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The Almighty Buck

When To Consider Taking Shares In an IT Company? 315

Posted by timothy
from the opportunity-costs-and-the-time-value-of-time dept.
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?"
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When To Consider Taking Shares In an IT Company?

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  • by alain94040 (785132) * on Thursday January 29, 2009 @07:50PM (#26660591) Homepage

    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 [fairsoftware.net] 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.

    • by PornMaster (749461) on Thursday January 29, 2009 @07:54PM (#26660623) Homepage
      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.
      • by NeverVotedBush (1041088) on Thursday January 29, 2009 @10:21PM (#26661789)
        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.
        • by MindKata (957167) on Friday January 30, 2009 @09:08AM (#26665093) Journal
          "what, if any restrictions are there on what you do with them." plus the parent posts, "equity stake should only be considered for such a long-term commitment if" and "What would be meaningful is a 10% revenue share of the annual profits."

          Another thing to watch out for with an equity stake is the small print. Because the next logical business move from a boss to just say in passing, (as if its unimportant) something like, "well you are getting a (good) share of the profits now, so that is your wages as well". Which at first sounds fine while the company is doing ok. But if the company has a bad patch, then you find you have very little money coming in. You need to have a guaranteed at least suvival wage plus shares. Be wary of this kind of move.

          Also what exactly is the shares sharing out? ... If the share is more like a performance bonus, so its sharing out some of the profits of the company, then how exactly do they calculate what is profit?. (I've got this problem now. Every expense and running cost they can dream up gets taken out, before finally I get a share of the profits of my work).

          Be very wary small print and how they go about calculations of profits.
      • Ruuuuuuuuu... (Score:5, Insightful)

        by mcmonkey (96054) on Friday January 30, 2009 @02:44AM (#26663137) Homepage

        ...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.

        • Re: (Score:3, Informative)

          by Anonymous Coward

          Exactly what I was going to say. If you're already thinking of leaving, you're not going to get any happier or more satisfied with your job - if anything, you'll get more frustrated, less motivated, your work will suffer, which will make you more frustrated etc. You might last the 5 years to get your shares, you might not, but either way you won't enjoy your time there.

          Ultimately, there's more to life than money - and as others point out, shares often end up not being worth the paper they're written on.

          The

    • by Anonymous Coward on Thursday January 29, 2009 @08:05PM (#26660715)

      Talk to a lawyer. Minority ownership of a closely-help company is often not worth much as there is often no requirement to pay dividends, which may be the only way to get a return on your shares.

      • by VampireByte (447578) on Thursday January 29, 2009 @09:00PM (#26661177) Homepage

        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.

        • by mattack2 (1165421)

          Wasn't the 10% ownership in writing? If not, why not? That would seem to have made it certain that she would get the $2 million.

        • by XanC (644172) on Thursday January 29, 2009 @09:35PM (#26661477)

          Isn't $50,000 a lot less than $1,900,000? What am I missing?

          • by Anonymous Coward on Thursday January 29, 2009 @09:52PM (#26661595)

            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.

            • Re: (Score:3, Insightful)

              by ari_j (90255)
              It's not just that. Revenue is not $1.9M. It's $2M times P, then minus the $100k, where P is a probability between 0 and 1. Even more realistically, it's a probability curve plotting numbers from 0 to $2M to the probability that you'll get at least that amount, which is impossible to calculate but easy to envision. You do have the time factor right, though.
        • by TheGratefulNet (143330) on Thursday January 29, 2009 @09:38PM (#26661501)

          mod parent up.

          this is the kind of back-stabbing that happens ALL THE TIME in corporate deals, especially with people like you (no offsense) who ask on slash instead of asking a lawyer, directly.

          chances are, the guys 'in the suits' are planning to screw you and you are quite ignorant of that. get a clue and stop listening to corrupt businessmen trying to take advantage of good working folks like yourself.

          also, to be honest, you've already spilled the beans by telling them you planned to quit. from now on, you (and they) can't be trusted to each other.

          leave. make plans to, and go. staying won't be productive once you've announced you intended to leave. it NEVER works out in the end, trust me.

          • Completely agree on the point of leaving. It's a golden rule I have, for the reasons outlined by the parent. Once you've made your decision to leave, go. The reasons you decided to leave probably haven't changed, even if more money is on the table, I'm sure that money isn't the reason you've decided to find something different.
          • by soap.xml (469053) <ryan@pcdomini[ ]net ['on.' in gap]> on Friday January 30, 2009 @11:51AM (#26666905) Homepage

            Careful what you call this. It isn't backstabbing if you get X shares for your time with the company. You simply need to understand the amount of shares approved, issued and what happens to your shares if additional shares are issued.

            Equity in a small private Corporation is basically the sames as in a large public Corp. Either one can issue, or approve additional shares. If you have common equity, your claim will be diluted.

            The magnitude of your dilution will likely be higher with a small, growing firm. There are ways around it, just get a lawyer. You can bind in what you're really looking for, you just need to use the law to help you. IANAL

        • Re: (Score:3, Informative)

          by Anonymous Coward

          If your company is a corporation (as opposed to a partnership) then shares in a company may be worth nothing, even when the company is sold, unless you also negotiate exit rights. In other words the buyer of the company has no obligation to buy your shares when they buy enough shares to control the corporation. If you want the right to sell your shares to the buyer for the price offered to the person who has a controlling interest, you have to negotiate such a provision.

          Note, I'm not a lawyer, the content p

        • Re: (Score:3, Interesting)

          by duffbeer703 (177751)

          Your friend allowed herself to be bullied out of $20 million. My uncle is an attorney who tried a similar case, where the principal partner was a real arrogant piece of crap.

          It took about 3 years, but the plaintiff was awarded treble damages due to the willful acts of the principal partner. The partner actually lost control of the company and eventually went bankrupt.

          My uncle got 25%, since the plaintiff was not in a position to pay a retainer.

      • Re: (Score:3, Funny)

        by Joe U (443617)

        I wish I did.

        My shares were at least printed on nice soft paper, so I got some use out of them.

    • by plierhead (570797) on Thursday January 29, 2009 @08:07PM (#26660747) Journal
      This is very complex and most likely the business owners haven't thought it all out.
      1. Waiting until 5 years is up is not a good idea (and I assume they don't want to give it to you up front). Who knows what will happen. Ask for it one year at a time - or even better one month at a time - in advance.
      2. Get tax advice. You are in dangerous territory.
      3. Asking for 10% of the profits is interesting but theres an old saying in business that the 20% owner gets paid what the 80% owner wants them to. Its hard to stop the owner (say) takinga big salary and depleting the profits that way.
      4. Consider a "roulette clause". With this, either party can offer to buy the other one out. The trick is that if they refuse, then you can demand they buy you out. This avoids stalemate, which is very destructive in this situation.
      5. Good luck!
      • by barzok (26681) on Thursday January 29, 2009 @09:05PM (#26661217)

        Asking for 10% of the profits is interesting but theres an old saying in business that the 20% owner gets paid what the 80% owner wants them to. Its hard to stop the owner (say) takinga big salary and depleting the profits that way.

        You don't ask for 10% of profit, because the numbers can be manipulated to where you're getting 10% of $10. You arrange it for a percentage of gross revenues (how much money came in, before it was all spent) instead of net profit.

      • Re: (Score:3, Funny)

        by Anonymous Coward

        That advice is worthless without
          - ???
        and
          - Profit

      • by profplump (309017)
        I don't understand what part of owning shares of a company is "dangerous territory" with regard to taxes. Care to elaborate?
        • I do not know tax law concerning this, but it wouldn't surprise me if the shares were considered compensation and assigned a value.

          That value would be added to the OP's income and be taxable at whatever rate they land in. However, withholding would probably only be based on actual salary so when April 15 rolls around, OP could end up having to pay money out of his pocket to cover the tax liability.

          Then, after a few years of paying the taxes on whatever shares were awarded during the year, if the compa
        • by sed quid in infernos (1167989) on Thursday January 29, 2009 @10:53PM (#26661991)

          Besides the comment above this about the shares themselves being income, the other thing to be wary of is whether the firm is set up as an S-corp (or LLC) [wikipedia.org]. In these firms, all income or loss is passed through to the shareholders for tax purposes. So the taxable income of a 10% owner increases by 10% of the firms taxable profits. This avoids the situation in which a dividend is taxed as part of the corporate profit and, once distributed as dividends, taxed as personal income of the shareholder.

          The catch is that there's no requirement that the firm distribute those profits. Some, but by no means all, S-corps are set up to require distribution of a certain percentage of taxable profit to allow shareholders to pay this tax. Owning stock in a firm not set up this way carries a real risk of having to pay taxes on profits one hasn't received. Therefore, a one should always consult a lawyer before acquiring such shares.

      • Re: (Score:3, Informative)

        by enjo13 (444114)

        Taxes is EXTREMELY important here. Those shares are going to be taxed as income, even though they have no cash value (they will be taxed at the current valuation of the company at the time of the award). This can be a very significant amount of cash..

        You should be looking for options, which allow you to defer much of that tax burden till at least they are liquid (but be careful how the contract is worded in terms of vesting and term of availability.

    • Re: (Score:3, Interesting)

      by geekoid (135745)

      really? MS shares aren't worth anything?
      You do not need to be acquired for them to have value.

      I'm confused, are you saying 10% of the revenue or 10% of the profit. These are different things.

      You are also assuming the the companies shares don't have value now.

      "how does the owner intend to force you to stick around for another 5 years? "

      that's the heart of it. Vesting over 5? better have a lot of confidence in the company.
      OTOH, maybe they will give it to him now based on his word. Or with a buyback clause if

      • Re: (Score:3, Interesting)

        by alain94040 (785132) *

        really? MS shares aren't worth anything?

        This was said in the context of private companies, not publicly traded ones.

        I just glance at Fairsoftware, but I didn't see who is liable when you are sued with that plan

        Liability is an interesting topic. Don't believe everything lawyers tell you :-) For instance, no matter how good your contract is, if another party wants to shut you down, they can outspend you. I have been on the receiving end. It's ugly, bogus and unfair, but that's life.

        To answer your specific question: projects don't sell directly to the consumer, so the consumer has no direct claims against the distributed contributors. That's

      • If you're not willing to sell them, well, Microsoft has yet to announce a dividend.

    • by snickers (36112) on Thursday January 29, 2009 @08:24PM (#26660909)

      I got offered a similar deal with 5% rather than 10% with a small fast growing company. While I liked the company and the job was interesting I had been thinking of moving to a larger city where a lot of my friends had moved. I ended up taking the deal. What the 5% gave me was a nice bonus at the end of each year plus more input into the direction of the company. While I wasn't on the board I was still consulted about all the decision and projects. We also ended up getting aquired so it was a nice pay day at the end of it which helped to buy a house. Looking back I made the correct decision to stay even though it was a difficult decision to make at the time. If overall you like the job and you think the company is worth working for, having a financial stake in it can make a difference. I found that it really motivated me. Good luck with whatever decision you make.

    • Re: (Score:2, Interesting)

      by Anonymous Coward
      As the parent suggests, 10% of a private company doesn't have a direct cash value, it has value, but you might not ever be able to get at it.

      10% is also a fairly large amount, so the company must be smaller and not have any VC or anything like that. I'd ask to meet with the other owners and a very good question to ask would be for them to explain the exit strategy. Are they planning on taking VC? Are they paying themselves dividends? Do they not have one and they just want to do this and get paid a

    • by Anonymous Coward on Thursday January 29, 2009 @09:18PM (#26661337)

      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.

      • Re: (Score:3, Insightful)

        by jwiegley (520444)

        And this is partly why the entire dot-com industry collapsed.

        I was at a company run by the likes of you. What I say is not legal advice, 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.

        No... The financial/sales/marketing/CEO have an attitude that they rule the world and no task is too great. "Sure, our programming team can add that feature in four weeks." Generally, they have no understanding of programming requirements nor the level of education or skill required to be competent at the task.

        Though I agree with you... 10% is ridiculousl

        • by whackco (599646) on Friday January 30, 2009 @12:55AM (#26662661) Journal
          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.
    • Re: (Score:2, Interesting)

      by Anonymous Coward

      I think you got some concepts mixed up here.

      "10% of shares in the company" means an ownership of 10% of the company. If the company is profitable and pays out dividends, then 10% of share entitles you to 10% of dividends.

      Many small IT firms get acquired and even some of them get a bigger and can try an IPO. Also, quite some of them have an exit strategy for minority shareholders, so do not assume shares have no cash value. If it's a profitable company, I can assure you, shares have value. Look at the exit s

    • by kobaz (107760) on Friday January 30, 2009 @02:07AM (#26662967)

      I vote for revenue sharing all the way. Having learned from experience.

      I joined a startup two years ago. I liked the technology, I liked the founder, I liked the direction of the company. The company needed some cash and I became an investor. I own about 20% of the company.

      I made the mistake of not insisting on being part of the operation of the company (I thought that was a given due to having a decent chunk of ownership). I made the mistake of not talking to a lawyer about what I should do. The founder would involve me in planning and etc, but we tended to have bitter arguments where myself and the development team would be in agreement and he would be against it. Never work for anyone who has an "I'm always right and you're always wrong" mentality

      The shot across the bow was 6 months after investing, the founder asked everyone about taking a pay cut to conserve cash. It was supposed to be for 3 months until some pending deals were finalized.

      10 months later, still making less than working at burger king, I had it. By then I grew to hate the founder and his complete ineptitude. His personality reminds me of a 2 year old, and his skills are found wanting.

      Due to not having any sort of non-compete, myself, my brother (who was also working there), the VP, and the sales guy jumped ship and now we have exactly the same company minus the original founder and we've made more sales and more progress in 3 months than we did in 1.5 years with the original startup.

      The other company is still going, they got another round of funding to keep them going, they almost have a product now. Lets hope they can make something so I can see something from my 20%.

    • Re: (Score:3, Informative)

      by Dahamma (304068)

      I would mod this up if it weren't already +5...

      "Shares" are useless in a company unless you get a dividend, they are bought out, or IPO.

      Your post is a bit vague, but if in fact you are saying you are being offered 10% of the company, clearly, the "CEO" (or "owner with an ego" at that point, I assume?) has no intention of doing any of those, so offering "shares" is a great way of keeping a valuable employee without any real cost.

      In fact, if you are being offered 10% of the company I guarantee things are comp

  • by GigsVT (208848) on Thursday January 29, 2009 @07:52PM (#26660607) Journal

    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.

    • by lymond01 (314120)

      If you already tried to resign, accepting counter offers is a pretty bad idea.

      This entirely depends on why you're leaving. I've attempted to leave jobs simply for more pay. I tell them I've interviewed and they ask what the offer is. I tell them, the offer more, I stay. As long as you like your job, you may as well go with there's more money as long as there's good will (which there was in my case). If there's no good will, a decent manager won't counter even if they could.

    • by wsanders (114993) on Thursday January 29, 2009 @08:18PM (#26660855) Homepage

      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.

    • by BluBrick (1924)

      My take on counter offers is that they are almost always amount to an insult. "If that offer is what you think I'm worth, why are you not already giving me that?"

      Get the counter offer in writing, decline it, and use it as a bargaining chip with future prospective employers. "Sure I was on slave labor rates at Cheap&Cheat Co. but this here is what I am really worth"

  • things to consider (Score:5, Insightful)

    by techmuse (160085) on Thursday January 29, 2009 @07:56PM (#26660649)

    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?

  • It might be a great offer if you think the company is going places. I might even ask for 15% because it gives you a second source of income later on in life. It is almost certainly a different kind of counter offers. In most other times, accepting a counter offer is generally not a good as they will then be looking to replace you. However, this offer sounds like they really value your services and want you for the long haul.
  • Well (Score:4, Funny)

    by Neil Blender (555885) <neilblender@gmail.com> on Thursday January 29, 2009 @07:58PM (#26660661)

    If you are low on toilet paper. Other than that, never.

  • by EEBaum (520514) on Thursday January 29, 2009 @08:01PM (#26660689) Homepage
    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.
  • Dilution (Score:5, Insightful)

    by bigbird (40392) on Thursday January 29, 2009 @08:03PM (#26660705) Homepage

    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.

    • by Beryllium Sphere(tm) (193358) on Thursday January 29, 2009 @08:33PM (#26660993) Homepage Journal

      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.

      • Re: (Score:2, Interesting)

        by Anonymous Coward

        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.

    • Re: (Score:3, Insightful)

      by Lumpy (12016)

      that is simple
      word the contract that you hold 10% of the shares
      If they issue more shares they MUST issue you the amount needed to keep yours at 10%

      Honestly, I wont take shares. I have thousands of bullshit shares of AT&T cable and AT&T wireless that were worth nothing when issued to us in the 90's and nothing when the companies were sold out. The AT&T cable shares were changed to Comcast options at $68.00 a share. Comcast will NEVER EVER hit $68.00 a share.

      Never accept optio

      • by Linux_ho (205887)
        Private options are not always worthless. My company bought mine for thousands just last year.
    • 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.

      It happened to someone I know. She was one of a bunch of engineers and not one of them did the math. Instead voting based on the warm-fuzzy blather from the CEO. They sold out and, those that are left, have gone from a dream job some held for decades to corporate cubicle-ville. There are now more than double the number of managers than engineers...

      The company started out not-for profit and had almost no overhead. Did only really cool things for high pay, for decades. The CEO talked them into going fo

  • Listen to your gut (Score:5, Interesting)

    by SiliconEntity (448450) on Thursday January 29, 2009 @08:04PM (#26660709)

    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.)

  • Minefield (Score:5, Insightful)

    by EmperorOfCanada (1332175) on Thursday January 29, 2009 @08:04PM (#26660711)
    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.
  • Stock is for chumps (Score:5, Informative)

    by Anonymous Coward on Thursday January 29, 2009 @08:05PM (#26660719)

    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. :)

  • Here you go (Score:4, Interesting)

    by geekoid (135745) <dadinportland@yBLUEahoo.com minus berry> on Thursday January 29, 2009 @08:06PM (#26660727) Homepage Journal

    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.

  • by Anonymous Coward

    As has already been mentioned, if the company is private the shares are worthless to you unless you have controlling interest. . . unless it goes IPO.

    If you have threatened resignation, I would not stay -- you've played your cards.

    However, if you have had another offer and this is your current employers counter, you should as has already been mentioned look for credit for 'time served', but only accept profit sharing. . . My experience with small IT consultancies is that they are very difficult to take publ

  • Middle ground (Score:4, Insightful)

    by starfishsystems (834319) on Thursday January 29, 2009 @08:14PM (#26660819) Homepage
    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.
  • Never accept shares. Not in today's market. The company can appreciate you more with greater pay, which you can then place into more secure investments like gold or the money market.

    • Bogus advice... (Score:5, Interesting)

      by SerpentMage (13390) <ChristianHGross@nospaM.yahoo.ca> on Thursday January 29, 2009 @09:16PM (#26661319)

      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...

  • Suggestions... (Score:5, Informative)

    by FrankSchwab (675585) on Thursday January 29, 2009 @08:15PM (#26660831) Journal

    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.

  • Important questions (Score:5, Informative)

    by UserChrisCanter4 (464072) * on Thursday January 29, 2009 @08:19PM (#26660863)

    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.

  • Appropo Timing (Score:4, Insightful)

    by drpimp (900837) on Thursday January 29, 2009 @08:23PM (#26660901) Journal
    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.
  • by geekmux (1040042) on Thursday January 29, 2009 @08:35PM (#26661007)

    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.

  • Is there a bigger sucker out there than you are to sell the shares TO. If not, you just got talked out of the last raise you'll ever see at THIS company.

  • Options or shares are good at only one time, just before the company goes public and you have a strike price of like 5 cents. If you are accepting them in lieu of industry standard compensation, you're getting screwed.

    As a part of your compensation, I've only felt that options are any good whatsoever when you can do something to actually improve their price directly with your own performance. That's why when you are an executive, they aren't bad. It also helps that unless you have 20 kids and college loa

  • Because you may have to pay tax on them (as a taxable benefit) well before you could ever liquidate them, if ever.

    If you are certain the company is going public in the near future, on a real stock exchange (not the OTC:BB or Pink Sheets or something scammy like that), and you think the company will maintain decent stock value for longer than your vesting period PLUS the legal holding period you have to hold your shares (maybe 1 year after actually receiving the shares),

    then, and only then, go for it...

    Oh an

  • by Giant Electronic Bra (1229876) on Thursday January 29, 2009 @08:52PM (#26661133)

    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.

  • I have a really bad track record with work and options, so take everything I say with a grain of salt.

    First, this requires a lawyer, if you are serious. If nothing else, 10% of shares seems like a lot (seriously, it does -- I'd put it in "too good to be true, so probably isn't" territory). But there's an obvious risk of dilution, which happens All The Time in these situations. Anytime they get money from outside (by selling stock), bang, dilution, and as a minority not-even-shareholder (because until

  • Sorry, but stock options have a habit of tanking when in a bad market and going up in a good market. Sure, it might be a good time to get in, but I think I'd counter with a half stock, half cash offer to ensure you at least see some of that promised gain. When those shares mature enough to do anything with them, will the company be in business to allow you to pick up that capital gain?

  • Bullshit walks.

    Ask for a raise instead.

  • Walk away (Score:5, Insightful)

    by pvera (250260) <pedro.vera@gmail.com> on Thursday January 29, 2009 @09:22PM (#26661383) Homepage Journal

    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.

  • Consulting firms have relatively low acquisition prices, typically about 1.5 times annual revenue. Unless the shares have a cash stream associated with them such as dividends, or excess earnings distributions, they're just wall paper. Even then, unvested shares don't pay dividends.

    If your boss wants to offer you 10% of company earnings (paid quarterly) on top of your existing compensation, then that is something--but you don't need to fool around with stock to do that, unless the company is structured as

  • High quality (Score:3, Insightful)

    by FrankSchwab (675585) on Thursday January 29, 2009 @09:29PM (#26661429) Journal

    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

  • As long as you get the revenue sharing and such figured out, as is mentioned above, keep in mind we're heading deep into a recession, and jobs, alone, are valuable. Basically a 5-year guarantee of a job is kind of nice.

    Just my two cents.

  • (sorry for that)

    but honestly, shares are a fool's game. I know of no one, personally, who ever got rich from shares (I live in silicon valley and have been since the mid 90's). I've moved place to place on the promise of shares.

    you know, JUST when you are about to vest, some nasty things happen. seen it over and over again.

    NEVER TRUST PROMISES OF SHARES.

    got that?

    "in god we trust. all others PAY CASH"

    got that?

    good.

  • My Advice (Score:3, Interesting)

    by wdr1 (31310) * <(moc.xobop) (ta) (1rdw)> on Thursday January 29, 2009 @09:36PM (#26661481) Homepage Journal

    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

  • by CuteSteveJobs (1343851) on Thursday January 29, 2009 @09:38PM (#26661505)

    > 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.

    • by dr2chase (653338)

      If I were the leech, I'd sue his ass. The leech fulfilled his end of the bargain, why shouldn't he get to enjoy that income stream?

      But I agree, this does make me wonder about the boss. Perhaps she is desperate?

  • 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'r

  • If [you do] there will be trouble An' if [you don't] it will be double
  • Just be very careful that the 10% is spelled out clearly. I took a similar deal about 10 years ago, stuck around the company was sold off about 3 years later but only after issuing tons more stock, in the end my 10% stake ended up being about a $10,000 buyout while the company was sold for around $10,000,000. It was a good lesson learned but a harsh one. 9 times out of 10 unless your buddies with the boss a "small company on the rise" will generally find a way to screw over the little people that helped

  • One that understands these types of deals or you will risk getting screwed.

    As for valuation, a traditional consulting firm; where most of the revenue is from consultants working with clients and not from sales of things like software, have a multiple of around 1. So you can figure out the expected value of your shares by multiplying the revenue projected for year 5 times 1 times your percentage. Of course, the 5 year projection is probably a best case so that will most likely represent the upper limit. L

  • I have been in this situation a few times and it never works out. YOU ALREADY HAVE STATED THAT YOU DO NOT WANT TO WORK THERE. The agreement that you are about to sign, even if written by the best attorney that money can buy, will not be able to set the work rules. What happens if the schedule is such that you are now needed in a "special" project that requires you to work under the most limited time requirements that you have ever heard of? How about being assigned the most "interesting" tasks, in COBOL

  • I was offered actually a 50% share in my company. However I turned it down for the following reasons, This may help you understand some issues.
    I was offered to take the place of a partner who wanted to be retired.
    However there were some issues.
    1. The company acquired some debt (so we had money to readjust to post tech bubble) which I would have been responsible for, while it is smaller then when it was but if I were to become a partner then I would inherent the debt.
    2. The companies futures are suspect. The

  • Too late (Score:5, Funny)

    by daybot (911557) * on Thursday January 29, 2009 @11:26PM (#26662171)

    When To Consider Taking Shares In an IT Company ?

    March 9, 2000. You missed it.

  • Shares? Ha! (Score:5, Insightful)

    by StickyWidget (741415) on Friday January 30, 2009 @12:07AM (#26662407)

    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

  • Two examples... (Score:4, Interesting)

    by johnlcallaway (165670) on Friday January 30, 2009 @01:33AM (#26662821)
    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.

    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 ... 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.
  • Exit Strategy (Score:5, Informative)

    by religious freak (1005821) on Friday January 30, 2009 @03:21AM (#26663291)
    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.

Some people have a great ambition: to build something that will last, at least until they've finished building it.

Working...