Does anyone know about asking for equity in a company

[leplan]

I have been offered a job by a small but growing firm. I have been a contractor but would rather be permanent.

I think the firm has potential to be very successful.

Under what circumstance can I ask for shares in the company (it's currently owned by 2 people)?

Can I, or would that just be considered weird?

So far, I have just been paid a project fee but I feel I should ask for some kind of target related bonus. I'm not sure what to ask for though.

Any advice would be greatly appreciated.

You can certainly ask as part of salary negotiations for the permanent job. You could ask for shares combined with a reduced salary - it's a gamble for you and for them - they would save money on salary initially, which may help them, you would obviously lose initially but potentially gain a lot later on.

So do you just ask for shares and they come up with an amount? If they are not listed the shares themselves have no defined value. How do you know what is a reasonable amount to ask for?

I suppose it is a little up to them. After working for 7 years in a business I was considered to have already own 2.5% of the goodwill. This was calculated as no goodwill accumulated in the first 2 years then 0.5% goodwill accumulated for each year after that.
I suppose it will also partly come down to are you bringing business with you and what type of business you are in.

It's a sales role, generating new clients. I've never done sales before but I have a lot if contacts in the industry, which is why they've hired me.

They haven't mentioned bonus or commission yet either but I'm assuming that is a pretty standard expectation.

May be worth asking their attitude to giving you some equity in the business, if things work out. Then if they're open to it, maybe have something in the contract.

I wouldn't give any until I knew for certain that the new arrangement was a success.

Bear in mind that this company may well be their 'baby', and there could be reluctance to give anything away - not personal to you, and probably not professional - but can see how it may feel for them.

Good luck!

It is quite common for small fast growing firms to pay lower wages than large well established competitors but give key employees a share in the firm to compensate them for the fact that they could earn more if they were working for a larger well established firm.

If you are key to the business and have a very specific skill that could earn you a lot more money elsewhere I think you are in a good negotiating positon. However if your skill is easily replaced for only slightly more money than you are being paid then the current owners will be under no pressure to agree.

The easier alternative though is to ask for some kind of annual bonus based on the turnover of the firm.

The first question is whether or not they are paying you the market rate for the job. If they aren't then you should tell them. Personally, I think a bonus would be far easier to negotiate. To do that you need to be up front about how much the going market rate is for your job and ask them to match that either with pay or a pay and bonus package.

If they cant do that then go down the share route BUT that is a far more complex, risky and potentially fraught relationship with your employer. I have two friends who have done this and in neither case did it work out well. Both ended up in lengthy legal battles with the majority owners attempting go back on the agreement and oust them from their respective firms wth only a small payout and nothing like the amount of pay/bonus they gave up in return for taking shares.

An alternative to just plain equity is equity tied to your employment. So if you leave their employnent, they revalue the shares and you are paid that value out. That is what my DH has done with his staff - so while they are employees they have a share holding which is allocated as part of a bonus, but they are not entitled to keep that shareholding when they leave. If their work increases the value of the shares then they have an increased value when they leave.

This may be more agreeable to them.

My DH and I have 3 businesses that are growing and we get asked this by virtually every senior person we employ.

Don't be surprised if the % you are offered is miniscule: we have sometimes ended up negotiating around the quarter of 1% mark at times. I think the highest we ever agreed to someone who came in after the initial start-up period was 2%. But it depends on masny things including: success of the company, length of time it might take to grow, chances of growing and ability of the owners to control it themselves and source funding themselves.

No matter how much you offer to give up salary in return, you will only get an equity share agreed if you are considered to be pretty indispensable to the firm.

That's really useful, thank you.

maybe just concentrate on negotiating massive bonus

As a quick note of caution, If you are "paid" in equity, you are also taxed on it at the point you receive it,but you may only be able to realise the equity at a later date, when it could be worth less - you end up paying tax on something you never had!!

Option schemes can be constructed to get round this - which is what I have instead of direct equity.

There is a lot more detail to the tax position, that I'm sure someone with more detailed knowledgeable will be able to explain