Hi,

I am considering leaving my current job to begin contracting (I work in IT).

My current company has said they can maybe offer me equity in the company. While this does interest me as I think they will eventually make money/be bought out, I'm quite wary as I am meeting owner in the morning to discuss, and have no idea what questions to ask to assertain what 'equity' I will actually get.

I also will then need to evaluate that and see if its worth it?

Can anyone offer me any advise on what questions to ask, and what to look out for in this discussion?

It is a small (<50 employees) limited company.


Thanks alot

Niall

Valuation of a company is a difficult thing but at a basic level if the the company was sold for €1m tomorrow and you owned 1% you could expect to get €10,000 before tax etc

€1m and you owned 10% = €100,000
€10m and you owned 1% = €100,000

The way to look at it is
(The likelyhood of the company getting sold X your return.)
So if you think there is a 20% chance the company will get sold and your return was €100,000 then the value to you is 100,000 x 0.2 = €20,000.

The problem here is while you can maybe quantify your return if you can estimate the value of the company and the proposed value of the equity, you cant really estimate the likleyhood the company will sell. You will just ever have this information and are relying on the management to be telling the truth. Most small tech companies are planing exit strategies that involve a sale and most never make it.

Most equity gets returned to a company if you leave as well so you could hang in there and leave in two years and lose your equity.

Verdict - potentially lucrative longshot akin to an accumulator at the bookies.

Thanks a lot that gives me something to think about tonight definately.

This is a tactic to get you to stay without paying you anything. They obviously rate you and want you to stay. By giving you shares, it doesn't cost them anything.

How profitable is the company?
Are the directors taking a dividend out every year?
What equity shareholding are you being offered?
Will they give you a pay increase to get you to stay?
Is there an opportunity to buy a bigger shareholding if you want to?

Ultimately, it's down to whether you are happy there or not? You were looking to move for a reason in the first place. Will having a shareholding make those reasons go away?


Steven
www.bluewaterfp.ie

Most interesting comment {when they eventually make money}

I read that to mean that today they are not making money.
If you are reasonably well paid, like the company and from what you see they look future good, I suggest stay with them and take the equity.
Enquire into their Financial Strength ,if Boss is evasive ,take that as a poor sign.
If Boss is open on future prospects and that ties into your judgment that they are focussed into what they are doing ,take the equity and pray it comes good!

Going into any Contract work has extra costs, allied to not getting full time work.
That said maybe your IT skills are future proofed.
In any event ; make the decision on what you see today, the future is unseen.
And Good Luck,

Some other threads

Buying shares in a private company

Company offering shares as part of package

I am meeting owner in the morning to discuss, and have no idea what questions to ask to assertain what 'equity' I will actually get.

Click to expand...

Taking a stake in a private company will require quite a few meetings. So you won't have to make a decision at the first meeting.

Find out what he is offering. Ask the questions SBarrett suggests and a few more initial questions to ask.

1) Can I have a copy of the management accounts?
2) What are the plans for the company? How can I eventually sell my shares?
3) If I leave the company in the future, how will I be able to sell my shares?
4) Who are the other shareholders and what percentage do they own?

A few other questions
1) How long does it take before the equity is fully vested? Put simply, how long will it be before you have full rights over the shares. I'd imagine the company will insist you have to work there for a minimum period in order to qualify for the shares.
2) How long do you have to hold the shares before you can sell them? That could be different to the vesting period.
3) Are there any restrictions on who you can sell the shares to?
4) Is there any guaranteed buyback in place? Basically the same as Brendan's question 3.

Also check whether these are normal shares. Some companies have different classes of share.

And... ask what happens to your shareholding in the event of additional investment - i.e are they ring fenced or will they be diluted.

I received equity twice in 2 tech start-ups, broke my back for several years and only ever got shafted, so caveat emptor. I've made a lot more money from IT contracting.

Thanks a mil for the advise, exactly what I needed!! Very much appreciated!

NiallNoi said:

Thanks a mil for the advise, exactly what I needed!! Very much appreciated!

Click to expand...

Yes, it's difficult to value a company, as one poster has explained. However, just to be absolutely clear: having a minority shareholding in a private limited company has little or no value in itself, unless there are some other rights or agreements in place.

This country is littered with examples of where people, including company founders, have put their life and soul into companies in return for shareholdings and have been royally shafted further down the line.

The person making the offer could be just trying to keep you for no additional cost. Equally, they could be completely above board and behind including you in what they believe will be a large win for you both, and just not have the funds to offer at the moment. In both cases (and in all shades in between), you cannot judge what will happen in the future, and there's a very good chance your shareholding will be valueless, regardless of the ultimate success of the company.

I'm not saying to rule it out completely, but the rights and agreements around the offer are far more important that the shareholding itself.

Amongst the things to watch for are:

- what happens when new investment comes in?
- what happens when you leave?
- what are the tax implications?
- how, when and to whom may the shares be sold?
- is there a directorship on offer? (be really careful of this one: you take on a whole bus load of responsibilities)

You'd need to have all of these as part of a written agreement. It's fairly likely the owner will baulk at that (with good reason). You could of course go ahead without such an agreement, but you need to do it on the basis that it's a very long shot you'll get anything out of it.

Thanks again for the responses!

When you say

"but you need to do it on the basis that it's a very long shot you'll get anything out of it."

Do you mean the longshot is the chance of them being bought out?

Assuming this was what you mean, say they were definately going to be bought out in 2 years (hypothetical), is it still a long shot? Like if I have a percentage, and in 2 years they are bought out, what is the probability and reasons why it could be worthless?

(Sorry might seem like a stupid question, but just trying to figure this out)

If they are bought out in two years, then your 2% would be worth something.

But one cannot say that a company will definitely be bought out after two years.

And, even if it is bought out, it might not be bought out for very much.

Brendan

Does e company have valuable Intellectual Property or is its success based on a founder or core team that are good at their jobs?
Many businesses are carried by their owner and so have no real value without that owner. This is particularly true in a service orientated business (be it IT or not).
That will have a huge bearing on the value of the company.

The value is in customer base and the platform (built by the IT dept) I would think as its quite unique.

Niallnoi.

I love to hear {value in customer base} . Tells me you believe your Company hold that rare plus-point = Customers.Getting customers is normally the hardest part.

You also seem happy with your skill {platform} and given your knowledge ,I accept that as another plus-point.

NiallNoi said:

When you say

"but you need to do it on the basis that it's a very long shot you'll get anything out of it."

Do you mean the longshot is the chance of them being bought out?

Click to expand...

What I meant is that several things have to happen for you to can get any return:

- the existing company shareholders are all decent people
- the existing shareholders don't have a falling out
- the company is trading profitably
- the company continues to trade profitably
- the company does not want to raise additional funding before an exit event, or if it does you are protected from dilution
- the company does not have to raise additional funding before an exit event
- an exit event actually happens (by "exit event" I mean sale or IPO)
- an exit event happens at the right price
- you remain with the company until an exit event happens
- probably more things!

If any one of these things doesn't happen, there's a good chance you won't get anything. What are the odds of them all happening? I don't know and can't say. What I can say is I've twice in my career been in a similar situation (once with shares, once with options) and didn't get a cent. In both cases there were extremely positive signs that all would be well. I know of many other companies where similar things happened. I know of only one where the founders did well (and even there the people on options didn't get much).

I do of course read the papers and hear of success stories, but when I look at the ones I have direct personal knowledge of, the ratio of people who do well to those who get nothing is not good. Even with the success stories you read about, many will have gone through tough patches somewhere along the line, typically wiping out all options and all but a few (if not all) shareholders along the way.

As I said, the stars have to align in a very particular way to do well in this game. No problem if you realise this and go in with your eyes open, but be prepared to be disappointed, and try and make some attempt to cover off some of the potential pitfalls.

Best of luck!

Thanks again, another group of helpful posts, made the decision to stay a bit easier for me. Im staying and going to see how it plays out, after several meetings and discussion on the plan the company have to reach a buyout.

The way im looking at it now, its much less of a gamble to stay here given a bump and some options, rather than start a limited company and be killing myself for a few years trying to keep in contracts enough to out-earn the salary I currently earn.

Thanks again guys!