When To Consider Taking Shares In an IT Company? 315
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?"
Stock is for chumps (Score:5, Informative)
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. :)
Suggestions... (Score:5, Informative)
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)
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.
Every situation is different (Score:5, Informative)
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.
Re:Ask for Revenue Sharing and Shares (Score:2, Informative)
fase [yahoo.com]
The august 19th quarterly dividend was $0.11/share. The November 18th dividend ("last quarter") was $0.13/share.
Hollywood Accounting (Score:5, Informative)
http://en.wikipedia.org/wiki/Hollywood_Accounting [wikipedia.org]
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.
Re:Agree, talk with a lawyer (Score:5, Informative)
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.
Re:Ask for Revenue Sharing and Shares (Score:3, Informative)
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:Agree, talk with a lawyer (Score:1, Informative)
Yeah, I gotta call BS on this one. The lawyers "agreed she had a valid claim", but it would cost her $50,000 in legal fees so it wasn't worth it? For $2,000,000? Let's see, $50K from $2 mil leaves... 1.95 MILLION DOLLARS! I guess the lawyers didn't want the money either? Give me a break.
Re:Ask for Revenue Sharing and Shares (Score:5, Informative)
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:Agree, talk with a lawyer (Score:3, Informative)
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 provided in this post is for informational purposes only. Before you make any decision that may have legal implications, you should consult with a qualified legal professional for specific legal advice tailored to your situation.
Re:Ask for Revenue Sharing and Shares (Score:3, Informative)
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 completely f-ed. No one offers 10% of anything valuable unless they are desperate, and if they are in fact offering it to you, then you must be smart enough to realize this and RUN AWAY AS FAST AS YOU CAN!
Exit Strategy (Score:5, Informative)
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.
Re:Ruuuuuuuuu... (Score:3, Informative)
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 only question you have to ask yourself is: do you really want to give this company another 10% of your productive life?