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?"
Never accept counter offers (Score:5, Insightful)
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.
Re:Ask for Revenue Sharing and Shares (Score:5, Insightful)
things to consider (Score:5, Insightful)
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?
Five years is too long (Score:5, Insightful)
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)
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.
Minefield (Score:5, Insightful)
Re:Ask for Revenue Sharing and Shares (Score:5, Insightful)
Private company? No, Public Maybe (Score:2, Insightful)
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 public by themselves -- however, they can and often did (before the current economy) received buyout offers from the bigger fish occasionally (in which case 10% may be a heap of change, if the controlling interest decides to sell).
Circle of Life, Simba (Score:1, Insightful)
I doubt that they're interested in replacing the Asker.
However, they will most definitely use the equity vetting timeline to quash all attempts at payraises, since you'd be unlikely to leave over a payraise denial when you're earning a share of the company.
So it's best to make that part of the deal right now. Wrap up the cycle of negotiation quickly and easily, to avoid awkward dickering. What should you be earning in 5 years from now? Ask for that amount effective immediately plus the 10% accruing over time.
If they agree, then take it and be happy. If not, leave and be happy.
Middle ground (Score:4, Insightful)
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.
You will resign anyway (Score:5, Insightful)
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.
Appropo Timing (Score:4, Insightful)
Re:Dilution and more (Score:5, Insightful)
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.
Take shares AND cash (Score:5, Insightful)
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.
Re:Dilution (Score:3, Insightful)
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 options, those are worthless. and unless the company is a publically traded company, provate shares are also worthless.
Re:Ask for Revenue Sharing and Shares (Score:5, Insightful)
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:Ask for Revenue Sharing and Shares (Score:1, Insightful)
It's also possible that they simply don't have the cash to pay you a cash bonus, which also tells you a lot. If they really think the company will be worth a lot more in 5 years, it's in their best interest to pay you todays valuation in cash and keep the ownership to themselves.
Re:Equity is much more complicated (Score:5, Insightful)
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.
Walk away (Score:5, Insightful)
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.
High quality (Score:3, Insightful)
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
Re:Agree, talk with a lawyer (Score:5, Insightful)
Isn't $50,000 a lot less than $1,900,000? What am I missing?
Re:Agree, talk with a lawyer (Score:5, Insightful)
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:Ask for Revenue Sharing and Shares (Score:5, Insightful)
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.
Re:Hollywood Accounting (Score:5, Insightful)
Exactly. Never negotiate for anything based on revenues, gross, etc. The numbers are too open to manipulation.
Do it like standard Wall Street contracts: specific dollar amounts on specific days if you are still employed by the firm. And specific dollar amounts if they fire you at some point (with clauses for you being a clear dick, e.g. fraud.) A good lawyer can get it it all set up easily if the firm is negotiating in good faith. If not, just leave.
Become a Consultant... (Score:2, Insightful)
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? Or you must manage the group that needs your "unique" leadership values?
If you are willing to work 28 hours a day, and move backwards ten years and do the work of the group, otherwise you are marked as NOT DELIVERING on your promise, stick around.
Ask yourself this question: If you are so valuable as to be worth 10% of the company, why did the owner wait until you were ready to walk? I have been at all levels, and when management believes that someone is worth it, they quickly make sure that you are tied in, way before you are ready to walk. You are valuable, but you are valuable because you have something that management feels it needs now, not long term.
Become a consultant, up your rate by 25%. And make sure that you a second job lined up, as you will quickly find out how "valuable" you are. IF I am wrong, you just got a nice raise.
Shares? Ha! (Score:5, Insightful)
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
Re:Equity is much more complicated (Score:3, Insightful)
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 ridiculously high... for both a programmer and for a CEO/board member.
Re:Agree, talk with a lawyer (Score:3, Insightful)
Re:Equity is much more complicated (Score:5, Insightful)
Ruuuuuuuuu... (Score:5, Insightful)
...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.
Dilemmas easily solved by logic (Score:2, Insightful)
Lots of variables... (Score:2, Insightful)
There is no automatic "yeah this is great" or "nah, this is crap" answer. All those advising one way or another directly are jumping the gun like crazy.
Your big question 'should I stay or should I go now?' only has one answer: 'it depends'.
I've been in similar situations before and in some cases taken shares, in others preferred to take more wages, in others left.
From what you state, the company is "a small IT consulting firm" and you are "a key resource". I think the important information that you're telling us is that the company is SMALL (5-10 people tops?) and that you are one of the key guys.
If taking 10% is equivalent to now considering you as a partner with a say, then now you have "clout" and will be regarded maybe in a different way.
Obviously you want to place a "value" on these shares. Does the company make a profit each year that they turn around and share with the partners? If so, how much has that been... If instead, all they do is adjust top salaries to what company makes (as happens with a lot of companies), then no dividends are paid out. In this case, does your also get adjuested? At what level? If you are made an equal partner on consideration (even if not on shares), will your salary now be on equal par to the others?. Being a "small company" probably means that it will stay privately owned, and never be sold, as such, your 10% probably won't ever have a decent "sale" value, so that part will not be worth much (if anything), unless the company has a declared monetary value, and thus the 10% can actually be redeemed for something... but for that you'd want guarantees in writing that it would be possible to sell at some point in the future.
A downside to "being a partner" is also that often now your guarantee of salary goes to the pits. I'll explain. As a "grunt" worker, you expect your salary as the company isn't yours. The owners generally (if they care at all about their employees), will first pay employee salaries before paying themselves. As an "owner", if hard times hit, you may find yourself with a salary that although on paper your still getting it, in reality you get what is left over... (anything missing considered to be "owed" to you by company, to be paid when [if?] things improve... after all, it "doesn't matter as it's your company after all!!!"].
You also mention that "I was ready to quit for consulting". So, you want to quit this small consulting company and go set up one yourself of your own? Well, if you are one of the key resources, maybe you are better off with your own company than having 10% of one shared with another 90%...
As mentioned above, it all depends... Conditions being special to your particular company, what the outlook is, what consideration you get for your shares, how that affects salary, if the value of shares is actually tangible down the road, etc. Impossible to tell without knowing more, but at least those are the things you should be factoring in to see if you want it or not.
Oh, and of course, the first question of all "are you comfortable with the company?" If not, then your choice is clear in any case.
$0.02
Re:Ask for Revenue Sharing and Shares (Score:4, Insightful)
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?
Be very wary small print and how they go about calculations of profits.
Re:Agree, talk with a lawyer (Score:4, Insightful)
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:Equity is much more complicated (Score:1, Insightful)
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.
If you think that's an affliction particular to programmers you're delusional. Parent is saying that CEO's, marketing people and lawyers do the same, and that's spot on.
Intelligent people are often able to do a better job than someone more experienced but less intelligent. Unfortunately, since everyone believes they're smarter than they actually are there are a lot of dumb people giving smart people a bad reputation.
Re:Agree, talk with a lawyer (Score:2, Insightful)
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.
Just because she has a "valid claim" does not mean that she will win. Nor does it mean that by the time she does win that the 10% share would be of $20M. What if her litigation causes the sale to fall through? What if she does win but it takes 5 years and by that time there is nothing left of the company? What if the 10% she was given 5 years ago has now been diluted by the next 10 people after her that were each given 10%?
Lots of reasons a 100k payout now on a "valid claim" to a possible future 2M might be the better choice.