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?"
Ask for Revenue Sharing and Shares (Score:5, Interesting)
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.
Listen to your gut (Score:5, Interesting)
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.)
Re:Ask for Revenue Sharing and Shares (Score:5, Interesting)
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.
Here you go (Score:4, Interesting)
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.
Re:Ask for Revenue Sharing and Shares (Score:3, Interesting)
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 he leaves before 5 years.
I just glance at Fairsoftware, but I didn't see who is liable when you are sued with that plan.
Re:Ask for Revenue Sharing and Shares (Score:5, Interesting)
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:Ask for Revenue Sharing and Shares (Score:3, Interesting)
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 a form of liability protection, but again, if anyone promises you that you can't get sued, they are lying.
Agree, talk with a lawyer (Score:5, Interesting)
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.
Re:Ask for Revenue Sharing and Shares (Score:2, Interesting)
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 salary until someone dies and let their kid takeover? Is the company totally solvent or will they need more money soon? If they need more money then you really get 2 options, dilute yourself or buy more ownership by putting in money yourself.
If external investment is needed, then understand that a typical VC will dilute the stock and end up with 70% ownership, your ten becomes maybe 3% Which, potentially, is still great, very great. You can also ask about valuations, they don't volunteer that information and they might even try to make it uncomfortable to ask but if they are trying to pay with stock then you're completely within your rights to ask and when you are a shareholder it's the law in most states that they tell you when you ask. Can they put a dollar valuation on the company? If they sold it today, how much would they sell it for? If they can't do that, it's not a great sign. Ask questions to help you quantify this stuff and get answers, don't let them run you around, this is compensation and you should be able to have some idea on its value. Also, if it's 10%, they damn well better be willing to take your meeting to discuss it.
In a venture backed company or one that is going public or has any realistic hope of it, 10% is gigantic. That's principle employee/officer type ownership, that's special SEC rules for you type ownership if it becomes public.
What does that ownership provide in the way of decision making capacity? Do you get a board seat? In your day to day job does that increase your say? Do you get hire/fire decisions?
If she opened with 10%, and she doesn't answer to a board of directors or something, I'd not accept anything less than 15% but it's also indicative that it's a very small outfit and a cash exit strategy might be very hard to achieve. Hard to say though, the big boys might be chomping at the bit to buy your company, you never know. Find out the planned exit strategy and then take a step back and look and try to be honest and objective, are they moving in that direction? What needs to happen for that to happen?
Re:Ask for Revenue Sharing and Shares (Score:5, Interesting)
The bigger questions are:
Will this business become a publicly traded giant or get bought out for enough money that your 10% can push you into the VC business yourself or at least provide a nest egg to make all future work optional?
Do you feel your presence in the top ranks of the business will enhance the likelihood of this type of outcome? Remember a 10% stake dosn't guarantee you a seat on the board, but that is not an unreasonable expectation.
This is just me stabbing in the dark here, but if an Engineer is worth 10% of the business, then this is likely not the type of business you can build up and let go. Basically the top engineers ARE the business.
Finaly. Mr. Neal. Did Hemos and Taco try to give you alcohol before making this offer?
Bogus advice... (Score:5, Interesting)
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...
Re:Dilution and more (Score:2, Interesting)
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.
My Advice (Score:3, Interesting)
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
Don't think your boss is very bright... (Score:4, Interesting)
> 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.
Take shares only if they give you control (Score:2, Interesting)
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're ready for something new. This sounds like you're getting 5 more years of the same thing. If you didn't explain yourself to your CEO, shame on you, but if you did, this means your CEO isn't listening to what you're saying, and you've been there almost 6 years. That's a good reason to get out just by itself.
Re:Agree, talk with a lawyer (Score:1, Interesting)
Actually, he should ask for some sort of compensation for the years he's put in already - as a sign of goodwill. Then, when that has been taken care of you can talk about negotiation for continued employment. At that point you can take it or leave it without any worries.
Re:Ask for Revenue Sharing and Shares (Score:2, Interesting)
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 strategies.
Finally "10% revenue share of the annual profits" means nothing. Revenue is revenue, profit is profit, revenue of profit is just a mess.
I think you are trying to say that a 10% share of profits would be meaningful, but then this is inconsistent with your first statement:
10% share of profits (what you suggest) is worse than 10% of shares (what you recommend against): in the first case, you get only profits, in the second case, you get profits _and_ ownership (which usually means you can sell you shares, at a price).
Re:Agree, talk with a lawyer (Score:3, Interesting)
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:Well (Score:3, Interesting)
I was given stock options for a company several years back that vested over a period of time. I never bought them but when they decided to sell most of the stock to another company (With a vested interest in how it was run) they chose to do so by buying back our options (half of them, anyway) at the current estimated stock value. Basically they took the current stock estimated values, subtracted the value at the time of the stock options offer, and made a pay out bi-anually for whatever had been vested until that point. While I didn't get much more than a few grand, it was free money. This isn't a very likely scenario either, and the payout I did get was taxed as additional income. Still, stock doesn't necessarily have to be worth nothing...
Re:Listen to your gut (Score:1, Interesting)
I just quoted that entire post and mailed it to myself. It applies to a situation that I'm presently so much that it's scary (not so much anything to do with stock options or cash; more just the general gist of 'stagnation and career growth', and making the decision to move on).
That's a keeper.
Two examples... (Score:4, Interesting)
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
Re:Ask for Revenue Sharing and Shares (Score:4, Interesting)
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:Agree, talk with a lawyer (Score:3, Interesting)
True enough. Even if your dissatisfaction about pay is the reason you're leaving, them offering more pay ain't reason enough to stay. It goes something like this:
"I really think my compensation isn't in line with my competences and responsibilities, could we discuss adjusting it to a more apropriate level ?"
"No."
"I see, in that case, here's my resignation-letter, I will be starting at [competitor-X] next month."
"We can't afford to lose you, we'll pay you whatever they're offering, plus 10%".
Seriously, at that point, the only sensible thing is to walk out. If they're only willing to pay you what you're actually worth to them when faced with (in essence) an ultimatum, then screw them. They had their chance when responding to your first inquiry, they blew it.
Re:Dilemmas easily solved by logic (Score:5, Interesting)
You would think people would be this smart but they aren't.
I know a person who spent 6 years taking care of her aunt in her own home as she was suffering from some disease and they decided not to stuff her into a nursing home seeing how there was only one other relative besides her alive still. She had around 3-5 million in rental property and probably another 2 million in other assets like stocks, bank accounts, jewelry and so on.
So after the aunts death, the will was read with the two surviving family members present. She ended up leaving everything to her attorney (who also made out the will). Not one dime went to anything else except her funeral and final medical bills.
I suggested that she fight the will and take some of the money, if nothing else, attempt to get additional money for taking care of her for the last 6 years. She decided against it because every lawyer she spoke with wanted 30 or 35% of the judgment and her aunts lawyer could spend some of the funds in defending the will. She would have needed no money at all and the lawyers would only be paid if they won and they were confident they could have the will invalidated. I told her she was stupid because 60% of 5-7 million dollars is a hell of a lot more then her $35,000 a year income. Her boyfriend, the restaurant manager who work his way up from a dishwasher convinced here that it wasn't worth it.
By my calculations, she should have still gotten around 60% which should be between 3 and 4 million to be split between two people. But somehow she was convinced that a lawyer taking over 1.75 million was just too much so she let it go to another lawyer without a fight. It's been about 5-6 years and not to long ago, she told me she finally realized how much money she let slip by.
People are stupid about these types of things even when otherwise intelligent. I don't know if it is fear or the uncertainty but it's easy for someone not directly connected to it to see the mistakes as they are happening.