Should I buy shares of the start-up I'm working for as an intern? [closed]

Question

I've recently taken an internship in a start-up as a software developer, and, although I'm being paid 500€/mo with a 6-months contract, my CEO (let's call him Bob) has offered me a small stake (2,500€/2.5%) in the start-up, his reasoning being that my presence as a shareholder will benefit the company long-term. Since I can't pay for the shares myself, he's offered to pay for me, and I would repay him when I can.

A few considerations:

1. We don't have any written contract about this loan, everything is verbal
2. As you can deduce from the numbers, the start-up has raised 100,000€ of seed capital
3. The stake might sound small, but the company is structured in a way to enforce a 5% maximum stake per shareholder, so it's not actually that small
4. All of the shareholders so far are friends and acquaintances of Bob (they seem like they know what they're doing, but given the small required initial investment and the fact they are not from "outside" I have my reservations)
5. The company can function even without my help, as it's non-tech, but the software I'm working on would definitely give it an edge
6. It would be very hard for me to turn down this offer now, as I already said yes and he already wired the money, but I haven't signed anything yet
7. In all honesty, I'm very excited about the opportunity to be a shareholder ina small-medium sized company, but I want to make sure I'm not being too naive

If you want more backstory about Bob and my experience working as an intern for the start-up, you can read this.

Do you think is wise to accept this offer?

EDIT: I forgot to include a (probably) important detail: the startup hasn't been formed yet, but the constitution is set to be next week.

Answer 1

No. It's not smart.

Bob has effectively loaned you 2,500€ to buy shares, with the shares being their own collateral.

What if the company collapses? Well, you owe Bob 2,500€, because the collateral that you have is now worthless, but your obligation to pay back Bob remains.

It's sometimes the case that employees are offered shares, or options, which get placed in trust until some maturity date. If the employee leaves, or the company collapses, then there is no obligation on the employee to pay back anything.

Looking at the figures you've provided, you've agreed to pay Bob almost half a years worth of salary for the shares. That is an incredibly large amount of money to burn, buying shares in a company that you seem to have concerns with how it's run.

In addition to tall that, 500€/mo is an incredibly low wage. You say you are an intern. A lot of EU countries have regulations that stipulate additional requirements on internships including ongoing training and a 3rd party university being involved. From what you said, it doesn't sound like these requirements are met.

Also carefully read jcaron's answer.

Answer 2

TL;DR, Give Bob his money back.

Warning: this post does not hold back any punches.

This start-up sounds heinously predatory.

You are working full-time for just 500€/mo or 3.12€/hour?!?!

They're essentially trying to raise another $2,500 in seed capital from you by offering a stake in the company via loan and it's just a round-a-bout way of not paying you. If they're too broke to pay 3.12€/hour then that's a big red flag.

You've already agreed to the miniscule wage so you could certainly finish your internship since the programming experience should be worthwhile.

the start-up has raised 100,000€ of seed capital

This is effectively nothing. The start-up has conned 100,000€ from various people; 102,500€ if you accept the deal.

the software I'm working on would definitely give it an edge

I doubt it; a coffee costs more than your hourly rate. They've bolstered your confidence so that you're willing to make silly deals with them.

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Lastly, from your linked post:

I have to build a complex multi-site web parser and a sibling web application (front-end and back-end) that exposes the parsed data to an an internal sales department.

Yeah, this is nothing new and is possibly against the ToS of the web sites they wish to scrape data from. If their business model relies on harvesting other site's/people's data then they really don't have a worthwhile business.

Answer 3

Don't do it, unless you are willing to see five months' worth of salary disappear.

A startup is an investment with high risk and high reward - it's basically a gamble. One should not allocate money to a high-risk investment without accepting the very real possibility that they will lose it all. For high-risk investments, do not invest more than you can afford to lose. Here, you're not even investing money you can't afford to lose, you're investing money you don't even have. It's like going into debt so you can play blackjack at a casino, which is widely regarded as a Bad Idea.

Investing in the startup you work at is doubly risky, since you're putting all your eggs in one basket. If the company fails, you lose your investment and your source of income. The lack of diversification is even more troubling than investing in any other startup.

Note that any investment comes with an opportunity cost - investing 2,500€ in one company necessarily means you cannot invest it elsewhere. Your investment strategy implies that you believe this company is the best investment among countless options, seemingly for no other reason than the simple fact that you work there. You haven't even indicated that you think the company is a good investment, merely that you're excited to be a shareholder - but why in this company? You should take your personal connection to the situation out of the equation and look at it in a cold, rational sense. If you did not work at this company, would you actively go to a bank and seek a loan for 2,500€ in order to invest in this company? Your current proposal is functionally equivalent.

Answer 4

Not really an answer, but that was a bit long for a comment:

• As you can deduce from the numbers, the start-up has raised 100,000€ of seed capital.

  Er, no. We can conclude that someone is valuing the company at this amount, and that this valuation is the basis for the price of those shares. That someone is your boss, and you, if you accept that. Nothing else. They could have raised 0. They could have raised 1000€ for 1% of the capital. They could have raised millions but decided to sell you shares at a discount. And anything in between. More likely the former rather than the latter, though.

• The company is structured in a way to enforce a 5% maximum stake per shareholder

  That would be fun. Probably false.

• They seem like they know what they're doing.

  Also known as "family, friends, and fools". Also cf. Dot com bubble, Bernie Madoff, TerraUSD, etc, etc. Of course, you don't know which side of the scam they are on.

• He already wired the money

  Wired to whom? What amount? What paperwork is there? A bank transfer to the company does not mean in any way that the company is issuing/giving shares in exchange (and much less to you).

It could all be very legitimate and a great investment. But it could be a con (worst case), or it could just be a risky operation. Just don't make any assumptions based only on what they say.

Answer 5

Scam scam scam

Bob has positioned you as a mark. You're inexperienced in the workforce and life, and he's taking advantage of you. Let's take your discussion points:

We don't have any written contract about this loan, everything is verbal.

Of course you don't have a written contract, because if things went south, tangible documentation is evidence for authorities to determine that Bob is running a shady operation. The fewer things Bob signs his name to, the better it is for him.

As you can deduce from the numbers, the start-up has raised 100,000€ of seed capital.

Don't "deduce" when it comes to investments. Have you seen any certified financial statements? Oh, but that's impossible because there's actually no business entity for the company as you've also told us.

The stake might sound small, but the company is structured in a way to enforce a 5% maximum stake per shareholder, so it's not actually that small.

This just sounds not-too-bright from a finance standpoint, but such a rule would have to be written in the bylaws. There are no bylaws for a still-unformed company. Are you seeing a pattern here yet?

All of the shareholders so far are friends and acquaintances of Bob (they seem like they know what they're doing, but given the small required initial investment and the fact they are not from "outside" I have my reservations).

You should honor those reservations. Investment is inherently risky. Bob will target people like yourself who don't know anything about investing. Suggest you do a background check on Bob.

The company can function even without my help, as it's non-tech, but the software I'm working on would definitely give it an edge.

If work product from an intern produces a tangible edge for a company's business, and you're the only technical employee, something's fishy.

It would be very hard for me to turn down this offer now, as I already said yes and he already wired the money, but I haven't signed anything yet.

This sounds like a confidence scam. Is the money in your account? Send it back. There's a catch. Doubt you'll be presented with anything to sign. If you do, it won't have Bob's name on it. Don't sign anything without having documents reviewed by your own attorney. If you mention attorney review, Bob will suggest you use his attorney, which is a conflict of interest; or goad you with the notion that you should just trust him.

In all honesty, I'm very excited about the opportunity to be a shareholder in a small-medium sized company, but I want to make sure I'm not being too naive.

This is called "fear of missing out" and is a well documented phenomenon.

I forgot to include a (probably) important detail: the startup hasn't been formed yet, but the constitution is set to be next week.

Huge red flag, for the points I've mentioned above.

Find a job where you're not being abused. An internship implies training, and not turning you into the IT department.

Answer 6

In your gut, you know deep down that this business relationship is not going to work. Your other question makes that very clear. Some people can be extremely charismatic and extremely pushy.

Please read this book: The Partner Charter by David Gage (video summary)

This book was written by an arbitrator. In the US, an arbitrator is like a judge. Basically, this guy has seen so many startups and partnerships fail, he wrote this book hoping to dissuade many partners from even getting into partnerships with each other in the first place.

Also, I'd suggest you read When I Say No, I Feel Guilt by Manuel J. Smith

This is the best self-help book I have ever read. I know the title of that book sounds weird, but I implore you to at least read its customer reviews on Amazon before you make up your mind about it.

Here is a snippet of my own review for it.

This book explains assertiveness and manipulation in opposition of each other. It explains manipulation as the act of indirectly asking for what you want by making others feel guilty. And it explains assertiveness as the act of firmly asking for what you want without feeling guilty and without making others feel guilty.

It gives examples of transcripts throughout the book. And the main technique is so simple ("fogging" and refusing the implied guilt) -- it's been very easy to apply in real life.

Also, I'd suggest you to get in touch with some of his former employees/former business partners (that he's no longer in touch with). What this guy is doing to you now, I can assure you that he has done to others in the past.

So if you want to find out what's going to happen to you a couple of years from now, talk to these people. Tell them your situation and ask for an informal coffee chat. Most people are reticent to badmouth a former employer/business partner over email, or over the phone, but in person, they're much more likely to talk to you.

And regarding the loan, if you don't know what to say to him, email him your own adaption of this message (it's important this is done over email for documentation purposes):

On second thought, I've changed my mind. If this ownership stake is a gift, I'll gladly accept it, but if it's a loan, I really can't.

After all, you praise me all the time, and you have very high expectations of me, but you're hardly paying me anything. And you say I'm an intern, but you don't have anyone technical training me.

So in light of this, I'd suggest that you pay me some better wages, gift me this small token ownership stake, and officially change my title to Junior Developer.

Now, it's difficult to say what he'll say to this, but even if he gets upset and you end up leaving the company, it will be a better outcome for you.

In addition, you may want to negotiate a reduction in the scope of the project. To me at least, reducing the scope is a no brainer. And if you're going to have a confrontation over this "loan" business, you might as well bring up everything else that's troubling you as well.

Answer 7

You NEVER! accept equity instead of money. It is a timeless con in the start-up world. The vast majority of equity being handed out in the various start-up scenes in the world would only be worth something if the owner's house ran out of toilet paper.

Don't do it!

Answer 8

I'm going to address this in two parts, in the first I'm going to give what I think is the sensible thing to do; in the second I'm going to tell you why I don't think you should do the sensible thing.

The sensible thing is to not get involved

You say Bob is as successful entrepreneur, yet what you've presented suggests this either isn't true or he has no faith in the project. €100k is not a lot of money, why is Bob raising that through lots of small pots of capital if he is actually successful? That doesn't make a lot of sense. If it was being spread among involved parties - programmers, designers, sales, whatever is relevant - in order to build commitment to the project that would be one thing but you say it is raised from friends. Raising small pots from friends is something you do when you don't have money or credit; successful entrepreneurs have both. Therefore Bob has most likely, at best, misrepresented himself to you.

What you know most about this company is that they have hired someone as their technical lead (you) that you know neither has the experience nor skill to achieve the task. They be non-tech but this is, at best, negligence on their part. Start ups live or die on the skills of their staff; choosing underskilled staff and giving them tasks beyond their means is a big red flag.

Giving equity is something startups do because they can't afford to pay the going rate; but you're already on pocket money. Trying to get you to put in money instead of getting paid (actually, it's worse than that since it's a personal loan) is not a good sign. Especially in a business supposedly backed by an already successful entrepreneur.

And most startups, even ones which don't already have numerous red flags, fail completely making any equity worthless. The likely outcome here is that you walk away with €2500 less than you otherwise would and that Bob is taking advantage of your naivety because he knows he won't get a skilled developer to come in on the terms he is offering you.

Edit: After the comment from Charles E. Grant I've decided to withdraw the rest of is answer. €2500 is not a huge amount but the possibility of greater liability is too big a risk.

Answer 9

I would like to provide a different perspective than the predominat one here: You say

5. The company can function even without my help, as it's non-tech, but the software I'm working on would definitely give it an edge

Combine that with the fact that you said (in your other post) that Bob is known as a successful entrepreneur it seems to me Bob knows what he's doing. If the software you write is not pertinent to the success of the company then I can see why Bob is fine with letting an intern do it.

Obviously there is risk involved (see Buffy's answer) but depending on your overall social and financial situation and how supportive and financially stable your parents/family are, I might in your shoes consider possibly giving it a shot, potentially.

Answer 10

This really comes down to how much risk you are willing to accept. A startup is a risky venture to begin with, so you are already comfortable with some amount of risk. Are you willing to add 2,500€ more risk?

I've worked for a number of startups and made some good money as a result. This could pay off handsomely. I didn't read your backstory, but if you are reasonably young, and you believe the company will turn into something, then you should go for it. The reason I say young, because losing a 2,500€ investment at 25 is not as harsh as doing it at 55. At 25, you have plenty of time to earn that money back.

You should also learn about the different types of shares that are available, and which ones you are buying. I'm going to greatly simplify this, but there can be A shares and B shares. They are both shares in the company, but there are differences. For example, in the event the company goes under, the assets are sold, and A shares will be paid off before B shares. B shares would get nothing. A shares might get voting privileges and B shares do not. You have to know what you are buying, so make sure you ask. Long story short, try to get the same type of shares the CEO has.

Also, be aware that you might own 2.5% of the company now, but if the company gets another 100,000€ investment, your ownership drops to 1.25%. Other things can also happen that will dilute your shares. This is a great opportunity to learn how venture capital works, so take advantage of it. Don't just throw in your money and hope for the best.

The part that bothers me is borrowing money from the boss. I would borrow from just about anyone else before I would borrow from the boss. That sets up a dynamic that I think would get a bit strange if you ever struggle to pay it off. I would borrow from my parents, my siblings, or my friends before I would borrow from the boss. You can still do that. Borrow from someone else to pay off the boss. Your parents, for instance, will most likely be more forgiving.