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If I choose to work for salary + equity, and the company loses and/or is in debt, am I obligated to pay a part of the company debts?

Is it common in the startup world?

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    Might need to ask this in the Law S.E. as it is not about the main goal of this stack: navigating the workplace. What kind of company is it anyway, is it a limited liabilty? – solarflare Oct 13 '19 at 22:34
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    It's common for startups to fall to pieces – Kilisi Oct 13 '19 at 22:35
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    @solarflare: or Money.SE since the question pretty much boils down to a stockholder's obligations. – Flater Oct 13 '19 at 22:49
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    Seconding advice to take it to Money or Law, but in either place probably the first question they'll ask you is "is your company a LLC?" – Geoffrey Brent Oct 13 '19 at 23:08
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    It will depend both on how the company is structured (partnership, limited liability corporation) and on local laws. Even if it were not off topic it would need a lot more information for a useful answer. – Patricia Shanahan Oct 13 '19 at 23:37
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Generally, no, equity-investors risk only the capital they contribute. If a company is liquidated or restructured, the debt-holders have first claim on assets. You, as an equity-holder, may only make claims on assets after the debt-holders are made whole.

However, what I say above is a simplification and not true of all corporate structures. Some common exceptions to be mindful of:

  • In a sole proprietorship, your personal assets are at risk if the firm’s liabilities exceed firm assets.
  • In partnerships, the personal assets of general partners are at risk if the firm’s liabilities exceed firm assets. This is not true for limited partners.
  • Individuals may file civil suits to reclaim losses from your personal assets.

As an additional aside, you’ll likely not receive equity compensation - instead, you’ll receive options. In the most common form, these options enable you to buy equity from the firm at a pre-determined price at a time in the future, specifically after an IPO. Options lack the obligations and rights of equity, but have a similar financial behavior - and thus are a favored way of providing equity-like compensation to employees of new ventures.

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  • " If a company is liquidated or restructured, the debt-holders have first claim on assets..." - The new trend is to protect institutional investors and push the risk on regular shareholders, ordinary investors and depositors. See, for example, Cypriots challenge "bail-in" to fight for lost savings. That kind of perversion will likely spread to all verticals. – user25792 Oct 17 '19 at 9:56
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It's possible to setup an entity such that employees with equity can wind up with financial obligations if the company goes bankrupt. But I've never heard of anyone setting up a company in this way and it would seem to be an incredibly foolish thing to do.

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    Well, I guess a ponzi scheme does this, where you pay the company to "work" for them... but obviously that's pretty bad and you don't want to do this. – Nelson Oct 14 '19 at 2:16
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    Nelson: In that case you lose your investment. A company scheme where you can lose more than your investment is rare. (However, If a limited company gives a director a loan instead of salary, which can be done to save/avoid taxes, that loan has to be repaid if the company goes bankrupt). – gnasher729 Oct 14 '19 at 9:41

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