5

I'm not expecting to potentially be screwed over in any way (this is being given to me alongside a raise and a promotion so it's more of a cherry on top.) I was told in passing that I'll be vested at a certain amount each year, but if we get bought out I'll be paid my share in full. I have no idea about figures or percentages or anything, I'll be getting it in writing on Monday.

What should I look out for in the writing? What's a normal setup for something like this? It's an LLC.

And I do of course intend to get this reviewed by a lawyer (I have seen The Social Network after all.)

update: I'm being offered 6.4 units/shares, or about 1%. One third vested after one year, the rest vested quarterly throughout the following two years.

9

In my experience, any kind of equity you may be offered by the company is just a carrot. Your offer may be written in such a way that your potential ownership represents, say, 1% of the company today. But if the company goes for a round of financing your ownership percentage can get diluted. If this happens a couple of times and the terms of financing aren't very favorable then your percentage can go from that 1% down to 0.001%, making the equity worthless.

I've known people who heard their company was being bought and thought they might get some kind of payoff. Come to find out the company hadn't done all that well and there wasn't anything to pay out after the main investors got some money back. (The main investors took a loss.) For obvious reasons, management wasn't keeping the staff up to date about the fact that they were operating in the red and their options were worthless. Some people grumbled about lawyers and filing lawsuits, but at the end of the day, there wasn't any money to be won. Keep this in mind.

As to your question regarding what to look out for:

  • What does the offer represent in terms of percentage of the company?
  • In a corporation, there may be multiple classes of shares. With an LLC, the sky is the limit as to what they're going to offer you. Beyond just share classes, profit rights and voting/control rights can be divided up in any way the Membership Agreement states.
    • Are they offering you Membership?
    • Will your shares/units have voting rights?
    • Are you even getting shares/units or is it just a promise to share profit/equity in case of a buyout?
    • Are there any provisions regarding dilution?
  • How big is the employee pool?
  • What is the vesting schedule?
  • What are your rights / obligations if you separate from the company?
    • Is there a difference between voluntary and involuntary separation?
  • If you exercise your offer before the company is bought, and you become a Member...
    • can you continue as a Member after leaving the company?
    • is your employment tied to Membership in any way?
    • can you sell your shares/units?
    • what are your rights/obligations as a Member?
  • Can you get a copy of the Membership Agreement (or Bylaws)?
2

Yes, what they said. You don't mention where you are on the totem pole. Are you reporting to the top dog, or are you 3 levels down? Not to be a downer, but until you know your cut, I'd not get too excited either way. 1000 shares/options of a LinkedIn turned to nearly $100K. Nothing to sneeze at, to be sure, but not enough to retire, nor bother contacting a lawyer. The details of the equity should be spelled out clearly, nothing against Lawyers, but it's likely to be wasted money.

2

The main thing is the percentage of the company represented by the shares. Number of shares is meaningless without total shares. If you compute percentage and total company value you can estimate the value of the grant. Or perhaps more useful for a startup is to multiple the percentage by some plausible "exit" value, such as how much the company might sell for or IPO for.

Many grants expire when or soon after you leave the company if you don't "cash out" vested shares when you leave, this is standard, but do remember it when you leave.

The other major thing is vesting. In the tech industry, vesting 1/4 after a year and then the rest quarterly over 3 more years is most common.

  • hmm; I thought it was 1/4 after a year and the rest monthly. not that I'm any sort of expert, mind you. – user296 Jun 4 '11 at 13:25
  • maybe monthly is more common, I guess I don't really know on monthly vs. quarterly. let's say "not annual" ;-) – Havoc P Jun 4 '11 at 18:31

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