How does equity work in a startup company?
May 3rd, 2009 | by Rick |
asked:
I produce videos for a startup company. I get paid after each finished project. Recently, I got offered to some “equity” but the catch is that my regular paycheck will be reduced. I have an idea what equity actually is but not quite sure how it works. I basically get a certain percentage of the company right and hope the company grows?
I produce videos for a startup company. I get paid after each finished project. Recently, I got offered to some “equity” but the catch is that my regular paycheck will be reduced. I have an idea what equity actually is but not quite sure how it works. I basically get a certain percentage of the company right and hope the company grows?
I guess my main question is what should I ask the company or what do I need to know before I sign the papers. What’s a good offer and what’s a bad one? Thanks.
DEVON
One Response to “How does equity work in a startup company?”
By MORGAN on May 4, 2009 | Reply
CECIL
Equity is stock. You are right that by getting stock, you are getting a percentage of the company. The key thing is what percentage. They should be willing to tell you how many shares that are outstanding. There are many variables here that you did not talk about (sales of the company, market potential of its products, quality of the management, etc.). A simple approach that could be useful is to consider the quality of the investors. Is the company backed by sophisticated (institutional or Venture Capital) or other professional investors? What stake does management own? Or, it is a Mom and Pop organization? If there is “smart” money involved, you could just trust that they probably know what they are doing. Another factor to consider is the likelihood of liquidity (getting cash for the stock) in the foreseeable future. If the company has great products and is going places, it could be a very good bet.