What are the benefits and headaches of equity in a private company?

September 21, 2010 10:21 AM

What are the benefits and headaches of owning equity in a private company?

I'm working for a start-up who is offering me equity in the company for my time. I have never owned stock before (not even a mutual fund) and am not really sure what benefits or liabilities having equity in a company exposes me to, nor what kinds of questions that I should be asking the company owner.

(anonymous because my twitter and mefi name are linked)

posted by anonymous to work & money (4 answers total)

The benefits are unlimited upside.

The downside is illiquidity and the potential for the investment to fall to $0 in value.

As to what sorts of questions, that depends on the equity stake being offered. Generally speaking the more equity you are offered the more leverage you have to demand certain information such as company financials, future plans, etc.
posted by dfriedman at 10:51 AM on September 21, 2010

The last company I worked (a private firm) for offered stock options for certain things - occasional performance bonuses, hiring bonuses, etc. I never got any, but several of my friends did.

Essentially, they were really only valuable if the company ever went public or was bought out by another company. The stock price, such as it was, was set by the board of directors. I think it stayed at about $1.10/share, but it seemed pretty much arbitrary. I'm not aware of anyone successfully exercising their options for whatever reason.

The kicker, which threw up a big red flag for me, was that every offer of options came with a clause that the company was allowed to buy back the options at any time, for whatever price, and you had no say in the matter. I fully expect that, if the options ever gain any value, they would be very quickly revoked by the board (paid to the owner of the options at the measly dollar or so a share) and then distributed to the owner of the company and the venture capitalists.

So, upsides: probably worth at least a little bit when given to you.

Downsides: if you're being paid stock in lieu of cash, you could get seriously fucked over. Basically, I would argue that you should be getting roughly your equivalent salary in stock or it's not worth it. At least you can sell back to them (hopefully) at that price if you need money to live.
posted by backseatpilot at 11:01 AM on September 21, 2010

If they're paying you only in equity, you should run far away.

If you can't run far away, ask for a significant chunk, like, 10% of the company. Equity-only is for companies who don't have the cashflow nor/or desire to actually pay people, so they pay you in fairy dust. Your position is not going to be financially or legally significant unless something actually happens to the comapny: e.g. IPO (unlikely) or acquision (slightly less unlikely). Suffice it to say, you'd be working for currently-worthless compensation. It will probably remain worthless, because serious companies have money to pay people and the ones who don't (and have to pay people in equity) typically result in failure. Typically.

But then again, maybe you're just asking about natural option grants and shit common to small companies. You'll want to quadruple (at least) any offer they make to you. You don't want to work your ass off for a tyrant startup boss only to see your WOW, 20,000 OPTIONS turn into a measly $8,000 when all is said and done.
posted by rhizome at 11:26 AM on September 21, 2010

Ha, I have to laugh, because I got 20,000 options at one of my first software jobs, worth (yes) $8,000 at the time. The shares I got with them haven't changed in value in the decade since I got them.

The downside was that I was motivated by something I thought would be worthwhile, but instead I got an asset I can't sell, and doesn't appreciate.
posted by blue_beetle at 1:45 PM on September 21, 2010