I suspect that instead of whips, the ancient Egyptians drove their slaves with stock options. “We can’t pay you for this Pyramid thing, but you can get a lot of sweat equity!” If you don’t want to end up working for free, know these before accepting shares in place of cash:
1. How Easily Can You Sell the Shares?
If your company isn’t listed on the exchange, how are you going to sell your shares? It doesn’t matter if the company’s worth $300,000 or $3 million; not when the shares are as permanently affixed as tattoos on your back.
There is, of course, the option of finding a private buyer. Now that’s something I’ve actually tried, but not successfully (the process was about as clear as a sign language lesson. For the blind). Good luck on that.
Also, note that if you’re a director or partner in the start-up, there may be restrictions even after the company takes off. Let’s just say it’s not reassuring when a director starts selling her shares.
2. What Kind of Shares are They?
Not all shares are created equal. Drop by the SGX website or Moneysense, and find out about the different types of shares. But mainly, you need to know about preferred versus common shares:
Let’s say some investors put $2 million into the company, and have preferred shares. You, being an employee, just have common shares.
A few years later, the company sells for $3 million.
Now $2 million of that money goes to the investors with preferred shares first. The remaining $1 million is distributed among the holders of common shares.
In brief, having common shares could mean your eventual pay-off is much smaller than you imagine. For more on how this is calculated, follow us on Facebook.
3. How Much of the Company Do You Really Own?
The number of shares isn’t too relevant – what counts is the percentage of the company you’re getting.
If the company has issued 10,000 shares and you have 5,000, you own 50% of the company. If the company has issued 500,000 shares and you have 5,000, you own 1 whopping percent.
Also, if the company is in its early rounds of funding, your percentage of it is probably going to be diluted further. It’s likely to issue more shares later on, thus shrinking your ownership.
You might want to ask about the company’s plans to issue more shares in the future, before accepting the deal.
4. Is the Company in Debt?
As with point 2, preferred shares get the money first. In the event that the company gets liquidated, all the money will go to creditors and the holders of preferred shares first. The holders of common shares get to pick at the table scraps.
So you might want to do some checking up on the company before accepting their shares – an independent financial advisor – or your stock broker – can help you out here. If the company is up to its eyeballs in unpaid bills, you might want to be paid in cash instead.
5. Understand that You May Be Taking a Long Shot on Start-Ups
Some 70% of start-ups fail in their first year. Of those few survivors, less than 5% will be around in five years. In short, accepting shares from a start-up is the same as getting paid in hope and good feelings.
Unless you’re dealing with a big company, there is a high chance that shares in a start-up are going to be worthless. For every Facebook and Google, there is a train of failures longer than Gaza strip peace treaties.
So if you do accept shares in a start-up, don’t do it for the potential pay-off. Do it because you believe in the company. Accept that you’re probably just working for less pay, and don’t plan your personal finances around those shares being worth millions in five years.
Have you accepted shares in place of cash? Comment and tell us why!
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