Loading...
Answers
MenuI've been at a startup for 4 years, & promised equity but never received it. Company now profitable. What pitfalls should I avoid when pushing for it?
This question has no further details.
Answers
You might be somewhat in trouble. You'll want to consult a lawyer, not to be adversarial, but rather to ensure you do things that are legal and are best from a tax-consequence perspective.
You can't back-date option grants or stock grants, for example. There are recent scandals reinforcing that statement. And if you don't back-date, your stock (or options) is worth something now, and might even have to get a 409A to ensure it's valued properly. (That's a 3rd-party stock valuation report, typically costs $10k-$30k, which companies with ESOPs are required by law to do annually, but I wouldn't be surprised if this company hasn't yet.)
There's all sort of other boogers which you couldn't even know about. For example, if an outside party made an informal written offer to buy the company, even if it went nowhere after that, that will change the 409A valuation.
So this is why, in short, I'm giving you the unsatisfactory answer that you'll have to use a lawyer to make sure everything is done properly.
This is, sadly, a object lesson in getting paperwork done properly from the start. I'm sorry to be the bearer of bad news!
You're likely out of luck. If you think that it really was an oversight, have an adult conversation with the people and see if there's some kind of mutually beneficial resolution possible, recognizing that back-dating shouldn't be done. Perhaps there's some kind of adjustment to be made to the amount of equity you get today or something along those lines.
Keep in mind a few notable pitfalls:
1. Not Having the Right Legal Counsel: In a misguided effort to save on expenses, start-up businesses often hire inexperienced legal counsel, including lawyers who are friends or relatives, or those who offer steep fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who can help avoid many legal problems.
2. Not Carefully Considering Intellectual Property Issues: Both the company’s founders and its investors have a stake in ensuring that the company protects its intellectual property and avoids infringing the intellectual property rights of third parties. Another potential intellectual property issue arises when a founder starts a new company while employed elsewhere.
3. Not Coming Up with a Great Contract: Most companies should have standard form contracts for dealing with customers or clients.
4. A good privacy policy will cover the following: The company must also consider the myriad of privacy data protection laws being enacted, including the GDPR and the California CCPA.
5. Not Using a Good Form of Employment Agreement or Offer Letter When Hiring Employees: Companies should ensure that the employee and the company sign the letter and anyfirst-day paperwork. For a good sample employee offer letter.
6. Not Requiring All Employees to Sign a Confidentiality and Invention Assignment Agreement: Employees have access to a good deal of their company’s confidential information, which can be unbelievably valuable, especially in technology companies. One basic way to protect proprietary company information is using a confidentiality and invention assignment agreement.
7. Asking Interview Questions That Are Prohibited by Law: Asking the wrong questions could lead to a discrimination claim against the company, even if decisions are not made on that basis.
8. Not Taking the Proper Steps Prior to Firing an Employee: Terminating an employee, even an “at will” employee, entails legal risk if not properly handled and documented.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Related Questions
-
What will be the pros and cons of equity crowdfunding? Will crowdfunding give a startup a higher valuation? How will valuations be determined?
After shepherding 300 equity crowdfunding raises through our platform I'd say all of them have a higher valuation. Reason is it is the entrepreneur that is calling the shots. It is the entrepreneurs offer on their terms on an equity crowdfunding platform. Once you get outside investors involved shaping the deal the valuation will most certainly go down. Agreed it may then be more realistic as everyone believes their company is more valuable than it is. My advice? Treat early investors fairly. Money is the lubricant to get your idea into reality. Give them a fair share of the business and they will reinvest when need be.PN
-
What are my risks in entering a partnership with 50% voting shares, but only 25% equity overall? How can I protect my interests in this scenario?
The first matter for you to conclude is to agree the terms of a shareholder agreement between the two founders. This shareholders agreement should govern the management of all significant governance matters. Without this you will subject to the constitution documents of the company and local company company law. This is a standard type of agreement that any decent corporate lawyer will be able to advise you on. As the voting shares are held equally, then no major changes will be able to be made without both founders agreeing to the changes. The non-voting shares (assuming all other terms are the same) will have equal rights to financial returns (dividends and liquidation rights), but will not be able to participate in voting issues. In simple terms, you will have an equal say in the running of the company with your co-founder, but will receive 25% of the returns, while they receive 75%.NH
-
What steps do I need to take to cash out the equity I have within a company?
Good Morning, Your question may appear to be a simple one. As a CPA, CGMA, and business performance expert for over 25 years now, I get questions like this from my clients often. Your options are not clear from your question, however, I will steer to you to where you need to look to determine what options are available to you: 1) Your company structure will determine some of your options. This means are you a Corp (C corp or S corp), LLC, partnership/multi-member LLC. Due to the 10% held by others, I'm sure your not a sole proprietor. 2) Any operating agreement you may have will also define more of your options. Operating agreements can hold many terms of how you operate your company, including ownership changes, so I cannot give you any advice here without knowing if you have one and what's in it, but the contents will flush out more options. 3) In the absence of an operating agreement (this is always possible) you may need to take "politically and legally prudent" steps. That means you'll need to work out any sale of your stake with your fellow partners. 4) Once you've flushed out your options available to you, you can then set the steps you need to take. 5) Your steps will need resources to help you. Business resources such as guidance on the sound business steps to take, and negotiations to conduct, while keeping your business rolling, as well as legal resources to put any agreements on paper. Because this is complex, by legal and business measures, I encourage you to call me for more accurate information to help you. I hope this helps!RS
-
How much equity I should ask for as the first employee of a startup with 2 co-founders?
If they are offering equity as your payment then I'm surprised that they didn't come with a number. Or maybe they will. It's hard to give a firm answer because it all depends on how much money the two founders are investing on their own. If you say you'll invest equal portions then you can ask for 1/3 of the company. If you're just investing time, how much time, compared to how much of their time plus equity. Depending on those answers, the amount of equity you're worth can drop pretty low.SD
-
What share split should I ask for in a new venture with a partner?
I've been a co-founder of three ventures and have had to negotiate ownership stakes with my partners for each one. I've also conducted intellectual property diligence, as a consultant to IP/M&A attorneys, for multiple multi-million dollar software M&A deals. As Stoney said, it's a bit hard to come up with a firm number, given the number of unknown variables involved here. Also, it almost sounds like you and your product are being acquired by this larger company, while essentially selling or licensing a product you've built to this company in the process. If that's the case, you may want to speak with an attorney who's experienced in software licensing agreements and M&A. They may be able to steer you in the right direction of a valuation, as well as make sure you're very clear in what you're giving away, from an intellectual property rights perspective. Another thought that comes to mind is that if the company is providing you with a lot of support, including a salary, be prepared for them to possibly low-ball you on the ownership stake. Once you decide on an ownership stake to suggest, I wouldn't be afraid to start at the high end of your estimate, taking into account the fact that they may try and negotiate the share down quite a bit, given the financial contributions they'll be making. In my experience, investors putting money on the table typically and unfortunately don't value sweat equity too highly or fairly, when compared to cold, hard cash. Always happy to discuss further on a call and good luck!CR
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.