I am in negotiations with a company about a full-time job. Instead of 10% shares however, they are proposing a bonus agreement where I would get dividends and if the company is sold, a bonus equal to the amount of shares I would otherwise had held will be paid out. They say it's the same like having the actual shares. It's a small company with 10000 shares, two employees and three shareholders, no outstanding shares. I would get an average salary for the job. I never heard of something like this, would this be a reasonable agreement and what would be the cons?
Equity means you own something. A bonus agreement isn't equity, it's just additional money you might get (if the conditions to pay bonuses are met).
Most firms that offer equity don't give it away. That's because of a number of reasons. The shareholders like to know their company isn't being handed over to unknown people, who had little to no interest in owning the company (but perhaps a lot of interest working there).
This means that in many small companies (law firms, for example) when a person becomes eligible to own some of the company (called "making partner") the company actually has the person buy their shares. This often makes the partner cash poor, and sometimes partners even borrow money to own a bit of the company.
If you ever find a company that's giving away shares on day one, odds are one of a few things are happening:
- They don't know what they are doing.
- They have a plan to devalue the shares should the need to regain control of the company (perhaps to sell it)
- They are giving away such a small amount of shares that they can effectively manage the loss of control.
- The company is worthless, and likely to remain worthless in the near future.
10% is a lot of the company. Odds are the shares aren't worth much.
In any case, if the offer is compared to Options, it's a different game, but you don't have Equity in the company, you have a promise that you can buy equity in the company at a fixed price after some future date. Sometimes the company is worth more than your price at that date, sometimes it's worth less and nobody would normally exercise the option to buy because you'd spend $10,000 to buy $6,000 of company.
In short, if you want Equity, and it's a company that's worth investing in, having to buy your shares (or the company offering an incredibly small amount of it's value) is an excellent indictor of a healthy company.
Now on to bonuses. There's never a guaranteed bonus. Guaranteed bonuses are called Pay. If you are accept a bonus plan, for it to be a bonus plan, there has to be some condition under which the plan is not paid. Maybe that's the company not having money to execute the plan, maybe that's done by not meeting your goals at end of review, maybe it's controlled by something else.
Should the company go under, it's also important to understand the order in which things get paid: Lienholders (including Employee's regular pay), Shareholders (if anything is left), then bonuses. As you can see bonuses are the least likely to be paid because there's often nothing left.
So let's look at advantages:
- Equity - Always worth something until the company goes under. If the company becomes valuable, will grow in value faster than any other asset.
- Option - if the company becomes valuable, can become a way to profit without the risks or costs of ownership.
- Bonus - might be paid even when the company doesn't become more valuable.
And the disadvantages:
- Equity - you are an owner, if the company gets in trouble, you might be responsible.
- Option - if the company gets in trouble, you don't exercise your options and walk away with nothing.
- Bonus - if the company gets in trouble, you don't get paid a bonus; and you might not get paid a bonus even when it's doing well.
No one can tell you how reasonable this is. All we can tell you are the implications, and you can decide on the reasonableness.
So, apparently, they're offering you dividends (as if you have shares) and a bonus-if-sold (as if you have shares) but no actual shares. There's a few potentially significant implications there.
- It's a lot easier to hide fine print in an agreement like this than it is in "Here. Have some shares". What would your dividends/bonuses be tied to? How would they adjust for things like stock splits?
- It is almost certain that if you leave the company before it gets sold, your non-shares go poof... which starts to get significant if they never actually sell. Could also matter if you happen to die unexpectedly.
- You don't get the control that shares would give you. This also means that you're not actually a "partner". That's going to matter as far as long-term influence int eh company is concerned. How much it matters is not at all clear.
- They don't have to print new shares, or get anyone else to give up theirs. That could be a notable savings in money/stress/etc for them.
So, basically it's strictly worse for you than just getting shares would be. A lot of that "strictly worse" is pretty conditional, though. If you don't care about the status or power that comes with being an actual partner with actual votable shares, and you're quite certain that the company will sell (or fold) before you'd want to leave, and you don't really care what happens if you die, and you're quite certain that there aren't any loopholes that could hork you over... at that point it might be pretty much the same.
On their side, it's strictly better for them, in all of the (conditional) ways that it's strictly worse for you, but they also get to opt out of the internal political issues that would normally come with cutting loose a block of stock for you and/or letting you potentially dramatically change the internal politics by playing tiebreaker.
Worth noting that there are reasons they might be concerned. 10% of the company is potentially quite a lot, and it sounds like a company that's already seen at least a moderate amount of investment in time and effort by the initial founder types. Even if you can somehow be sure that you'll be sticking around long enough to sell the place off, they can't. If they offer you 10% of the company, vesting in 6 months, and then you walk off at month 7, that's kind of a serious hit, you know?
So... yeah. It's definitely not worth as much as the equivalent in actual stock, but you're going to have to judge for yourself how much you care about the difference. They have reasons to want to shift it down, and you don't currently know which reasons those are. If you're going to make a counteroffer... it might be helpful to understand why they made an offer in this particular way.
Imagine if your girlfriend/boyfriend wanted to buy a house with your money, but would prefer not put your name on the title. This is essentially what's happening here.
If you don't have shares, then you won't be part of the negotiations if the company ever gets sold, and you won't even be aware of how much the company was sold for.
Anyway, I recommend you read this book: The Partnership Charter by David Gage https://www.amazon.com/Partnership-Charter-Start-Right-Business/dp/0738208981/
That book won't answer this particular question, but it will make you think about many other aspects of this negotiation that you haven't really thought about yet.
They're offering you a reasonable salary and the potential for a bonus that may never come to fruition. Are you satisfied with the salary offer? Are you satisfied with the other aspects of your potential employment?
If so, then treat the bonus as exactly what it is; something that may or may not happen.
If you're not satisfied with the salary offer and/or the other aspects of the potential employment then negotiate for those. Then treat the bonus as exactly what it is; something that may or may not happen.