עבריתPart I
Most of the young and under-funded entrepreneurs choose to pay for the hired help (algorithm coders, web designers, engineers and various advisers) with a solemn, usually written in an email promise for sharing the wealth if and when the project will become a success.
What does it actually mean?
They promise shares, some more, some less, depending on the quality of the help. Sometimes, the unseasoned ones don’t even keep tabs on how much they promised and whom.
Following round A or round B most of you will upgrade, succeeding in paying fair salary and promise of shares will become the signing bonus, but what will happen to the compensation of those who had been there when money was scarce?
Both the founders and the employees received shares or options for their trouble. Which kind of shares? That’s a different question entirely.
There are multiple kinds of shares a shareholder of one company may have in his/her possession:
There are regular capital shares which allow the holder to receive a percentage of the dividend when shared, or part of the company’s cap when an exit, a merger or an IPO are on the horizon.
Voting shares which enable the holder to make decisions for the company.
Preferred shares that allow the holder to be the first to receive profit (dividend) sharing and be the first to receive money on liquidation.
And that is not the end of it. There are all kinds depending on the profile and need of the company in question. Medical is not the same as telecom and so on.
Usually due to lack of comprehensive legal advisement at the beginning of the start up it seems to everyone including the founders that everyone is dealing with the same shares and its all good.
The Woodstock environment will be over as soon as a third party (an investor or a VC) will enter the festivities. Suddenly the promised shares don’t worth as much, and if you’re not a founder you probably don’t even get to vote although, you were promised to.
The employees or the freelancers or those considered employees by the founders, even though the former think of themselves as cofounders, will usually receive only capital shares and won’t even be the first in line. [The irony lays in the definition – if they actually were employees and not freelancers or independent advisers they would probably receive more].
Moreover, your shares will definitely be worth less both in quantity and in quality unless you negotiated in advance an anti delusion mechanism (this I had only seen done by independent lawyer advisers).
Given that negotiation after the fact is usually not a good idea, its very much advisable to put your foot down as a shareholder (but not a founder) before the joining of the investor and to ask for a compensation for the upcoming delusion.
To be continued