128

Almost nobody would just give you a pile of money with no expectation of return. In most cases you exchange equity in the company for the investment. A simple example might be that I estimate your idea/company to be worth $4M currently, so for $1M I want 25% equity. When you sell for $30M, I get 25% of the proceeds. If you go belly up, I likely don't recoup ...


61

What can be done? Buy that person out or find a different method of financing the company. You're not going to get very far calling that person greedy and framing the entire issue around that. The shareholder agreement includes a provision not to dilute. Either find a different funding solution or come up with a more compelling argument than that ...


47

My general rule of thumb with start-ups is don't quit your day job until you can afford to quit your day job. If you were a single man, or your wife also could provide income for the family, then you would have more flexibility but if you are the single income provider I suggest a more cautious route. It may be frustrating to deal with the drudgery of work, ...


36

A no dilution privilege is precisely that, a privilege and not a duty. There is no reason to believe the shareholder is being greedy, after all, they are adding risk to their own position at the same time. A no dilution privilege only gives the right to maintain a constant percentage, if there are no resources to protect or maintain that right then it ...


35

A firm is a separate legal person from its shareholders or owners (but doesn't get invited to parties much). Owners invest capital to get shares in the firm or may get shares for investing time, effort etc. but those shares are on a limited liability basis. That means that shareholders are only liable up to the value of their shares and that the firm itself ...


29

I did this 20 years ago. I wanted desperately to quit my job, but my wife wouldn't let me -- not because she thought it would fail, but just because she thought it would take longer than I thought. It took us 2 or 3 years to get to roughly half my previous salary as a software engineer. It's been my full time job for 15 years now. It's much better to not ...


28

You will probably never see it. The startup at some point may start issuing dividends to the shareholders (which would be the owners, including you if you are in fact getting equity), but that day may never come. If they hire others with this method, you'll likely lose even that 5% as more shares are created. Think of inflation that happens when ...


28

The details of how you can convert your 5% equity share to cash or stocks will be detailed in writing in the legal agreement you have already signed. If you do not have any signed written agreement, there is no 5%. Since 0% of anything is zero, you can expect to get $0 some time within the next few years. Lastly, if the person running the business, tells ...


28

It seems like I hold only $1 because 100,000*$0.00001 = $1. No - you have the right to buy stock at $0.00001 per share. Presumably, the stock will be worth more than that, so your "profit" will be the value of the stock that you essentially get "for free". What is meant by the vesting and cliff periods? Every month you are "vested" (entitled to) an ...


17

Read the book, "Slicing Pie: Fund Your Company Without Funds". You can be given 5% over four years and in four years, they hire someone and give him twice as much as you, for working a month and not sacrificing his salary at all. Over the four years, the idiot who offered you the deal will waste investors money on obvious, stupid things because he doesn't ...


16

There are various ways that a company can raise capital without diluting shareholder stakes. Have the company issue bonds. These are loans that the company will pay back with interest. Usually bond repayments consist of regular interest amounts during the life of the bond with a lump sum capital repayment at the end. The company could seek to get a bank ...


13

This is several questions wrapped together: How can I diplomatically see the company's financial information? How strong a claim does a stockholder or warrantholder have to see the company's financials? What information do I need to know about the company financials before deciding to buy in? I'll start with the easier second question (which is quasi ...


13

I used to work in transfer pricing for 5 years so I know a bit about international tax (I am not an international tax expert by any means). Tax authorities don't generally care about transactions unless they're adversely impacted. US tax laws are usually written to say that intercompany transactions should happen at an arm's length price (i.e. fair market ...


13

Typically, if you create a business that wants investors, you will issue stock in the company. One unit of stock is called a share. You decide how many shares there will be and how much each share is worth. The total value of all the shares represents the market value of your business. Say you issue 1 million shares in your company, and you value each ...


12

No one can make this decision for you. Involve your wife and truly value and heed her thoughts on the situation. Succeeding in such an endeavor without her full support/consent will bring an unwanted undertone into your marriage. I am personally more reserved and in your situation I would stick with my job until my start-up can stand on its own. I know it ...


12

Generally you should keep your paystubs until you receive your W2, and keep your W2 indefinitely. That is how you can keep track of what you earned, what taxes you paid, and settle disagreements with the IRS/States and the Social Security Administration, if and when those arise. But that is not helpful to you as you have not done that, and its too late. ...


11

Yes, but only if they're looking for investors. You would need to contact them directly. Unless you're looking to invest a significant sum, they may not be interested in speaking with you. (Think at least 6 figures, maybe 7 depending on their size and needs). This is otherwise known as being a Venture Capitalist. Some companies don't want additional ...


11

There are a few common errors you are making in your statement. Before I try to address what I see as problems with your line of thinking, take my overall response to the headline of your question as asked: Why is it ever a good idea to found a company? To make money, to pursue a hobby, or both. As to issues with your line of reasoning, consider: (1) A '...


10

A couple of factors: The company grew gradually since 1981 - the perception that you cannot have a successful company without outside investors is most commonly associated with internet startups that aim for much quicker growth. Bloomberg actually took investment from Merrill Lynch for a 30% ownership share in 1983 but bought it back later - much later (...


10

You go public to raise money, to invest in the business and/or pay off the existing shareholders. It's really as simple as that. The advantage of being public is that your shares can easily be bought and sold, and so you can issue and sell new ones and your existing shareholders can sell out if they want to. The disadvantage is that you are much more ...


9

Since I can't transfer/gift shares directly to my Roth IRA, what's the most tax-efficient way for my Roth IRA to take ownership of as many units of XYZ LP as possible? None. XYZ LP has some high fair market value so selling those shares directly to my Roth IRA seems incorrect. Also - illegal. I thought of incorporating an LLC ("MY-OWN LLC"), ...


9

Equity could mean stock options. If that's the case if the company makes it big, you'll have the option to buy stocks cheap (which can then be sold at a huge profit) How are you going to buy those without income? 5% equity is laughable. I'd be looking for 30-40% if not better without salary. Or even better, a salary. To elaborate, 5% is fine, and even ...


9

I agree with all the people cautioning against working for free, but I'll also have a go at answering the question: When do I see money related to that 5%? Is it only when they get bought, or is there some sort of quarterly payout of profits? It's up to the shareholders of the company whether and when it pays dividends. A new startup will typically ...


9

I think your question might be coming from a misunderstanding of how corporate structures work - specifically, that a corporation is a legal entity (sort of like a person) that can have its own assets and debts. To make it clear, let's look at your example. We have two founders, Albert and Brian, and they start a corporation called CorpTech. When they start ...


9

Saving money for the future is a good thing. Whether spending those savings on a business venture makes sense, will depend on a few factors, including: (1) How much money you need that business to make [ie: will you be quitting your job and relying on the business for your sole income? Or will this just be a hobby you make some pocket change from?] (2) ...


9

Cliff period is defined as that period until you vest any options. So if your employment is ended at 2 months 29 days, then you would have zero vested options. Waiting one more day gives you 8.33% of your options, or 8,333. Each month thereafter about 2778 options vest. Your base price is essentially zero, or just a fraction of a cent. To determine ...


8

You can definitely do that, however if you decide to sell the portion that is now in the European LLC, your US corporation will pay income taxes on proceeds over $1. At corporate rates.


7

You can borrow money from an individual and pay him interest with a simple agreement. A friend or relative might offer a low rate, a stranger, a far higher rate. Either might ask for a portion of the profits. This all depends on how much the options are in the money. Say you were my sibling. You want $25K, and I'm happy to help, but if the options are not ...


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