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The last few months at my company have made me worried. I work for a small software development company, there were 5 of us: 2 techy's, 2 developers and my boss. 1 tech left leaving me to cover her work (I do a lot more than tech work, websites, domain administration, programming etc...). Now another developer is leaving this month. My boss has moved to the coast, so now there are 3 of us all working from home.

He is now offering me and the developer shares or profit sharing. I am confident that the business is successful because we are busy and our product has a high profit margin. But I am confused as to what his plans are, as he went to the coast to get our software line into a new industry.

So how can I evaluate his offer and are there any risks or benefits to having equity in a company like this?

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    Where's the 'medium to large business' your new title mentions? From what you say this business will soon have the boss and two employees. That's not large or even medium. – AakashM May 15 '13 at 11:41
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    So long as he isn't saying "have some stock options, but less salary" then what's the problem? That part wouldn't worry me nearly as much as the boss moving away, leaving you a scattered team to do basically whatever. Unless the stock options are tied to a "if you accept, you have to stay for xx years". How much headway can you really make with one developer and one tech, if you have hundreds/thousands of customers? – Dave Johnson May 15 '13 at 12:59
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    I have edited your question to make in general enough to answer and help you find the answers you need. Just so you understand a company with 3 people working for it is a small business. M-L business have 500+ employees. Being offered equity in a medium to large business is a much different proposition. I am guessing this business is less than 7 years old so that would also qualify it as a startup. – IDrinkandIKnowThings May 15 '13 at 18:35
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    Something to consider when offered equity: Will you have investor contact? Are you actually a stakeholder in the company, or "just a tech guy"? Typically when stock options are offered in a startup environment, the earlier you get in, the more valuable they are, so make sure you know what percentage of the total your options are. – Codeman May 15 '13 at 23:13
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    He probably wants you to stay so badly (3 guys seems to be a critical mass). He probably thinks some stake in the business will make it more likely. – Petter Nordlander May 16 '13 at 5:11
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A company this small, with a newly evolving product will always be risky. If for no other reason that you don't have all that many people to cover all the needs of the business, and business needs tend to grow with profits. That said, many people love the small size, since it can provide great experiences, chances to learn, and a place where you can really make your mark. If you want all the fun and challenge of a small company, it comes with this risk. I've noticed that the majority of folks I know who love this sort of work tend to see their careers as more tied to their skill set than to their companies, they bank on all that great experience (and a savings account!) and know that they could be job hunting on short notice. That, IMO, is the guaranteed approach to any small business.

There's no perfect answer - startups fail more often than they succeed - if it was easy to forecast what was likely to succeed, venture capital investing would be much easier and more widely available.

The real question is - how likely is this company to:

  • continue to thrive/profit
  • be a great place to work with good opportunities
  • provide financial benefits if you share equity

Let's take each one...

Continuing Business

Is a matter of having the resources you need to give customers the value they paid for. And having customers who will continue to pay for more value. It's not what you made/did last month - it's what you expect next month and how your company is planning for it. There's plenty of business speak for this, but in general, figure that you are as good a judge as anyone, and ask yourself or the owner:

  • what is the prognosis for sales next quarter, this year and next year? Why do we forecast it that way? - a great prognosis is only as good as the quality of the analysis. If they can't explain it to you in a way you understand, it may because it's not a good guess.

  • how are we changing the business to meet that demand? Works both ways - if demand decreases, the cost of business must decrease, if demand increases, the company must plan to provide more of what it provides. Again - use common sense. And realize that "providing value" does not equal "ship more copies of the software" - more customers equals more customer issues, more demands for features, more sales costs, and more competition.

There's one last ultimate test - are the bills getting paid? If your salary has been delayed for any reason - start looking. Financial management is its own discipline, but it isn't that hard. If the company can't meet it's obligations to its employees, then it's very, very risky and you have to start considering that it may be more of a personal project and less of a job - and treat it accordingly.

Great Opportunities

So this is the question of - why are developers leaving? There's two sides - the company's side, and the developers side - and you may not get both, or believe both. The important part is separating what was a driver for those who leave to what's a driver for you. Particularly in a small company, stability can be its own driver, and it becomes more important due to personal considerations - family is always the big one, but health, and personal style are also really significant drivers.

Also - look at you work. Do you like it? Does your near term work include opportunities to learn and grow? Is it fitting your work/life needs? If the answer is yes - sounds like a pretty good opportunity.

Value of Equity

Equity typically provides two things - money and control. It's important in any offer to determine what the parameters of each may be.

Control

Get this figured out up front - are you making any business decisions here? If so, what is in your purview, and how is your input collected and what weight is it given? Do you vote? Are you an officer? What's your share in making decisions that affect the company you are now a owner/shareholder of?

Not all equity comes with control. It's not a drop-dead, must have - but if you have no vote, realize that you have no way to impact the value of your equity - you are trusting others - so the questions about the business above are doubly important.

Another aspect of control is how transferable your equity may be. What happens if you quit? Can you sell it? Does the company buy it? Is it just lost?

Profit

When and how will this equity be profitable. In a small startup - "not right now" is a pretty good bet. Here's some options:

  • Dividends - money paid back to investors that came from the profits of the company. This is a tradeoff, the same money could be used to pay off debt, or improve the business. Who decides and what dividends are expected is important to know.

  • Stock shares - if you are traded on any public market, equity usually means stock. You can sell it, it has a value. You aim to acquire it for cheaper than you sell it.

  • Buy out - many small companies offer no benefit from equity until the company is sold in some way - either it will become a public offering, at which point, you'll be issued some number of shares with a sellable value, or a company will buy your business and you'll receive some share in the money.

Equity is tricky stuff - my general thought is to have something in writing, reviewed by a lawyer, and check in with a tax accountant to make sure you understand any tax ramifications pertaining to your locale.

For any job

It's a mix of the work you do vs. the compensation in both money and intangibles. I outlined what fits for a small business in the situation you described, but mileage can vary significantly from case to case, and person to person.

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