Being offered equity
Discussion
This has probably been asked before but its not stopped anyone else before me, so here goes...
I have recently been approached to join another company and part of the deal on the table is equity in the business. This has been through an intermediary and I haven't got talking to the company just yet but it is of sufficient interest for me to progress things forward. Some necessary facts:
The business is well established, so I feel the risk on offer of equity is minimal
The team I would lead is underperforming so both they and I feel a difference can be made
The remaining lifespan of the business is 5-10 years before cashing out
I am mid 30's and have no real world idea about what I need to cover off when discussing with the company at hand. For those with experience, what should I ask about the equity offering, what would you challenge the senior management on and in your experience is their initial position negotiable?
Thanks in advance.
I have recently been approached to join another company and part of the deal on the table is equity in the business. This has been through an intermediary and I haven't got talking to the company just yet but it is of sufficient interest for me to progress things forward. Some necessary facts:
The business is well established, so I feel the risk on offer of equity is minimal
The team I would lead is underperforming so both they and I feel a difference can be made
The remaining lifespan of the business is 5-10 years before cashing out
I am mid 30's and have no real world idea about what I need to cover off when discussing with the company at hand. For those with experience, what should I ask about the equity offering, what would you challenge the senior management on and in your experience is their initial position negotiable?
Thanks in advance.
You say the company is doing well but you need to define this. A bulging sales book is all very well but are they making a profit? And even a profit may not be a good indicator if their cash-flow is being funded through excessive borrowing. So first, you need to establish the full picture, not just the obvious. A slice of the equity comes with a slice of liability.
You need to look at the order book, cash-flow, lending, cash at bank and check out the owners too. If you don't know what you are looking at, find a friendly accountant to do this for you. Won't cost a fortune.
It's not unusual for companies to offer equity inducements to attract key people only to then, regularly put in cash calls* that they know those now shareholding employees cannot afford. In the absence of cash, shares are redistributed and you end up with yours being ever more diluted to the point of extinction. Trading history and accounts will give an indication of the likelihood of this happening.
(*A cash call is when the owners say that they need to raise funding from shareholders; let's say for argument £100,000. If you owned 10% equity, you would then need to find £10,000 to retain your current equity. If you can't or don't want to, then the value of the shares would be reset and reallocated leaving you with £10,000 less value in them and less equity - others here may explain this with a little more clarity)
You also need to ascertain what level of added influence your equity will afford you - if any. This will in part be determined by the percentage but not always. If the owners want to do something that you firmly believe to be the detriment of the business, would you have any say?
Personally....
I always worry about such offers. If they want you, they want you. And if you want to work for them, you will. End of. Equity can be earned as an incentive or given as an inducement to someone with very significant contracts but should never simply be included as part of an offer of employment.
Go fish but tread carefully. At the end of the day, it's all about what goes into your bank at the end of the month. You can spend that. You can't spend equity. Sure, you may see some gold in 5 to 10 years time. But you may also be saddled with X% of a £1m debt.
Try to ascertain the value of the equity they are offering now (in money) and what this is projected to be at the time of the sale of the business. This will at least give you a sense of the value of what's being offered and whether the risk is worth taking.
You need to look at the order book, cash-flow, lending, cash at bank and check out the owners too. If you don't know what you are looking at, find a friendly accountant to do this for you. Won't cost a fortune.
It's not unusual for companies to offer equity inducements to attract key people only to then, regularly put in cash calls* that they know those now shareholding employees cannot afford. In the absence of cash, shares are redistributed and you end up with yours being ever more diluted to the point of extinction. Trading history and accounts will give an indication of the likelihood of this happening.
(*A cash call is when the owners say that they need to raise funding from shareholders; let's say for argument £100,000. If you owned 10% equity, you would then need to find £10,000 to retain your current equity. If you can't or don't want to, then the value of the shares would be reset and reallocated leaving you with £10,000 less value in them and less equity - others here may explain this with a little more clarity)
You also need to ascertain what level of added influence your equity will afford you - if any. This will in part be determined by the percentage but not always. If the owners want to do something that you firmly believe to be the detriment of the business, would you have any say?
Personally....
I always worry about such offers. If they want you, they want you. And if you want to work for them, you will. End of. Equity can be earned as an incentive or given as an inducement to someone with very significant contracts but should never simply be included as part of an offer of employment.
Go fish but tread carefully. At the end of the day, it's all about what goes into your bank at the end of the month. You can spend that. You can't spend equity. Sure, you may see some gold in 5 to 10 years time. But you may also be saddled with X% of a £1m debt.
Try to ascertain the value of the equity they are offering now (in money) and what this is projected to be at the time of the sale of the business. This will at least give you a sense of the value of what's being offered and whether the risk is worth taking.
Edited by StevieBee on Wednesday 23 September 15:08
Edited by StevieBee on Wednesday 23 September 15:08
Edited by StevieBee on Wednesday 23 September 15:13
I regularly get offered equity, it's rarely a good thing IMO. People who have valuable equity rarely give it away, it's a bargaining chip in exchange for something you have.
Scenarios for me have been:
1. To ensure commitment and that I give my all, coupled with a 6-fig salary, this was a good one but the bubble burst and the equity was worthless. Best deal I ever had in fairness as I could still run my own business at same time.
2. To ensure commitment and to reduce my charging rate. Had fun with it, learn a lot with someone elses cash but it eventually died off. Made a bit of cash from it but not from the equity.
3. To try and get me to work for free hahaha. Thought the equity was worth loads, it's currently worth nothing. Ended up paying me a slightly reduced consultancy rate as I wanted to see where it went and only for a few days PCM. I can see it's dying already tbh and my contract is coming up for renewal after 3 months. Chief exec just sounded me out about a £25k investment, struggled to keep a straight face when I potentially declined.
I'm sure there are other scenarios I have forgot, in fact there is but this one was mental and I found out the guy lived in a mental home, can't be bothered to type the story atm
Scenarios for me have been:
1. To ensure commitment and that I give my all, coupled with a 6-fig salary, this was a good one but the bubble burst and the equity was worthless. Best deal I ever had in fairness as I could still run my own business at same time.
2. To ensure commitment and to reduce my charging rate. Had fun with it, learn a lot with someone elses cash but it eventually died off. Made a bit of cash from it but not from the equity.
3. To try and get me to work for free hahaha. Thought the equity was worth loads, it's currently worth nothing. Ended up paying me a slightly reduced consultancy rate as I wanted to see where it went and only for a few days PCM. I can see it's dying already tbh and my contract is coming up for renewal after 3 months. Chief exec just sounded me out about a £25k investment, struggled to keep a straight face when I potentially declined.
I'm sure there are other scenarios I have forgot, in fact there is but this one was mental and I found out the guy lived in a mental home, can't be bothered to type the story atm
jonamv8 said:
People who have valuable equity rarely give it away
In my experience, those that do give away equity often lack sufficient business nous to make its value worth having. Often, the act of offering it tells you all you need to know.OP: Another way to assess this and weigh up the option is to try to establish the money value of the equity they are offering and ask yourself that if you were using your cash to buy that equity, would you do so?
Some very naive advice re equity on this thread.
Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
Almost every business of a decent size uses equity to incentivise management teams.
Nearly everyone who makes a stack of cash in business has equity to thank for it.
Equity is offered in an number of circumstances, from small chucks to low end employees and potentially life changing amounts to more senior staff.
The reasons are obvious -
To reward loyalty
To retain key individuals
To motivate key individuals
To ensure that the management team and non exec shareholders are aligned (crucial)
To ensure that new senior hires has "some skin in the game"
To mitigate tax
On the top end, to attract the right people, a key individual might not care about the difference between 150K & 200K in terms of salary, they want to see 7 figures if the business reaches its goals.
It can be offered in several different ways and this would depend on many factors, including the structure of the business, the type of employee, the reasons for offering it in the first place etc.
The upsides are that if the business does well AND you are able to crystallise that equity, you can be the recipient of a big chunk of cash and if the equity was structured right in the first place, pay 10% tax on the gain.
The downsides are that an event that would trigger such a crystallisation might never happen or if it did, the company might have under-performed and the hold be worthless.
The only thing that is certain is that if you don't have any equity, you will have little to gain in the event of a trigger (MBO, trade sale, IPO etc etc)
I'd take equity in any business I was joining even if it cost me short term so long as
1) The business had potential
2) The management team were solid
3) I thought I could make a difference
But if I couldn't answer yes to those 3, then I wouldn't be joining regardless.
Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
Almost every business of a decent size uses equity to incentivise management teams.
Nearly everyone who makes a stack of cash in business has equity to thank for it.
Equity is offered in an number of circumstances, from small chucks to low end employees and potentially life changing amounts to more senior staff.
The reasons are obvious -
To reward loyalty
To retain key individuals
To motivate key individuals
To ensure that the management team and non exec shareholders are aligned (crucial)
To ensure that new senior hires has "some skin in the game"
To mitigate tax
On the top end, to attract the right people, a key individual might not care about the difference between 150K & 200K in terms of salary, they want to see 7 figures if the business reaches its goals.
It can be offered in several different ways and this would depend on many factors, including the structure of the business, the type of employee, the reasons for offering it in the first place etc.
The upsides are that if the business does well AND you are able to crystallise that equity, you can be the recipient of a big chunk of cash and if the equity was structured right in the first place, pay 10% tax on the gain.
The downsides are that an event that would trigger such a crystallisation might never happen or if it did, the company might have under-performed and the hold be worthless.
The only thing that is certain is that if you don't have any equity, you will have little to gain in the event of a trigger (MBO, trade sale, IPO etc etc)
I'd take equity in any business I was joining even if it cost me short term so long as
1) The business had potential
2) The management team were solid
3) I thought I could make a difference
But if I couldn't answer yes to those 3, then I wouldn't be joining regardless.
StevieBee said:
jonamv8 said:
People who have valuable equity rarely give it away
In my experience, those that do give away equity often lack sufficient business nous to make its value worth having. Often, the act of offering it tells you all you need to know.OP: Another way to assess this and weigh up the option is to try to establish the money value of the equity they are offering and ask yourself that if you were using your cash to buy that equity, would you do so?
StevieBee said:
Y
Go fish but tread carefully. At the end of the day, it's all about what goes into your bank at the end of the month. You can spend that. You can't spend equity. Sure, you may see some gold in 5 to 10 years time. But you may also be saddled with X% of a £1m debt.
Whilst I completely agree you can't spend equity (in most cases) the suggestion that equity might mean you could be saddled with a debt is very wrong and can NEVER happen if the equity is offered under the normal terms.Go fish but tread carefully. At the end of the day, it's all about what goes into your bank at the end of the month. You can spend that. You can't spend equity. Sure, you may see some gold in 5 to 10 years time. But you may also be saddled with X% of a £1m debt.
Edited by StevieBee on Wednesday 23 September 15:08
Edited by StevieBee on Wednesday 23 September 15:08
Edited by StevieBee on Wednesday 23 September 15:13
cashmax said:
Some very naive advice re equity on this thread.
Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
This is PH, we have limited info available and we shoot feedback without thinking or having the time to reply in full, got money to make in between posting on a car forum. To say it's naive advice when I personally am talking about numerous real world examples around the tech industry is a little naive in itself.Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
Rest of your post rings true in certain areas
cashmax said:
StevieBee said:
jonamv8 said:
People who have valuable equity rarely give it away
In my experience, those that do give away equity often lack sufficient business nous to make its value worth having. Often, the act of offering it tells you all you need to know.OP: Another way to assess this and weigh up the option is to try to establish the money value of the equity they are offering and ask yourself that if you were using your cash to buy that equity, would you do so?
Also should add I'm about to accept equity in a company as I feel it has potential, has solid financial backing and I know I can add value.
cashmax said:
StevieBee said:
jonamv8 said:
People who have valuable equity rarely give it away
In my experience, those that do give away equity often lack sufficient business nous to make its value worth having. Often, the act of offering it tells you all you need to know.OP: Another way to assess this and weigh up the option is to try to establish the money value of the equity they are offering and ask yourself that if you were using your cash to buy that equity, would you do so?
I can name you many that have and regretted it (including me on a different business)
There's a big difference between a small or even medium sized business divvying out equity to whoever and larger concerns that offer share options and equity to attract senior directors and managers.
My view is based upon advice I was given quite a while ago by a chap who recently sold one of his businesses that put £44m in his bank account. If that's naive then I'll take it.
The primary point I was making to the OP is that with equity comes responsibility and often liability and my opinion remains that equity should be earned. If you really want someone, pay them above the going rate or offer them a 5-series rather than 3 or some other incentive. Once they prove themselves and you are convinced they are a vital component in the business then, you can give them a slice of the pie.
cashmax said:
Whilst I completely agree you can't spend equity (in most cases) the suggestion that equity might mean you could be saddled with a debt is very wrong and can NEVER happen if the equity is offered under the normal terms.
Yes, I agree. But given the OP stated his limited experience in such matters, I feel it worthy of note that equity CAN come with liability. Reading between the lines of his post, I suspect that there will be an offering of Directorship somewhere in the mix. As a shareholding director, it's highly likely he will then be required to support future lending and thus take a representative proportion of the liability - the majority of which would (I hope) be protected under limited liability.cashmax said:
Name me a successful business where the founder still owns 100%. I'm sure there are a few, but I doubt there are many.
I'd missed this. Define successful, what does the founder have to be taking per annum for you to say it's a success?Also there are plenty of businesses that are struggling whose founders are trying to give equity away to individuals who would add value in an attempt to get back on track.
Works both ways.
OP Should be aware of both.
Nice to hear more positive feedback. I can't fully disclose information on company/industry as discussions are next week and despite best laid plans "walls have ears". I do work with the company in question already I know more than enough to be interested and ask the more pointed questions where necessary. The upside in salary and bonus far exceeds my current circumstances, so that will be covered. The equity side of things to which i am completely bloody clueless is as far as I am concerned the icing on the cake.
I am in a small pool of fairly static "talent" so these opportunities are hard to come by, but when they do its worth paying attention to. If taking all the above into consideration (I appreciate the good and the bad opinions) it's not right I can leverage my current position where I am and relax. The thing is, equity is viewed highly doing what I do and taking into consideration the above it may be worthwhile throwing caution to the wind.
I don't take decisions lightly. When all the necessary is laid out in front of me, who generally are the better advice givers (PH community aside) lawyers or accountants? I suspect I will lean on them before the final leap.
Thanks again.
I am in a small pool of fairly static "talent" so these opportunities are hard to come by, but when they do its worth paying attention to. If taking all the above into consideration (I appreciate the good and the bad opinions) it's not right I can leverage my current position where I am and relax. The thing is, equity is viewed highly doing what I do and taking into consideration the above it may be worthwhile throwing caution to the wind.
I don't take decisions lightly. When all the necessary is laid out in front of me, who generally are the better advice givers (PH community aside) lawyers or accountants? I suspect I will lean on them before the final leap.
Thanks again.
buckline said:
Nice to hear more positive feedback. I can't fully disclose information on company/industry as discussions are next week and despite best laid plans "walls have ears". I do work with the company in question already I know more than enough to be interested and ask the more pointed questions where necessary. The upside in salary and bonus far exceeds my current circumstances, so that will be covered. The equity side of things to which i am completely bloody clueless is as far as I am concerned the icing on the cake.
I am in a small pool of fairly static "talent" so these opportunities are hard to come by, but when they do its worth paying attention to. If taking all the above into consideration (I appreciate the good and the bad opinions) it's not right I can leverage my current position where I am and relax. The thing is, equity is viewed highly doing what I do and taking into consideration the above it may be worthwhile throwing caution to the wind.
I don't take decisions lightly. When all the necessary is laid out in front of me, who generally are the better advice givers (PH community aside) lawyers or accountants? I suspect I will lean on them before the final leap.
Thanks again.
Depends on the lawyer or accountant in question IMO. You get some in both professions who haven't been blessed with a business brain.I am in a small pool of fairly static "talent" so these opportunities are hard to come by, but when they do its worth paying attention to. If taking all the above into consideration (I appreciate the good and the bad opinions) it's not right I can leverage my current position where I am and relax. The thing is, equity is viewed highly doing what I do and taking into consideration the above it may be worthwhile throwing caution to the wind.
I don't take decisions lightly. When all the necessary is laid out in front of me, who generally are the better advice givers (PH community aside) lawyers or accountants? I suspect I will lean on them before the final leap.
Thanks again.
The fact your sal + bonues far exceeds your current circumstances is enough for me, no brainer as long as the equity is given in a standard way. Good luck
jonamv8 said:
Depends on the lawyer or accountant in question IMO. You get some in both professions who haven't been blessed with a business brain.
The fact your sal + bonues far exceeds your current circumstances is enough for me, no brainer as long as the equity is given in a standard way. Good luck
Not my field and whilst i have been blessed with a bit of Common sense i would not say that I was likely to be considered a razor sharp businessman - that's not my forte, I get others to do the money side of things.The fact your sal + bonues far exceeds your current circumstances is enough for me, no brainer as long as the equity is given in a standard way. Good luck
I would say, to answer your question, that you need both. One to advise you on what the numbers say and one to tell you if your shareholders agreement is worth diddly squat, a potental mint or is tucking you up nicely...
jonamv8 said:
cashmax said:
Name me a successful business where the founder still owns 100%. I'm sure there are a few, but I doubt there are many.
I'd missed this. Define successful, what does the founder have to be taking per annum for you to say it's a success?Also there are plenty of businesses that are struggling whose founders are trying to give equity away to individuals who would add value in an attempt to get back on track.
Works both ways.
OP Should be aware of both.
cashmax said:
Some very naive advice re equity on this thread.
Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
Almost every business of a decent size uses equity to incentivise management teams.
And almost every wannabee business uses equity inplace of actually paying people what they're worth in pictures of the Queen. Its difficult to provide advice given the lack of information about company, size, funding & current shareholders but assuming the business is private and unquoted -
Almost every business of a decent size uses equity to incentivise management teams.
Equity should be the cherry on top, not the Victoria sponge that it's often used as
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