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Equity-only startup - good move or bad news?

By wayne62682 ·
I recently was in contact with someone advertising a position in a new startup company; the position would be the lead developer for the product, and eventually transition to the IT Manager. However, it is "sweat equity", meaning not a paid position but you get a percentage of ownership in the company (what percentage I am not sure yet). I would not be required to leave my current job, and I would not be required to put up any sort of investment.

What worries me is that the founders are unable or unwilling to pool together even some resources to come up with even a small salary to compensate the right person. Also, the medium with which the position was advertised is a little unusual, not where I would expect a serious startup to look for what amounts to their initial CTO. I've made some initial inquiry with one of the principal founders; I'm now determining if I wish to pursue it further.

Has anyone encountered a situation like this and, if so, what did you do? On one hand it seems like a great opportunity and if the product does take off, could provide a great return. I am young (26), so the idea is appealing to me, but I'm not sure I like the idea of giving what might amount to free work with my only compensation being equity that will be worthless if things don't take off. I also would be working what amounts to two jobs as I cannot quit my fulltime position without being able to earn some form of income.

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Don't Walk,

RUN!

seriously, if a company is that tight for cash, they are a really bad risk right now.
They might be able to make it work, but it's not something I would consider.

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I'm in exactly the same position right now

by drowningnotwaving In reply to Equity-only startup - goo ...

I have an opportunity to 'partner' with a long-term friend and ex-colleague whom I know and very much respect.

The opportunity is based upon 'software as a service' - that is, subscription-based licencing to web-distributed application. Hence the money is basically nothing to commence but, if it works, the long-term payoff is fantastic.

What am I doing? Research. Heaps and heaps and heaps.

Strategy and decisions can only be based upon thorough intelligence and research.

I am getting references from the individuals concerned and checking them in detail. I'm asking around my network of contacts for anyone else who may have had dealings with these people or with the companies they used to work for, to get some semblance of 'independent' review.

I'm finding out about the competition in all its forms, to the extent that I can. I've spoken to both of the initial clients that have signed up (a: to confirm they exist! and b: to ask about their experience).

I'm speaking with industry leaders about their opinion of the market, and the method of distribution (software as a service has not really made the groundbreaking revolution that a lot of people predicted).

I'm spending time with the people to get a feel for whether or not I can get on with them under adverse conditions. Because let me assure you, working with no revenue is, in itself, an adverse condition.

With regards numbers (or dollars): Double and halve. In your rigorous analysis of the dollars: double your expenses and halve your income. How does it look now? Double the time - that is, if they say you can expect some money in 1 year, double it to 2 years and work out if you can survive.

With regards shares and stock - be incredibly sure as to what this entitles you. Even a large shareholding - e.g. 5% or 10% - looks great. But if the company is run and managed on voting rights then it is worthless. Your voice and opinion will basically mean nothing. Always remember - people don't necessarily think or act rationally, logically or empathetically when it comes to their own money. So discuss and document how decisions are made UP FRONT. Discuss how any dissolution would take place in 1, 2 or 15 years.

And then, when you've done all your research, you have to make a decision to jump or not jump. Good luck !!

If their names are Wozniak, Jobs or Gates - jump on board and dream about your 250 yacht in the Bahamas!!!!

:)

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